The National Security and Investment Act 2021 (the Act), received Royal Assent on 29 April 2021. The Act will come into force on 4 January 2022 and will establish a new, standalone statutory regime to enable the UK government to intervene in acquisitions and investments to protect national security. The new regime will replace the national security aspects of the government's current powers of intervention under the Enterprise Act 2002.
This Act is being adopted due to concerns over long-term shifts in the balance of global economic and military power, increasing competition between states, and the emergence of powerful non-state actors; and that the general merger control regime was not adequate to address such concerns.
"National security" as such is not defined under the Act. However, the government has sated that in order to assess the likelihood of a risk to national security being caused by a qualifying acquisition, 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: this concerns whether the target of the qualifying acquisition (the entity or asset being acquired) is being used, or could be used, in a way that poses a risk to national security.
- Acquirer risk: this concerns whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from the acquirer having control of the target.
- Control risk: this concerns whether the amount of control that has been, or will be, acquired through the qualifying acquisition poses a risk to national security (a higher level of control may increase the level of national security risk).
Scope of the regime
The Act introduces a mandatory notification regime applicable to any notifiable 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
and a voluntary notification regime applicable to transactions in any other sector where the government’s call-in power would apply (see below).
Mandatory notification of transactions to the Secretary of State for Business, Energy and Industrial Strategy (BEIS) will be required under the 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).
Before the transaction occurs, notifications will need to be submitted by the person gaining control via a digital platform to the newly formed Investment Security Unit within BEIS, setting out specified information about the transaction.
Voluntary notifications and 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 (this will generally follow the "material influence" concept referred to in the Enterprise Act and can cover acquisitions of a shareholding or voting right as low as 15% or even less depending on the circumstances).
- 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 – this includes trade secrets, databases, source codes, algorithms, formulae, designs, plans, drawings and specifications and software; and can thus cover the mere acquisition of intellectual property rights.
These "call in" powers can be exercised at any time while a transaction is in progress or contemplation or, where completed, up to six months after the date BEIS become aware of the non-notified transaction, provided that the trigger event occurred within five years of that date. Transactions in relation to which this call-in power applies can also be voluntarily notified by the buyer or seller/target, which may be done at any time when in progress or contemplation.
The call-in power will also retrospectively apply to any notifiable transactions potentially raising national security concerns that were completed in the period between the introduction of the Bill for the Act on 12 November 2020 and the commencement of the new regime.
Informal advice process
The government is intending to establish a process whereby parties can have informal discussions with government officials to seek advice prior to submitting both voluntary notifications and mandatory notifications. However, any advice provided by regime officials will not be binding and call-in decisions will remain at the discretion of the Secretary of State.
Key difference under the new regime
The most significant difference under the new regime is that businesses will be required to notify in advance of completion. This will have significant repercussions for many for M&A transactions, such as a reduced ability for deals to simultaneously exchange and complete, and a much higher frequency of governmental interventions in deals. Since 2003, only 12 national security interventions have taken place under the Enterprise Act’s public interest intervention regime in the field of natural security. In contrast, under the Act the number of notifications envisaged across the compulsory and voluntary regimes is expected to exceed 1,000 per year with 70-95 detailed national security assessments undertaken.
Interaction with the CMA
Whilst the new national security regime will be separate to the regular merger control regime under the Enterprise Act, there will be interaction between the two regimes, as transactions may engage both. The government has stated an intention that any national security remedies will be aligned with competition remedies and that timetables will be aligned to the extent possible within the statutory framework to achieve this. The interaction between the national security regime and CMA’s merger control regime will be covered in more detail in a future Memorandum of Understanding with the CMA.
Once the regime is in place, notifications should be made to BEIS’ Investment Security Unit via the new digital portal. Notified transactions will either be cleared to proceed or "called in" within 30 working days of acceptance of the notification. If "called in", BEIS have a further 30 (or 45 if extended) working days to assess the transaction for any potential national security implications. In practice, the exercise of information gathering powers, which has the effect of pausing the statutory timetable, could also further extend the total investigation period.
Once the Secretary of State initiates the assessment, interim orders can be imposed to prevent any national security risks being realised during the course of the assessment period.
Once the assessment is concluded, the Secretary of State must issue its final order, either:
- Clearing the transaction
- Where a national security risk has been found to arise, imposing conditions to address that risk
It is not intended that parties will be able, as under the merger control regime, to offer undertakings to obtain clearance.
The types of conditions the government would consider include ones focussing on access to sensitive sites, access to confidential information, supply chains, intellectual property transfer, compliance, monitoring, and personnel. The government has not ruled out ultimately blocking a transaction altogether or requiring it to be unwound. However, unwinding remains a last resort where all possible options for divestment have been explored and exhausted.
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. Any penalty notice under the Act can be appealed to the High Court within 28 days of receipt of the notice.
Given the new regime’s mandatory notification requirements, the potential sanctions involved and the close scrutiny that notifiable transactions will face, particularly for deals taking place in the 17 key sectors, businesses should be aware of the new rules and seek legal advice in relation to transactions that risk falling within the wide scope of the Act.