UK National Security Regime passes Parliament: implications for deal doers before commencement later this year
The NSI Act radically overhauls the UK’s approach to foreign investment screening. For the first time, the UK will have a standalone regime – and it will subject foreign investment in the UK to some of the highest levels of scrutiny of any regime globally. It is notably not limited to foreign investment, applying to UK investors, too.
The Act introduces a hybrid mandatory and voluntary/call-in system. Notifications will be mandatory for investments in 17 sectors that are perceived as particularly sensitive for national security (these cover a broad range, from energy, defence and transport to AI, quantum technologies, and satellite and space technologies). In addition, parties can voluntarily notify other transactions where there is a need for deal certainty given expansive Government call-in rights covering amongst other things assets and IP acquisitions.
The implications for investors will be far-reaching. The Government expects 1,000–1,800 transactions to be notified each year - a dramatic increase from the 13 transactions which have been reviewed on national security grounds since the current regime was introduced in 2003. Faced with mandatory notification obligations in many cases, as well as severe criminal and civil consequences for non-compliance, companies will have to pay serious attention to national security risks when investing in the UK.
However, the Government has emphasised that the UK remains open for investment and that the new regime aims to proportionately mitigate national security risks. Indeed, the Government has been keen to stress its ambition that the new regime will enable the fastest and most proportionate foreign investment screening in the world. If this is realised, the practical burden for investors will be somewhat mitigated.
What has changed since the government announced its plans in November?
Having received broad cross-party support across Parliament, the Act passed through both Houses of Parliament largely intact. As we blogged recently, the most important change is that the threshold for mandatory notification of acquisitions in sensitive sectors was increased to 25% of shares or voting rights (up from the originally proposed 15%). This amendment was intended to screen out certain types of investments (e.g. venture capital investments below 25%) which are crucial sources of capital in some industries – notably the tech sector – and which deploy rapid fundraising rounds for which a 30 working day clearance process would present major obstacles. That said, the Government will still be able to ‘call in’ asset acquisitions or transactions below the 25% threshold where ‘material influence’ has been acquired. In these cases, voluntary notification may be advisable to provide parties with greater deal certainty.
What happens next?
Although the Act has become law, the regime is only expected to become operational towards the end of this year, and secondary legislation will be introduced to bring this about. Until then, the Government plans to work closely with investors and business – including through a cross-sector Expert Panel – to help them understand the new regime. Special attention will be given to those sectors where mandatory notifications will be required.
The Government will also be publishing new regulations on different aspects of the NSI Act. These will mostly cover various procedural elements but, most significantly, they will also set out the precise scope and definitions of the sectors in which transactions will be subject to mandatory notification. More detailed guidance will also be provided, with the Government expecting to publish an initial set of guidance in July.
What should clients consider in the meantime?
Although the Act does not formally start applying for several months, transaction parties already need to factor the regime into their plans. The NSI Act contains retroactive provisions that give the Government the power to “call in” transactions that completed after 12 November 2020 and before the regime comes into force. For transactions completing in this interim period, the Investment Security Unit (the operational unit within BEIS that will handle notifications and call-ins) is already actively providing informal guidance on transactions that may fall within the scope of the regime. This informal notification also has the effect of reducing what would otherwise be a 5 year call-in risk to 6 months following the Act taking effect.
In practice, parties planning investments that may fall within the regime will need to consider upfront, ahead of signing:
- Whether their transactions raise any substantive national security issues / considering both the target and the acquirer’s profile?
- How will the notification and review process (or even informally consulting with the ISU) affect the deal timetable?
- How will potentially burdensome information requirements for the notification be managed (and whether co-investors will be willing to disclose potentially sensitive ownership information); and
- Additional transaction costs
Finally, the existing (albeit much narrower) national security regime under the Enterprise Act remains in place until the new legislation takes effect, and will still need to be considered alongside the new NSI Act as the public health, media plurality and financial stability heads of intervention will remain in place and apply in parallel after commencement of the new regime.