Under the new National Security and Investment Act 2021 (the NSI Act), which will come into force on 4 January 2022, a new standalone statutory regime will enable the UK government to intervene in acquisitions and investments to protect national security.
Under this new regime, various acquisitions and investments within certain specified sectors will require a mandatory pre-notification to the Secretary of State for Business, Energy and Industrial Strategy (BEIS). BEIS will also have powers to call in certain transactions, including acquisitions of certain assets. This will have profound implications for the life sciences sector, as many transactions in this industry could fall within the scope of the NSI Act; and we outline below the key points to consider.
Scope of the regime
"National security" as such is not defined under the NSI Act but the Secretary of State will consider primarily three risk factors in conjunction (although one risk factor being triggered can be sufficient to give rise to a national security risk):
- Target risk, i.e. whether the target could be used in a way that poses a risk to national security
- Acquirer risk, i.e. whether the acquirer has characteristics that suggest there may be a risk to national security from the acquirer having control of the target
- Control risk, i.e. whether the amount of control that will be acquired poses a risk to national security
The NSI Act introduces a mandatory notification regime applicable to certain acquisitions that take place across 17 key sectors, the definitions of which have been set out in the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021:
- Advanced materials
- Advanced robotics
- Artificial intelligence
- Civil nuclear
- Computing hardware
- Critical Suppliers to government
- Cryptographic authentication
- Data infrastructure
- Military and dual-use
- Quantum technologies
- Satellite and space technologies
- Suppliers to the emergency services
- Synthetic biology
A voluntary notification regime applies to transactions in any other sector where the government’s call-in power would apply (see below).
Mandatory notification of transactions to BEIS will be required under the NSI Act where:
- The target is a "qualifying entity", broadly any entity carrying on activities in the UK, or supplying goods or services to persons in the UK.
- The qualifying entity undertakes activities in the UK within any of the above 17 sectors.
- As a result of the acquisition, there is a "trigger event". This will broadly be the case in respect of the mandatory regime where the acquirer acquires or enhances its control of the entity to or above 25% of shares or voting rights (or increases the percentage of shares/votes in the entity to more than 50% or 75%; or acquires voting rights in the entity that enables it to secure or prevent the passage of any class of resolution governing the entity's affairs).
Voluntary notifications & call-in power
For certain transactions that fall outside the mandatory regime, there is a voluntary notification regime and "call-in" powers.
The voluntary regime applies to qualifying transactions that fall outside the 17 sectors listed above, or are within the 17 sectors but where the trigger event falls short of the acquisition of a controlling shareholding and instead results from acquiring a material influence over a qualifying entity's policy; or acquiring or enhancing a controlling right or interest in a "qualifying asset". A qualifying asset is defined as:
- Tangible moveable property
- Ideas, information or techniques which have industrial, commercial or other economic value
The call-in power will also retrospectively apply to any notifiable transactions potentially raising national security concerns that were completed after 12 November 2020.
Once the regime is in place, notifications should be made to BEIS via a new digital portal. Where a national security risk has been found to arise, the Secretary of State could impose conditions to address that risk. This includes conditions focussing on access to sensitive sites/confidential information and intellectual property transfers. The government has not ruled out ultimately blocking a transaction altogether.
Sanctions for non-compliance
Sanctions for failure to comply with the new national security regime will be severe. This includes the risk of a transaction requiring mandatory notification being void if completed prior to clearance and fines of up to 5% of worldwide turnover or £10m (whichever is the greater) and/or imprisonment of up to five years.
Impact for life sciences businesses
A number of the 17 specified sectors could capture transactions within the life sciences industry. This includes technology-related sectors such as artificial intelligence and advanced robotics (which may be particularly relevant for e.g. the medical devices industry) and supply to emergency services, although the latter do not appear to cover hospitals.
However, the main specified sector affecting the life sciences industry would seem to be synthetic biology, which has been defined under the NSI Act as the “process of applying engineering principles to biology to design, redesign or make biological components or systems that do not exist in the natural world”. This includes:
- The design and engineering of biological-based parts of:
- Genetic circuits and cells
- Novel devices and systems
- Redesigning existing natural biological systems
- Using microbes to template materials
- Cell-free systems
- Gene editing and gene therapy
- The use of DNA for data storage, encryption and bio-enabled computing
Under the NSI Act, the mandatory filing requirement will apply to any acquisition where the acquirer acquires or enhances its control to or above 25% of shares or voting rights (or takes it above the 50/75% thresholds) of a "qualifying entity" which carries out activities consisting of or including the:
- Carrying out of basic scientific research into synthetic biology
- Development of synthetic biology
- Production of goods using synthetic biology
- Formulation of synthetic biology to enable the degradation of materials
- Provision of services that enable the activities
In addition to that mandatory scope, the call-in power extends very broadly, e.g. to:
- Acquisitions of material influence over such an entity.
- Acquisitions in areas of the economy which are outside the 17 specified sectors (and therefore not subject to mandatory notification) but closely linked to any of those 17 specified sectors (such as synthetic biology).
- Acquisitions of "qualifying assets" (see above), which includes trade secrets, databases, source codes, algorithms, formulae, designs, plans, drawings and specifications and software. This can thus cover the mere acquisition of intellectual property rights and also extends to overseas assets if they are used in an activity in the UK or used to supply goods or services in the UK. Such asset acquisitions will more likely be called in where the assets are linked to any of the 17 specified sectors.
It is worth noting that helpful exceptions have also been outlined, including general services or servicing not related to core synthetic biology (where “core” means those activities without which experiments cannot be conducted, such as DNA synthesis or cloning).