Five months with the NSIA – what have we learnt?
Almost five months have passed since the UK’s National Security and Investment Act 2021 (NSIA) took effect, radically overhauling the UK’s approach to foreign investment screening.
We set out below key takeaways from our practical experience with the NSIA over the past five months, consider how transacting parties have been navigating the NSIA in practice, and highlight some continuing areas of uncertainty that we understand the Investment Security Unit (ISU) will helpfully clarify going forward in a series of market guidance notes.
We also look at the Secretary of State for the Department for Business, Energy & Industrial Strategy (BEIS) Kwasi Kwarteng’s recent announcements to call in two high-profile transactions and consider what light they can be expected to shed on the NSIA regime.
A recap of the NSIA regime
The NSIA introduced a hybrid investment screening regime, consisting of a mandatory regime for 17 of the most sensitive sectors of the economy and a voluntary regime for all other sectors.
Under the mandatory regime, parties must submit a notification to the newly established ISU at the Department for BEIS if they acquire more than 25%, 50% or 75% of votes or shares (or the ability to block or pass resolutions) in a target entity active within a specified sector in the UK.
Due to the suspensory nature of the mandatory regime, a transaction cannot close until it receives clearance. It is also important to note that the NSIA has an extremely expansive jurisdiction: there are no turnover, transaction value or market share safe harbours, and the UK nexus requirements have been satisfied in most transactions we have considered.
The 17 sectors caught by the mandatory regime are: advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to government, critical suppliers to the emergency services, cryptographic authentication, data infrastructure, defence, energy, military and dual-use, quantum technologies, satellite and space technologies, synthetic biology and transport.
The voluntary regime applies to all sectors of the economy, and parties are encouraged to voluntarily notify any “trigger events” which they consider may be of interest from a national security perspective. In addition to the thresholds under the mandatory regime, trigger events for the voluntary regime include the acquisition of “material influence” over a company (a well-established concept under UK merger control rules, which may be deemed to exist in shareholdings as low as 10% or 15%), and acquisitions of a “right or interest” in a qualifying asset (such as land or intellectual property).
The UK Government also has extensive “call-in” powers to review qualifying transactions that have not been notified up to five years post-completion. If the Government has been made aware of the transaction, however, the call-in period is reduced to six months.
Five months of practical experience with the NSIA
The UK Government’s intention was to establish an efficient and proportionate screening regime to allow fast clearances of most non-problematic deals and thereby minimise the burden of the NSIA for business. We consider how effective the NSIA is at reaching these goals, how investors have reacted to the new regime, and where we understand the ISU will helpfully clarify going forward in a series of market guidance notes.
The NSIA in practice
For transactions that do not raise substantive national security concerns, notifications have generally been “accepted” for review rapidly (within a week) by the ISU. Similarly, information requests are typically proportionate for no-issues cases and non-problematic cases are usually cleared comfortably within the initial 30 working-day NSIA review period.
We have generally seen investors taking the NSIA in their stride, particularly for big M&A deals, with several notable themes with respect to how deal conditionality is negotiated:
- Shared interest in ensuring mandatory notification. Missing a mandatory NSIA filing results in transaction voidness, which represents a shared risk for buyer and seller. As such, inclusion of a condition in the transaction documents allowing for such a filing is typically uncontroversial – at least for the mandatory regime.
- Contention with standard of performance and remedies. In many cases, the main point of contention focuses on the standard of performance to obtain NSIA clearance and obligations with respect to remedies. A seller will typically want the buyer to take all steps necessary to obtain NSIA clearance, whereas a buyer will generally want to limit the scope of this obligation.
- Risk allocation with co-investment. Where an acquisition is being made by a consortium of investors, there is a risk that some investors may pose a greater risk from a national security perspective. Transacting parties sometimes consider how consortium arrangements can be restructured or re-negotiated to mitigate this risk.
A spotlight on potential issues
However, the past five months have also shed light on some potential issues and areas where pending market guidance from the ISU will be very welcome:
- The NSIA’s broad scope has driven a significant number of precautionary notifications. The expansive scope of the regime, coupled with the breadth and ambiguity of certain mandatory sectors, has resulted in a considerable number of benign deals being notified. In particular, the mandatory notification requirements for internal reorganisations – including where there is no change of control – have accounted for a material proportion of the filings that we have made to-date. The mandatory sector definitions have also been criticised as being too broad and difficult to interpret and have led to a large number of benign deals being notified on a conservative basis.
- Concerns about the lack of transparency and accountability in the ISU review process. Unlike the CMA merger control process, notifying parties are not allocated an ISU case handler, making this process particularly anonymous. Additionally, experience has shown that the ISU has on occasion been reticent in providing the parties with information on either the substantive appraisal of the case or the anticipated timetable for Secretary of State’s clearance, leading to criticism that the ISU is something of a “black box”.
- Lack of clarity on application of the NSIA to financing transactions, contractual rights and minority acquisitions. There are a number of important areas where the application of the NSIA is not adequately clarified by existing guidance, namely on: (i) the application of the NSIA to the taking and enforcement of security; (ii) the circumstances in which contractual rights could trigger a mandatory notification; and (iii) when the acquisition of an a stake in excess of 25% of shares or voting rights structured via an intermediate holding company satisfies the “indirect” holding provisions constituting a “trigger event” that gives rise to a notification requirement.
Learnings from the two recent call-ins
Last month, the Government publicly announced that two transactions would be called in under the NSIA, namely China-backed Nexperia’s acquisition of a stake in Newport Wafer Fab (NWF) and the increased stake in BT by French billionaire Patrick Drahi. It will be interesting to see how the reviews of the NWF and BT transactions play out as these cases have the potential to showcase what types of remedies could be expected, how long the review process is likely to take, and what issues the UK Government is likely to focus on. The NWF case in particular is expected to be a “critical test case” of the UK Government’s appetite to exercise its new powers.
NWF – publicising intervention
As discussed in our earlier post, the UK Government is reviewing the acquisition by China-backed Nexperia of the UK’s largest silicon wafer manufacturer, NWF.
The Government’s decision to review NWF represents the first instance that we’re aware of where the Government has used its retroactive powers under the NSIA to assess a transaction that had closed before the NSIA took effect. Interestingly, the Government publicised the fact of its intervention, and that the “call in” of the NWF transaction comes despite Stephen Lovegrove (the UK Government’s national security adviser) previously concluding that there were insufficient reasons to block the deal on specific security grounds, and following increasing pressure from US members of Congress in relation to the transaction.
BT – using the review process to warn against “creeping control” of national champions
In December 2021, Patrick Drahi’s telecoms group Altice increased its ownership of the UK-headquartered BT from 12 to 18%. This subsequently fuelled speculation about a takeover attempt – although Drahi has stated that he does not intend to make an imminent takeover bid – and triggered a six-month standstill obligation under the Takeover Code, which expires this month.
The Government’s recent announcement that it would review the increased ownership in BT demonstrates that BEIS is prepared to carefully scrutinise acquisitions of comparatively small minority stakes (i.e. below the 25% level that gives rise to a mandatory notification under the NSIA) for companies perceived as UK “national champions” – even where the acquirer is from a so-called friendly country, such as France.
While BT is clearly sensitive in terms of UK national security, the decision to review may also be in part driven by concerns that Altice may increase its stake (following the upcoming lapse of the Takeover Code restrictions in June), rather than solely by concerns that the incremental 6% stake in BT is a threat to national security.