Among the most talked about legislation introduced in the UK over the last year is the National Security and Investment Act 2021 (NSI). As we reported previously in our overview of this legislation (see here), the NSI establishes a new regime that enables the UK government to intervene in acquisitions and investments to protect national security following a number of controversial acquisitions of critically-important UK businesses by overseas investors.
The NSI requires mandatory notification to the Secretary of State for Business, Energy and Industrial Strategy (the BEIS) with respect to certain ‘notifiable acquisitions’. In broad terms, these involve acquisitions of UK entities that carry on business in one of 17 sensitive sectors (such as artificial intelligence, defence, transport and energy) (a qualifying entity) and where a ‘trigger event’ occurs as a result of that acquisition. ‘Trigger events’ include an acquisition where a person acquires more than 25% of the shares in such a qualifying entity. A notifiable acquisition that is completed without the approval of the Secretary of State is void.
An immediate question raised by the City of London Law Society (the CLLS) was whether the NSI applies to equitable share charges over 25% or more of the shares in a qualifying entity. Read on to find the answer…
1. The characteristics of an equitable share charge
One of the distinguishing features of an equitable share charge is that it does not transfer legal ownership to the shares until an enforcement or default event occurs. In other words, the chargor (shareholder) remains the legal owner of the shares until default, at which point the beneficiary can enforce the security and transfer the shares into its own name.
Most share charges are equitable in nature, with the chargor retaining any voting rights and the right to receive any distributions in respect of the shares until an enforcement event.
Conversely, occasionally security over shares can take the form of a legal mortgage whereby ownership of the shares is transferred to the beneficiary on day one but with an equity of redemption to re-transfer the ownership when the debt for which the security is granted is repaid. Banks are typically averse to taking legal mortgages over shares to avoid taking on the additional obligations owed by shareholders.
2. The BEIS response
BEIS’ full response as to whether the NSI applies to equitable charges over 25% or more of the shares in a company can be found here.
The crucial part is the following statement:
“While the grant of security over shares could create an equitable interest in such shares, such an interest would not appear to grant any control over such shares until the happening of an event that would provide control. Therefore, it does not fall within the scope of mandatory notification until such event that would grant control.”
In summary, so long as you’re dealing with a typical equitable share charge as described above, you don’t need to worry about notification to BEIS at the point of taking security (even if the shares relate to a qualifying entity).
But, as the BEIS acknowledges in its response, it’s clear that the NSI can apply to the following types of share charges in respect of qualifying entities:
(a) A legal mortgage over shares whereby the beneficiary gains the requisite control of shares in the qualifying entity as prescribed by the NSI from day one
(b) An equitable charge over shares but under which the beneficiary is entitled to exercise voting rights in a qualifying entity above the threshold prescribed by the NSI before the legal ownership of the relevant shares is transferred to the beneficiary (an unlikely construct in practice in our view)
(c) An equitable charge over shares whereby the beneficiary gains the requisite control of shares in the qualifying entity as prescribed by the NSI only after the relevant enforcement or default event occurs
In the case of the third example given above, the beneficiary would have to seek clearance from BEIS prior to acquiring the relevant level of control over the qualifying entity as prescribed by the NSI (i.e. before the transfer of legal title to the shares upon enforcement). Whereas in the first and second examples clearance would be required before execution of the legal mortgage (example (a)) or the acquisition of the relevant voting rights (example (b)).
The NSI has attracted a lot of attention and the government has been keen to play down any unnecessary concerns about the mandatory notification regime. Lord Callanan, the Business Minister, told the Institute of Chartered Accountants late last year that the NSI is “focused on potential national security risks that may arise from, let me emphasise, a small minority of acquisitions”. Calming words perhaps but even more reassuring is the BEIS response which reinforces the thinking that with equitable share charges relating to qualifying entities pre-clearance from the Secretary of State is unlikely to be necessary.
As a trailing note, the BEIS made clear in its response that further clarification may be appropriate, so more may yet follow!