Reflecting on the National Security and Investment Act

Introduction

The National Security and Investment Act 2021 (NSIA) is a new and robust regime enabling the Government to scrutinise and intervene in transactions that it views as potentially harmful to the UK’s national security. There are both mandatory and voluntary notification provisions to the regime but, importantly, the Government has the power to call in a transaction whether or not it has been notified and may apply conditions to the transaction or, in extreme cases, block the transaction altogether.

We look here at how the regime has been working in practice.

Application of the regime – the challenges

It is fair to say that the expansive scope of the NSIA regime has brought its own practical challenges. The 17 high-risk sectors identified in the legislation are very broadly defined. Acquisitions, which may at first blush be viewed as insignificant may, on closer analysis, fall within the regime and require notification. This means that transactions have to be “screened” with great care. Where there is doubt as to whether a particular sector does apply, it may be advisable to err on the side of caution and notify rather than run the risk of a Government call-in at a later date.

There are also some unexpected consequences of the regime; its application goes well beyond that of traditional M & A activity. The Government has confirmed, for example, that it can apply to internal group reorganisations even though the ultimate beneficial owner of the entity remains the same. In addition, it is possible for the regime to apply to other types of corporate activity such as joint ventures as well as allotments of shares and share buy backs, which result in significant changes in shareholder control.

How has the regime gone so far?

The Government has published a report on the first three months’ operation of the regime. In that initial period, 222 notifications were made which is slightly lower than the Government’s expectations. The notification process appears to be running smoothly with the Government making its initial assessment of transactions (to clear or to call it in) within the required 30 working days. Of the 222 transactions notified, only 17 transactions were in actual fact called in for a closer assessment. Generally speaking, that is in line with Government expectations and reflects the approach of introducing a broad based regime where a large number of deals are caught, but the vast majority are cleared quickly.

Any interesting decisions?

In July, the Government issued a final order to block an intellectual property licence granted by the University of Manchester to a Chinese company. The licence related to vision sensing technology, which was to be used in relation to children’s toys but was blocked on the basis that the technology had dual-use applications (i.e. both civil and military application). Interestingly this transaction fell within the voluntary rather than mandatory section of the NSIA regime but the order is a case in point: NSIA can be applied broadly in practice including to the acquisition of a licence for relevant technology.

Impact on transactions

The NSIA regime can add uncertainty to transactions as well as potential delays to deal timetables, and buyers (and their funders) need to understand the implications, if any, of the regime on their deals. It is therefore crucial to seek advice early on. 

Birketts can help buyer clients screen a transaction to assess whether the NSIA regime applies and, where applicable, help with the notification process. We can also review potential sales on behalf of business owners to identify whether the NSIA regime may be applicable to a sale of their business so that they are forewarned of potential delays and additional sensitivities around the identity of potential bidders.