The National Security and Investment Act 2021, which gives the UK Government much greater powers to intervene in corporate deals on national security grounds, received Royal Assent and became law on 29 April 2021.
The Act introduces a major new screening regime for investment and M&A activity in relation to targets active in the UK, particularly (but not exclusively) in certain key sectors that will be subject to the Act's mandatory notification regime. The UK Government has recently completed its consultation on the sectors that should be included within that regime. Anyone owning or acquiring a business in one of the affected sectors (or any other business that has possible national security implications) should be aware of these new rules, which could mean Government consent is required for any sale, purchase or major investment.
We wrote about the new framework shortly after the Bill was introduced to Parliament: see Part I on the requirement for pre-closure Government clearance in 'high-risk' sectors, and Part 2 on the Government's power to "call-in" deals that parties are not obliged to notify. The Act will significantly expand the Government's ability to intervene in transactions on national security grounds, resulting in far more deals being subject to the sort of intervention recently announced (under the Government's more limited existing powers) in relation to NVIDIA's proposed acquisition of ARM.
Since the Bill's introduction there has been a potentially significant change to the mandatory notification regime. As initially drafted the Bill provided that an acquisition of a 15% interest in a company covered by the mandatory notification regime (see below) would need pre-completion approval from the Government. However, that 15% threshold was removed in the House of Lords. The initial threshold for the notification obligation will therefore be an acquisition of at least 25% of the shares or voting rights in the relevant entity (or the ability to secure or block the passage of any class of resolution). This change should significantly reduce the number of deals that have to be proactively notified and cleared under the Act, and in particular reduce the administrative burden on those taking smaller minority positions in companies.
However, the Government's 'call-in' power has not been amended since the Bill's introduction. It remains a sweeping power that will be available whenever the Government has a national security concern about essentially any deal, including ones that confer less than 25% (or indeed 15%) of shares or voting rights. Though it is not yet in effect, the Act will still empower the Government to retrospectively review deals completed from 12 November 2020 onwards. The option of voluntarily notifying deals to the Government in advance of completion will not be available until the relevant part of the Act comes into force, but parties to potentially sensitive deals are already engaging informally with the Investment Security Unit (ISU) that has been set up within the Department for Business, Energy and Industrial Strategy to deal with notifications and reviews under the Act.
The Act still does not define what qualifies as a risk to national security, leaving a broad discretion to the Government. It seems the ISU does not intend to publish any decisions on deals notified to or called in by it, frustrating hopes for a body of precedent that could have provided helpful guidance to parties and advisers on whether deals should be notified voluntarily. The House of Lords attempted to amend the Act to require the Government to include summaries of its assessments and decisions in the annual reports it must produce, but those amendments were rejected by the House of Commons.
There is currently no clear timetable for when the Act will come into force. However, the Government's powers to make regulations confirming questions of scope and procedure are already in effect. We can therefore expect secondary legislation to be produced soon that will put flesh on the bones of the scheme, including defining the deals to be caught by the mandatory notification regime. See our separate posts on the Government's updated plans for the energy, communications, critical suppliers to government and transport sectors.
The removal of the 15% equity threshold in the Act, combined with the Government's consultation response narrowing the scope of deals to be covered by mandatory notification, will mean that the regime does not apply to quite as many deals as it might have. Nevertheless, it will still catch a large number of deals each year, while those that no longer fall within the mandatory notification regime will still be reviewable under the 'call-in' regime if necessary. The Act therefore remains one of the most significant changes in decades to the UK M&A landscape.
To hear more about the Act, and for an opportunity to ask questions, sign up to our webinar on 18 May.