In this article, Corporate & Commercial Associate, Zoe Watson outlines what NSIA is and when it applies to company transaction…
What is the National Security and Investment Act 2021 in the UK?
The National Security and Investment Act 2021 (NSIA) is an act of parliament introduced on the 11 November 2020 and which came into force on the 04 January 2022. The act allows the UK government, via the Secretary of State, powers to scrutinise and intervene in certain acquisitions that could harm or impact the UK’s national security.
The purpose of the act is to encourage continued investment in the UK whilst also protecting the UK’s national security by controlling the acquisition of key manufacturing or services businesses by entities based in countries hostile to the UK
Which transactions are affected by the National Security and Investment Act?
Whilst the powers introduced by the NSIA cover the whole economy, if your business is involved in 1 of the 17 areas of the economy that have been identified as being sensitive, a notification may need to be made to the Investment Security Unit (ISU) to receive approval before completion.
The 17 areas affected by NSIA are:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Communications
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
- Defence
- Energy
- Military and Dual-Use
- Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
- Transport
This list is an overview and if you think your business or the business you are acquiring falls into one of these areas, you should speak with your solicitor regarding the further, specific legal tests to be applied.
Note also that there are no “de minimis” levels and so any economic activity falling within these categories could be relevant, even if it only a small part of the total output of the business involved.
If following further investigations, you believe your business or the target falls into one of these 17 industries, the question is then asked of whether the acquisition itself will be a qualifying acquisition. To establish whether the acquisition will be qualifying, the following questions need to be asked:
Will the acquiring entity be taking control of the target or asset?
Control under the NSIA is defined as an interest:
- of at least 25% in voting rights;
- that allows the buyer to pass or block resolutions governing the affairs of the entity;
- that enables the buyer to materially influence the policies of the entity; or
- that enables the buyer to use the qualifying asset, or direct or control its use more so than pre-acquisition.
Is the acquisition over a qualifying entity or asset based in or with connections to the UK?
Any entity can be a qualifying entity including companies but also the likes of unincorporated associations and trusts.
A qualifying asset includes: land, tangible moveable property, equipment, materials and intellectual property.
If it is concluded that the target entity or asset qualifies under the above rules a notification should be considered.
What are NSIA notifications?
Notifications are the means by which the buyer gives notice to the Secretary of State about the acquisition if it meets the legal tests set out above. Parties to an acquisition can make three types of notification: mandatory, voluntary or retrospective validation applications.
Mandatory notifications are those made in relation to “notifiable acquisitions” in other words, acquisitions that fall into the 17 high risk sectors.
Voluntary notifications are available to provide the parties with business certainty (given that the Secretary of State may call in acquisitions where they reasonably suspect the acquisition to give rise to a national security risk).
Retrospective validation applications are applications for notifiable acquisitions to be recognised retrospectively as being valid in law after they have been completed without approval.
Parties should note however that if a notification is made as a mandatory notification but it should have been a voluntary notification, or vice versa, the ISU have been rejecting such notifications. If the notification is rejected the ISU is contacting the parties to explain why to ensure that the system remains transparent.
Whilst parties cannot ask the ISU for assistance when it comes to notifications, it is recommended that experts within the specific sector be approached to assist.
How long does NSIA clearance take?
Once the Secretary of State has accepted a notification, the government has 30 working days to decide whether to call in the acquisition or to provide clearance. If the acquisition is called in, the Secretary of State then has a further 30 working days to assess whether any remedies are needed to address national security risks.
There is a right under the NSIA that this period can be extended by a further 45 working days and even further by mutual agreement with the buyer if needed.
How does the NSIA affect business sales and purchases?
All businesses and solicitors acting in either sales, purchases or in investment and fundraising activities should be acutely aware of the NSIA and the government’s power to intervene in transactions involving the 17 listed activities.
The key impact for our clients will be upon the structure and timings of transactions. If a notification is required, be that a voluntary or a mandatory notification, it is likely that the transaction will become conditional upon clearance being obtained meaning there will be a need for a split exchange and completion.
The government’s annual report for 2023/2024 states that the ISU received 906 notifications: 753 mandatory, 120 voluntary and 33 retrospective validation applications. Of the 906 notifications, the government accepted 876 and purportedly rejected 24 during the reporting period.
This is promising for business owners that the new requirements should not cause too much disruption to their transaction if the notification is dealt with in good time and ideally at the outset of the transaction.
Are there sanctions for failure to comply?
Yes. If it transpires a notification should have been made but was not, the whole transaction will be legally void. There are also civil and criminal sanctions that can be enforced against: companies, individuals and advisers.
Can you avoid the NSIA regime?
There is no way of avoiding the NSIA, it has been purposely designed to protect the UK’s national security and as such if you are operating in one of the 17 areas discussed in this article a notification must be considered and discussed with your legal team.
The good news is, if you are operating in an industry that does not fall under the scheme, your transaction can continue as planned with no diversion needing to be made to deal with the NSIA requirements. And if you do fall within the scope of NSIA, the majority of cases notified are being given clearance.
This article was written and issued on [DATE]. The government have expressed a desire to fine-tune the workings of the NSIA and are therefore publishing updates and guidance to make the regime as business friendly as possible.
Specialist Business Solicitors
If you have any questions after reading this article you can get in touch with a member of the team on 01202 499255, or by filling out the form at the top of the page.
We offer all new clients a free initial chat, were you will get the chance to meet us and discuss your needs.
Comments