Following a number of recent high-profile deals, the Government has reformed its power to scrutinise foreign investment. The NSIA (which came into force on 4 January 2022) introduces a new statutory regime which allows the Government to review certain acquisitions falling within the remit of the NSIA and either prohibit them or impose certain conditions or remedies where it identifies national security concerns.
The Investment Security Unit (ISU), which is a body sitting within the Secretary of State for Business, Enterprise and Industrial Strategy (BEIS), has been tasked with managing and administering the NSIA notification and screening regime. Under the NSIA, an acquirer is required to make a mandatory notification of a “notifiable” transaction which must receive clearance prior to completion. A “notifiable” transaction is an acquisition of a certain level of control (trigger event) of a “qualifying entity”. An entity will be “qualifying” if it carries on activities in the UK in at least one of the 17 “sensitive” sectors of the economy, namely:
- advanced materials
- advanced robotics
- artificial intelligence
- civil nuclear
- computing hardware
- critical suppliers to government
- cryptographic authentication
- data infrastructure
- military and dual-use
- quantum technologies
- satellite and space technologies
- suppliers to the emergency services
- synthetic biology;
- and transport.
Non-compliance with the mandatory regime results in civil penalties (e.g. fines of up to 5% annual global turnover or £10m – whichever is higher) and criminal sanctions (i.e. company directors could face up to five years’ in prison). In addition, and of particular concern for lenders, the un-notified transaction will be void and unenforceable.
The NSIA also envisages a voluntary notification regime. The trigger events for voluntary notification are broader than those for mandatory notification, and comprise the acquisitions of “qualifying entities” or “qualifying assets” which the BEIS considers to be a national security concern (note: voluntary notification is not limited to the 17 “sensitive” sectors of the economy but is likely to be activities closely linked to those sectors).
The remit of the voluntary notification regime reflects the ISU’s general “call-in power” to scrutinise proposed or completed acquisitions of “qualifying entitles” or “qualifying assets” which it considers to be a national security concern. This Government “call-in power” is subject to a five-year limitation period, which is reduced to six months once the Government is aware of the relevant trigger event.
Note the NSIA retrospectively applies to transactions occurring on or after 12 November 2020, even though formal notification could not be made prior to 4 January 2022. In other words, the Government is still able to “call in” a transaction taking place at any time on or after 12 November 2020 subject to the time limits set out in the legislation.
Examples of how the NSIA could impact finance transactions
Where a lender is providing acquisition financing for an underlying transaction which triggers mandatory notification/is subject to call-in. The concern here is that the underlying transaction could be void and unenforceable if the acquirer was required to make a mandatory notification and didn’t or progressed the underlying transaction before receiving clearance to proceed. Even if the transaction is not subject to mandatory notification, BEIS could still impose conditions on the transaction which could fundamentally affect the lender’s desire to provide acquisition finance.
The grant of a loan if (a) the terms of the loan give the lender control1/material influence over the borrower; and (b) the nature of the borrower’s activities give rise to potential call-in by the ISU. Although this situation is unlikely, if it exists, the relevant mandatory or voluntary notification should be made prior to granting the loan.
Enforcement of security
The granting and taking of security will not ordinarily trigger the NSIA. However, if enforcement of security over shares, voting rights or assets amount to a “trigger event”, notification should be made prior to enforcing security.
Sale of security assets
In addition to enforcement, the NSIA is relevant where a lender realises the value of the security (e.g. exercising a power of sale).
Statutory exemption means that administrators and creditors who have the right to exercise control over a borrower will not trigger review under the NSIA. However, there is no such exemption for liquidators or appointed receivers, so this must be borne in mind when considering what steps to take on an insolvency.
Converting debt to equity
Where a borrower issues a debt instrument to an investor which provides for a debt for equity swap on the occurrence of certain events, the arrangement could fall within the ambit of the NSIA. Crucially, the NSIA is only triggered on the conversion, not the grant of the debt instrument itself.
Practical steps for lenders and borrowers
- Due diligence (DD) – Through the DD exercise, lenders and borrowers should satisfy themselves that (1) no NSIA notification is either required or advisable; or (2) the relevant NSIA notification has been made and clearance has been obtained.
- Loan agreement – Lenders could consider including the following to mitigate NSIA risk:
- Conditions precedent – to (1) ensure any required NSIA notification has been made and clearance has been obtained; and (2) require written confirmation of NSIA advice given to the borrower (e.g. through disclosure of a legal due diligence report).
- Representations – to require a borrower (and its parent and/subsidiaries) to represent that (1) no NSIA notification is required; or (2) the NSIA has been complied with.
- Undertakings/covenants – to require a borrower to undertake to (1) comply with retrospective NSIA “call-in” requests; and (2) provide information pertaining to any “call-in” request.
- Event of Default – to make retrospective “call-in” an Event of Default.
The NSIA can clearly impact past and future financing transactions, so lenders and borrowers should be aware of the regime. For further information on anything mentioned in this article, please contact: Alex Schaafsma or Devreaux Gravell.
1 The City of London Law Society (CLLS) recently published a response it received from BEIS in which Government confirmed that an equitable interest in shares, created by a charge, will not of itself grant control over the shares. It follows that the creation of a charge granting security over 25% or more shares will not fall within the scope of the mandatory notification regime until an event happens that would grant control (e.g. enforcement). Government have agreed to continue considering the point and will publish further guidance in due course.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2022.