The UK National Security and Investment Act 2021 ('the Act') took full effect on 4 January. This is Part 3 of a three-part series on the key questions and issues deal-makers (both in and beyond the UK) need to be aware of. Part 1 covers the mandatory notification regime. Part 2 deals with the Government's proactive call-in power. This Part 3 sets out the consequences that can apply under the Act and the key risk factors for a deal, as well as the application of the Act to non-UK transactions.

What deals will the Government actually want to review?

The Government has issued a Statement on how it will exercise its call-in power. Perhaps unsurprisingly there is a significant focus on the specified activities within the 17 sectors to which mandatory notification applies. The Government is more likely to want to call in an acquisition of material influence over an entity if an acquisition of control would have to be notified, and to get involved in relation to assets connected or relevant to those activities. Deals for entities that are not subject to mandatory notification, but which are “closely linked” to the specified activities, are also more likely to be called in. The voluntary notification option will therefore be most attractive in relation to such deals.

Beyond that, the Statement helpfully notes that "acquisitions which occur outside the … areas of the economy subject to mandatory notification are unlikely to be called in as national security risks are expected to occur less frequently in these areas".

Those aspects of the Statement concern which non-notifiable deals the Government is most likely to take an interest in, which will inform buyers' views on whether to make a voluntary notification.

There is then the further question of which deals the Government is most likely to be actually concerned about – i.e. when it will issue a formal call-in notice so it can review a deal in detail. That will be relevant whether a deal is the subject of a mandatory notification or a voluntary notification, or where the Government learns about it from public or other sources.

The Statement identifies the following three risk factors.

  • Target risk: the entity / asset could be used to undermine UK national security, because of what it does or could be used for (or, for real estate, because of proximity to sensitive sites). Activities in or closely linked to the 17 key sectors are more likely to involve target risk.
  • Acquirer risk: the acquirer's characteristics would suggest national security risk. Relevant factors include: any person who controls or can exploit the acquirer; the acquirer's pre-existing holdings; and any links to criminal activities, hostile states or organisations. A history of passive or long-term investments would indicate low acquirer risk. The Statement disavows judgments based solely on country of origin, though foreign state involvement is high on the Government's agenda – the notification forms require information about any non-UK government shareholdings or influence.
  • Control risk: the level of control over a target's strategy or activities will be relevant to overall risk. Greater control will allow the acquirer to direct the target's activities or influence the wider market, whereas even a hostile acquirer may be unable to do much with limited control. The type of deal will also be relevant here: the Statement notes that "loans, conditional acquisitions, futures, and options are unlikely to pose a risk to national security and so are unlikely to be called in".

These factors will be considered in combination, and the Statement says that the Government would expect all three to be present for a deal to be called in. However, that is not guaranteed and all assessments will be on a case-by-case basis.

What can the Government do if it has concerns?

Where the Government is concerned about a deal it can impose remedies to prevent, remedy or mitigate the identified national security risk. The Act gives the Government a wide discretion, but the most obvious options are prohibiting an uncompleted deal and unwinding a completed deal (e.g. divestment of the relevant entity or asset). More nuanced remedies would include operational restrictions, such as requiring the business to appoint someone to supervise or control the activities causing the national security concern, or making UK security clearance a condition of access to particular information, working at a particular site, taking part in certain operations or holding a management role in the business.

If a completed deal is called-in or notified, the Government will be able to impose interim orders to prevent the review process being frustrated, most obviously by restricting what the acquirer can do with the acquired business or asset pending a decision. Such orders are routinely imposed in merger control situations and can be extremely onerous, but they may well be even stricter in the national security context.

To what extent are non-UK transactions covered?

As noted above, the mandatory notification obligation is not limited to UK entities: if a target carries on the relevant activities in the UK it will be caught. The broader call-in power will apply to entities that carry on activities in the UK or supply goods or services to persons in the UK, and to assets used in connection with such activities or supply.

The Government's Guidance on how the NSIA could affect people or acquisitions outside the UK confirms that these definitions have a very significant reach. A non-UK entity that is "sufficiently involved" in the carrying on of activities or supply of goods or services in the UK will be caught. Examples given in the guidance include:

  • doing business from a UK office;
  • having a UK R&D facility;
  • producing goods for exporting to UK customers, or being responsible for distributing them;
  • overseeing a subsidiary that has UK activities;
  • doing work for UK customers / clients similar to that done from a regional office (e.g. regularly delivering services to UK customers);
  • moving goods through the UK, if they are modified or used while they are here.

For non-UK assets, the guidance points to the asset being used by a person in the UK, for the supply of goods or services into the UK (e.g. machinery used to produce equipment that is then used in the UK), and to generate energy or materials used in the UK (e.g. an offshore wind farm that generates electricity supplied to the UK).

The guidance does not explain how a notifiable acquisition of a non-UK entity will be treated if it completes without approval. UK law would regard the acquisition as void because of the Act, but UK law may not be relevant to the entity's ownership. The guidance does confirm that the Government can nevertheless pursue civil or criminal penalties against non-UK entities that breach the notification requirement.

Conclusion

The consequences of failing to comply with the Act are potentially severe, and at present appear to be resulting in an abundance of caution, at least in the short-term. Over time, practice and precedent will build up around the Act and remove some of the uncertainties around its application and effect, but in the meantime, those involved in deals will need to understand the key questions above and consider them on a case-by-case basis.

If you have any queries about the Act, or need any assistance in assessing its application to your deal, don't hesitate to get in touch.

Contributor

Charles Livingstone

Partner