On 4 January 2022, a new piece of legislation known as the National Security and Investment Act 2021 (“the NSI Act”) came into force in England and Wales. This new legislation gives the UK government a significantly enhanced ability to scrutinise mergers and acquisitions from a national security perspective.
What are the new merger control rules?
The NSI Act introduces a new mandatory notification requirement for certain “notifiable acquisitions”.
Notifiable acquisitions are defined as the acquisition of a certain level and type of control of a qualifying entity that carries on activities in the UK in any of the following 17 sectors (on the basis these are considered sensitive to national security):
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Communications
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
- Defence
- Energy
- Military and Dual-Use
- Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
- Transport
The target entity or assets do not necessarily need to be established or located in the UK to be caught under the NSI Act; it will be sufficient if the entity only supplies its goods or services into the UK or carries on activities in the UK.
If an acquisition is notifiable, the proposed buyer needs to submit a mandatory notification to the Department for Business, Energy and Industrial Strategy once arrangements are in progress or contemplation that, if carried into effect, will result in the transaction falling within the scope of the NSI Act – for example, when heads of terms have been agreed. The notification must contain sufficient information to allow the government to decide whether to assess the proposed acquisition. A voluntary notification may also be made at an earlier stage by the proposed buyer, the seller or the target entity.
What happens after submitting a notification?
Where a mandatory or voluntary notification is made, the government will consider whether to “call-in” and review the transaction, to assess if it should be allowed, prohibited, or whether any remedies are required for it to go ahead. To effect a call-in, the government will issue a call-in notice and the parties cannot subsequently complete the proposed transaction without the government’s prior approval. This is known as a standstill obligation.
In deciding whether to issue a call-in notice, the government will consider the following risk factors in relation to the transaction:
- Target risk: Whether the target is or could be used in a manner that poses a risk to national security. Targets active in one or more of the 17 specified sensitive sectors and related areas are likely to score high in terms of this risk profile.
- Acquirer risk: Whether the buyer has characteristics that suggest that the acquisition of control is, or could be, a risk to national security. The government may consider the buyer’s ultimate controller, its pre-existing holdings, and any previous or current criminal activities and links.
- Control risk: Consideration of the amount of control being acquired. A higher level of control can be expected to result in an increased national security risk profile.
The government may also exercise this call-in power (whether or not notification is given) if it otherwise becomes aware about an acquisition of control or material influence over qualifying entities or assets that may present a risk to UK national security. This power may be exercised within the six months after the government becomes aware of the transaction (even if it has already completed), subject to a longstop of five years following completion of the transaction.
The new regime applies equally to UK and non-UK buyers, which sets it apart from other major countries’ foreign investment and national security regimes.
What happens if a transaction is called-in?
After issuing a call-in notice, the government has the power to make an interim order to prevent or reverse actions that could prejudice its functions under the NSI Act. For example, in relation to completed transactions, the government may restrict the buyer from making changes to the acquired business, or for anticipated transactions, this could involve information flow restrictions or a prohibition on completion.
If the government finds, on the balance of probabilities, that a transaction gives rise to national security concerns, then it has the power to make a final order prohibiting the transaction or imposing requirements to address its national security concerns. In the case of a completed transaction, they may order that it be unwound.
Some of the remedies that the government might impose to remedy national security concerns may include:
- Maintenance of specific operations in the UK
- A right for government officials to enter and inspect premises
- Limits to the level of shareholding that may be acquired
- A minimum number of directors on the target’s board being UK citizens
- The appointment of a dedicated compliance officer
- Restrictions on the sale or transfer of intellectual property rights or technology
- Security clearance of key personnel
- Limited access to sensitive information, technology, or sites
Sanctions for non-compliance
Completion of a notifiable acquisition without prior approval from the government constitutes a criminal offence. The sanctions for breaching this standstill obligation are potentially severe, including prison sentences of up to five years for the buyer’s directors. Additionally, civil sanctions include a penalty of up to 5% of the company’s worldwide group turnover and £10 million, whichever is higher. Crucially, a notifiable transaction that is completed without prior approval will automatically be void.
Practical challenges
In the context of merger and acquisition transactions, considering the mandatory notification regime and severe sanctions for non-compliance, many investors will likely prefer to volunteer notifications on a precautionary basis. If there is a possibility an acquisition is potentially notifiable, it is likely to be advisable for the underlying acquisition agreement to be executed on the basis completion is conditional on clearance under the NSI Act.
The regime under the NSI Act is also likely to present challenges in the context of many other transactions, such as:
- Lending and finance arrangements: Lenders will likely want to make any financing they provide to borrowers in connection with mandatory notification acquisitions to be conditional on NSI Act clearance. A lender providing secured finance to a borrower in any of the 17 “sensitive” sectors will also need to consider notification requirements on enforcement of their security as well as if their finance documents afford them material influence over the borrower.
- Private equity and venture capital: Investors may want to consider whether a possible investment is active in any of the 17 “sensitive” sectors and whether certain categories of buyers would present an execution risk, thus limiting possible exit routes. A limited partner taking a stake in a private equity fund entitling them to control or, by virtue of governance rights, material influence over the fund will also need to consider notification requirements and the call-in risk.
- Group re-structuring: Intra-group acquisitions could be caught by the regime even where there is no change in ultimate control. For example, where companies A and B are part of the same corporate group, and company A acquires company B that is active in one of the 17 sensitive sectors, a notification to the government will be required.
This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Maria Nadarajah or write to us using the contact form below.
