Understanding the National Security and Investment Act 2021

The National Security and Investment Act 2021 (NSIA), together with the relevant regulations made under it, came into force on 4 January 2022, says Edward Craft, partner at Wedlake Bell LLP. 

This legislation was one of the most notable achievements of Theresa May who introduced and sponsored this project when Home Secretary, then later as Prime Minister.

Controversies over 5G and new nuclear had put the issues of inward investment into critical infrastructure onto the front pages. The legislation itself was made under Mrs May's successor and received Royal Assent on 29 April 2021.

There is a balance to be struck between maintaining the UK as an attractive place to invest and protecting our national interests. The NSIA seeks to address that balance.

There has been a growing appreciation that, whilst the UK government had effective tools to intervene in transactions involving a change of control on competition grounds, there was no effective mechanism for formal monitoring or blocking of transactions on grounds of national security: enter the new regime.

Before you read further, it is vital for the reader to understand that the limited scope of the new legislation, which is only intended to address matters of national security. The NSIA gives the UK government no powers to block transactions generally, nor does it represent a broadening of existing competition law powers.

The transactions within scope

The NSIA regime captures the acquisition is of a right or interest in, or in relation to, a qualifying asset or qualifying entity. It should be noted that an entity is construed widely and beyond the customary meaning of the word.

Entities and assets will be qualifying entities and qualifying assets if they are incorporated in/situate in the UK or, despite being outside of the UK otherwise have a connection to the UK.

An entity is formed or recognised under the law of a country or territory outside the UK, it is a qualifying entity if it carries on activities in the UK or supplies goods or services to people in the UK.

Assets outside of the UK which are used in connection with activities carried on in the UK or in connection with the supply of goods or services to people in the UK are also within scope.

Transactions which completed before 12 November 2020 cannot be reviewed in any way under the NSIA. This means that certain historic transactions might be reviewed.

The Control Test

The test of control used in the NSIA needs to be carefully considered. It is not a simple 50%+1 test, but, like the PSC regime contained in Part 21A Companies Act 2006, focusses on crossing thresholds at 25%, 50% and 75%.

Accordingly, an existing 74.99% shareholder moving to 75% of an entity in a sector for which a mandatory notification is required will need to make a mandatory notification whilst a new investor moving from 0% to 25% will not need to make a mandatory notification.

In addition, control will also include:

- acquisition of voting rights which can pass or block resolutions;
- material influence, for example acquiring the right to control the board's decisions; and
- an ability to control an asset.

The ISU and its process

the Investment Security Unit (ISU) at BEIS is the team which has been created to deal with the processing of notifications made under the NSIA. It is a well-resourced team which is working to perform its role in an efficient and effective manner.

The basic process can be described as 30+30+45 and breaks down as an initial period of 30 days, in which the ISU might call in the transaction, triggering a second 30 day period, which may be extended for a further 45 day period.

If a notification is received and the ISU determines that no national security arises, the ISU intends to swiftly approve the transaction.

What does this mean?

A transaction which will effect a change of control of a body corporate within a sensitive sector, being one of the 17 detailed below must be notified to the ISU. Given the stated sensitivity, a buyer of assets involving these sectors will be well advised to make a voluntary notification. These sectors have been identified because of specific concerns of risk to our national infrastructure, national interest or defence and you will see that a number of them are focussed on cyber and advanced technologies.

The 17 sectors where mandatory notification is required:

What impact will the NSIA have on investment transactions?

The NSIA should put issues onto the agenda at an early stage. Buyers and sellers will consider if there is likely to be a national security issue early on. Accordingly, there will be changes to the manner in which relevant transactions are negotiated and structured. The major change is that contracts requiring mandatory notifications will need to be conditional upon ISU consent. On a practical level, buyers will need to factor the consent procedure and timing into the transaction programme and funding drawdown. It is likely that material adverse event provisions would include ISU rejection of the transaction and this need to be carefully considered.

Hopefully, and possibly perversely, the NSIA should result on less political and media scrutiny ex post facto and more robust, objective consideration of transactions by civil servants.

By Edward Craft, partner at Wedlake Bell LLP