National Security and Investment Act: What this means for private equity managers and investors

The National Security and Investment Act 2021 (“NSI Act”) established a new standalone statutory regime enabling the UK government to scrutinise and intervene in acquisitions and investments for the purposes of protecting national security in the UK (the “NSI Regime”).  The NSI Regime entered into force on 4 January 2022 and replaced the national security aspects of the government's powers of intervention in transactions under the Enterprise Act 2002.

See our client briefings:

• What you need to know about the National Security and Investment Act (NSI Act)
• Countdown to the UK National Security Screening Regime: Is your business prepared?
• Further guidance from the UK Government on the new national security investment regime and the likely impact on M&A
• What does the National Security and Investment Act 2021 mean for finance transactions?

The NSI Regime

The NSI Regime is broad and covers acquisitions of shareholdings or voting rights as low as 15% (possibly less) made by investors from any country which could harm the UK’s national security.  Whether a transaction falls under the definition of a “qualifying acquisition” under the NSI Act will depend on whether it involves the acquisition of control over, or of a sufficiently material right/interest in a qualifying entity or asset, that is located in, or has a connection to, the UK.  Unlike with merger control, there are no minimum turnover or market share jurisdictional thresholds. 

Mandatory notification

The NSI Regime introduces both mandatory and voluntary notification procedures.

A mandatory notification is required if the acquisition:

• increases an investor’s shareholding or voting rights to more than 25%, more than 50% or more than 75% in an entity which carries on activities, or supplies goods/services to persons in the UK (“Qualifying Entity”); OR
• results in an investor acquiring voting rights which enable it to secure or prevent the passage of any class of resolution governing the affairs of the Qualifying Entity;  AND
• the Qualifying Entity operates in one of the 17 sensitive sectors listed below.

Advanced materials	Communications	Cryptographic authentication	Synthetic Biology	Transport
Advanced robotics	Computing hardware	Data infrastructure	Military and dual use
Artificial intelligence	Critical suppliers to government	Defence	Quantum technologies
Civil nuclear	Critical suppliers to the emergency services	Energy	Satellite and space technologies

Failure to notify such a transaction and obtain authorisation from the Secretary of State for Business, Energy and Industrial Strategy (“BEIS”) before completion will result in it being legally void. Furthermore, the investor could be subject to criminal and civil sanctions for non-compliance including imprisonment of up to 5 years and fines of up to 5% of its global turnover or £10 million, whichever is greater.

A Qualifying Entity means any entity, whether or not a legal person, and includes a company, a limited liability partnership, any other body corporate, a partnership, an unincorporated association and a trust.  An individual is not considered a qualifying entity.

Voluntary notification

An investor may choose to notify an acquisition to BEIS on a voluntary basis if it may give rise to national security concerns in the UK and:

• the Qualifying Entity does not operate in one of the 17 sensitive sectors; or
• the investor acquires less than 25% of the shareholding or voting rights in a Qualifying Entity but is able to exercise material influence over it; or
• it concerns the acquisition of an asset (e.g. land, tangible moveable property, IP) situated in the UK (or outside the UK if used in connection with activities carried on in the UK or the supply of goods/services to persons in the UK) and results in the investor being able to either use the asset (or use it to a greater extent than previously) or direct or control how the asset is used, (or do so to a greater extent).

Call in power

The NSI Act gives the Secretary of State the power to call-in any in scope transaction if they have a reasonable grounds that the transaction could give rise to a risk to national security.  The Statutory Statement, published on 3 November 2021, provides three primary risk factors that the Secretary of State must take into account:

• target risk
• control risk
• acquirer risk

The Secretary of State may issue a call in notice at any time during a transaction or within 6 months of becoming aware of a completed transaction.  Five years after completion transactions cease to be vulnerable to call in, provided the party making the acquisition did not fail to notify a transaction which was within the mandatory notification regime.

Parties to transactions which fall outside the scope of the mandatory notification system will need to weigh the risks of not making a notification, in particular, as the transaction may be called in by the Secretary of State for more detailed analysis.  If a transaction is subsequently found to raise national security concerns, it may be ordered unwound.

National security is not defined

The NSI Act does not define national security for the purposes of the notification regime.  The factors which the Secretary of State must take into account when accessing national security risks are set out in a statutory statement, published on 3 November 2021.  

The final Statutory Statement reflects criticism of the consultation draft published in July 2020.  In response to concerns raised by the Joint Working Party of the Company Law Committees of the City of London Law Society and the Law Society and the International Trade Committee, the Statutory Statement includes:

• an explicit statement that the call-in power will be used solely to safeguard the UK’s national security and not to promote any other objectives, and that the Secretary of State will use the call-in power where there may be a potential for immediate or future harm to UK national security
• in the context of the three primary risk factors, a statement that the Secretary of State expects that, when calling in an acquisition, all three risk factors will be present, but does not rule out calling in an acquisition on the basis of fewer risk factors 

What does this mean for private equity GPs and LPs?

Deal impact and timing: consider the NSI Act at the outset of a transaction

Private equity managers should consider whether an acquisition falls within scope of the NSI Regime early on in the acquisition process to determine whether it triggers a mandatory filing under the NSI Regime or whether a voluntary filing would be prudent to reduce the risk of it being “called-in” up to five years after it is completed.  They should also consider whether transfers of interests between funds fall within scope.

The definitions of the 17 sensitive sectors specified under the mandatory regime are very detailed and the Secretary of State is able to update them in the future, for example, to take account of evolving technology.  It may, therefore, not be straightforward to identify if a particular target’s activities fall within one of the sensitive sectors which require mandatory notification.  

If a notification is required, the effect on the transaction timing must be taken into account.  Transactions which fall within the mandatory regime must be structured so that clearance is obtained prior to completion.  GPs will want to ensure NSI Act compliance is built into their due diligence process for acquisitions.

UK investors will be caught by the NSI Act

UK investors are not exempt from the NSI Act.  Unlike similar regimes in the EU, the NSI Regime applies to both UK and overseas investors.  The focus of the NSI Regime is on the national security sensitivities of the activities of the target as opposed to the nationality of the investor and a transaction in which all parties are UK incorporated and domiciled entities may well be caught.  

Impact on LPs

The NSI Act could have direct as well as indirect impacts on LPs.

For bespoke investment funds, particularly single investor funds, where LPs have additional governance rights (particularly in relation to a fund’s portfolio companies), an LP could be directly impacted by the NSI Act and so careful consideration of the application of the NSI Act will be needed.

However, for LPs with normal governance rights (which typically would not amount to ‘material influence’) the impact is likely to be indirect.  For example, if a transaction is subsequently found to be legally void because it should have been notified to the Secretary of State under the NSI Act, this could have an impact on returns and there could be reputational issues to consider.

Examples of circumstances in which GPs should consider whether the NSI Act may apply include:

• an increase in an existing stake which results in the fund’s shareholding or voting rights exceeding the 25%, 50% or 75% thresholds
• acquisition of “material influence” in an energy company (which could arise in relation to shareholdings lower than 25%)
• acquisition of a transport company as part of a restructure or reorganisation 
• acquisition of a non-UK data infrastructure company if the non-UK company supplies services to persons in the UK
• investment in a SPAC or other acquisition vehicle for which the target is either undisclosed or unascertained (the risk here is that the target of the SPAC may itself be subject to the NSI Act and this may prevent the acquisition or reduce its profitability)

Areas where further guidance is needed from Government

As a new and broad regime there are areas of ambiguity where further guidance from BEIS would be welcomed, for example in relation to swamping rights. Where a private equity investor invests in a company active in one of the 17 sectors and such investment is made on the basis that the investor will automatically acquire future additional rights (e.g. more share capital or a larger proportion of voting rights) if certain events take place, this could be impacted by the NSI Act. The wording of the Act is sufficiently broad that the acquisition of such additional rights could in themselves trigger a further mandatory notification. In this context and without further guidance from BEIS how the NSI Act might impact swamping rights on a specific deal.

Webinar

See our webinar, “Impact of Foreign Investment & National Security regimes on Private Equity”, in which Peter Harper, James Lindop, Jeff Bialos, Martin Bechtold and Claire Morgan discuss the NSI Act and equivalent regimes in other countries.

How can Eversheds Sutherland help?

Our global team of lawyers have cutting-edge experience, operating at policy-level and regularly appearing before authorities across Europe, the US and Asia, advising transactions that often raise complex and difficult foreign investment and competition issues. If you would like any further information on the NSI regime or need advice regarding financial services, please contact our Competition and Trade team or get in touch below: