National Security and Investment Act to take effect on 4 January 2022
The UK National Security and Investment Act 2021 (NSIA) received Royal Assent in April, and the Government has now confirmed that it will take effect from 4 January 2022. It has also published additional draft implementing legislation and additional guidance notes to help businesses prepare. In this post, we explore what has been published, what is still outstanding, and discuss how we expect the review process to work in practice.
The key points for investors and businesses which are takeover targets to note are that:
- From 4 January the Investment Security Unit (the ISU) can call in deals signed and not completed by 12 November 2020. So deal parties need to factor in the application of the legislation now and provide for risk allocation in their agreements where closing could occur after 4 January;
- The Investment Security Unit is already seeing informal engagement with lawyers on transactions that might be at risk of being called in using the retrospective provisions. These discussions will become more formal once the ISU is operational and their electronic filing process is up and running - but scope for informal approaches is still likely.
- BEIS are hoping to avoid the system being seen as an automatic process that requires a filing on all transactions – and would not expect businesses which could have no conceivable national security concerns e.g. two biscuit manufacturers merging - to notify their transaction.
- The call-in power could be used even if only one of the risk factors is engaged, to enable the ISU to look at the detail and understand a transaction better. However - unlike with the Enterprise Act, where intervention is very public - under the NSIA processes are not public until the final order stage has been reached. This may take some of the media and resulting political heat out of the process. Other commentators have however labelled the NSIA a “lobbyists’ charter” - and we are already seeing Government intervention risk being deployed by deal advisers in relation to hotly contested transactions.
- The ISU will gather information from around Whitehall (including in relation to the track record of particular acquirors), then make recommendations in relation to calling in and final orders. It will not have powers of its own, and decisions will rest with ministers. BEIS ministers have stated this “hub and spoke” model should have tangible co-ordination benefits on the present system.
- BEIS is discussing its working relationship with the CMA, to ensure there is no conflict on individual cases and avoid different remedies being imposed (and indeed the legislation enables a national security override to the CMA). It is possible that there could be an overlap between public health and national security, with cases in some sectors e.g. pharma covered by both existing and new legislation - BEIS and the CMA would need to consider the case together and decide whether to look at both pieces of legislation. In UK-only cases, the NSIA is likely to drive the timetable as the UK merger control regime is non-suspensory.
- BEIS is also considering how to handle its interactions with overseas counterparts such as CFIUS, staying within the boundaries of the NSIA and respecting the limits on information sharing.
- In relation to cases under the Takeover Code, the Panel is expected to be robust about not accepting undertakings relating to security.
- The Government is not considering an exempt list for certain acquirers in order to give “friendly / low-risk” acquirers more certainty – this would create opportunities to evade the provisions (although the draft Statement on exercise of the call in power notes that a history of passive or longer-term investments may indicate “low or no acquirer risk”). The current intention is to provide for a bedding down period before BEIS considers whether exemptions for certain investors are needed to refine the process.
Notifiable Acquisitions Regulations
Following two earlier iterations, the Government has now published updated draft definitions for the 17 sectors in which transactions will require mandatory notification. Whilst most of these definitions are broadly the same as contained in the previous draft, a number of the proposed descriptions have been redrafted and further refined following consultation with stakeholders. By way of example:
- the definition of communications has been amended to focus on public communications networks and services, and on providers of submarine cable systems; the definition relating to the supply chain for public communications has been removed;
- in relation to data infrastructure, the legislation now contains a new table setting out the authorities that come within the definition of a “public sector authority” (previously “critical sector entity”), including government departments and agencies, and regulatory bodies; the definition of qualifying entity has also been amended to include sub-contractors who have been notified that they are in a chain with a public sector authority;
- the section on synthetic biology (previously engineering biology) has been clarified to state that the development of human or veterinary medicines or immunomodulatory approaches that employ synthetic biology are excluded from the specified activities in that section (unless the synthetic biology technology involved could be modified to deliver certain toxic chemicals or materials or uses certain substances or pathogens); and
- the definition of energy has been substantially revised and expanded to clarify the qualifying activities and the conditions that apply to those activities.
A helpful clarification relates to the definition of a notifiable acquisition, and provides that a qualifying entity falls within the description of the 17 sectors only if it carries on the activity in the United Kingdom. This may benefit, for example, companies with supply arrangements with the UK in certain mandatory sectors, but whose main focus of research and production activity is elsewhere.
Final regulations will be published in the autumn and the Government has noted that they will continue to be finessed, updating the scope of the sensitive sectors by means of secondary legislation. This is seen as critical to responding promptly to evolving national security concerns, and the Government will also have the ability to ‘call in’ non-notified transactions regardless of sector – although it has stated that it is unlikely to call in transactions which are not closely related to the 17 sectors.
Statement on exercise of the call in power
The Government is also consulting on this statement, with a deadline of 30 August.
The statement - previously referred to as the Statement of Policy Intent - sets out the expected use of the call-in power. This is expected to be reviewed at least every five years. The Statement is not unfortunately more detailed than the draft guidance published in November last year (and in some respects removes general statements of assurance made around pension funds, sovereign wealth funds etc).
The Statement has been modified in three respects:
Areas of the economy: Whereas the previous version divided the economy into three broad areas, each with a different likelihood of being called in, the revised Statement makes clear that each acquisition will be treated on a case-by-case basis. The Statement explains that areas of the economy which are closely related to those sectors subject to mandatory notification are also the areas in which qualifying acquisitions are more likely to be called in. Further, qualifying acquisitions of entities or assets that are closely linked to those sensitive sectors are also likely to be called in.
Risk factors: These have remained broadly the same as in the previous version but they are worded slightly differently. References to the risks of “disruptive or destructive actions”, “espionage” and “inappropriate leverage” have been replaced by references to the “possibility of a target being used to harm national security”, “reduce the diversity of a market”, or “influence the market’s behaviour” (in a way that may give rise to a risk to national security). The guidance on “acquirer risk” refers to “economic prosperity” – this appears to be less relevant to national security and more related to public / economic interest, possibly reflecting wider concerns.
The Government has also indicated that it is not minded to make use of the safe harbouring of investors although there is scope under the rules for it to do so.
Assets: The draft statement clarifies that the same tests of risk factors will be applied to qualifying acquisitions of assets as to qualifying acquisitions of entities. The statement also specifies that qualifying acquisitions of assets related to the 17 sensitive areas of the economy are more likely to be called in.
To read more commentary on the Statement, read our post here.
The Government also published four guidance notes, with the aim of assisting business in understanding how the new NSIA will operate in practice.
NSI Act Overview: prepare for new rules about acquisitions which could harm the UK’s national security: This provides an overview of the NSIA and explains how to verify whether the new rules will apply to an acquisition; the cases in which parties will be required to inform the Government about their acquisition; and what to do if the Government decides to assess an acquisition for a national security risk.
How the National Security and Investment Act could affect people or acquisitions outside the UK: This guidance provides details of entities formed outside the UK that are likely to fall within the scope of the new rules – such as foreign entities that supply goods or services to people in the UK, or overseas companies doing business from a regional office or R&D facility in the UK. It also provides information on when the Government can ask entities outside the UK for information, or to take further action, and details the consequences of an entity outside the UK breaching the rules.
The National Security and Investment Act alongside regulatory requirements: This sets out how the NSIA may interact with other processes, such as merger control investigations, the Takeover Code or export control rules.
In relation to public interest intervention under the Enterprise Act, this remains in place and will still need to be considered alongside the NSIA. Once the NSIA starts applying, the existing national security ground will be repealed. The other grounds for intervention (media plurality, public health and financial stability) will continue to apply and be available to BEIS in parallel to the standalone new foreign investment regime.
NSI Guidance for the Higher Education and Research-Intensive sectors: The guidance outlines the operation of the NSIA from the perspective of these institutions, which often work within many of the sensitive sectors for which a mandatory notification is required. It highlights how private companies, governments and other organisations are frequently involved in universities and other organisations’ research at early stages, such as by means of contract / sponsored research, or sponsoring a research position (e.g. a chair) or a theme.
If through these agreements a person gains control over a university or research organisation’s qualifying assets - which can include both tangible moveable and intellectual property, for example where such assets are licensed out (exclusively or non-exclusively) by a university - this will amount to a qualifying acquisition under the NSIA. This would also be the cases where a party gains control over a qualifying asset generated by the research it has funded.
What’s coming up next?
BEIS will continue to engage and communicate with business to ensure awareness of the NSIA provisions. More guidance will be published in the autumn, on (i) the end to end process for engagement with the NSIA; (ii) how notification will work, and how to use the portal; (iii) orders under the NSIA; and (iv) data protection and handling.
Next year, BEIS will also publish market guidance notes covering the first six months of operation of the system. The first annual report is due to be issued in March 2022.
Separately, the Government is also consulting on a power to block listings on national security grounds. This is expected to be a targeted power that will have minimal impact on the listing process, helping to maintain the UK’s status as a world-class destination for listings but without affecting the vast majority of companies seeking to raise capital on UK financial markets. The consultation will close on 27 August. After considering responses, the Government will bring forward a formal response.