Compliance and cooperation vs the unknown: how is the National Security and Investment Act impacting on acquisitions and reorganisations?

The National Security & Investment Act 2021 (“NSIA”) came into effect at the start of this year. The aim was to tighten existing safeguards, which enable the government to monitor and, where it is deemed in the national interests, to intervene to block an acquisition or to impose conditions on it.

In fact, it has resulted in a period of flux as businesses work out whether the NSIA is something they need to be concerned with and, if so, how transaction structures and timetables can be revised to cater for the new regime.

The reality is that reverberations have, with a couple of exceptions, been pretty limited. Nonetheless, the consequences of not complying – draconian fines and the potential for corporate and individual criminal liabilities – are such that the NSIA needs to be taken seriously by everyone. What, then, are the main watchpoints?

• “National interest” is an underlying concept but is given a deliberately broad interpretation. Despite its name, the NSIA isn’t just about defence or national security. It is more broadly concerned with the economic and “compliance” safeguards which make the UK an attractive market in which to invest and carry out business.
• The NSIA extends to acquisitions of both “entities” – for which read just about any vehicle through which business is conducted – and assets – again this covers virtually any asset, tangible and intangible.
• There are specified thresholds which can trigger a notification requirement. For example any increase in stake or voting rights which takes an acquiror over 25%, 50% or 75%.
• Often what is needed is a detailed analysis of the nature of the right being acquired to ascertain whether the NSIA applies. For instance, where an interest is held jointly or via a nominee, or where rights are exercisable only in specific circumstances.
• There can also be less defined parameters to consider, such as whether an acquiror will acquire a “material influence” over an entity’s policy. This is a concept largely determined in accordance with the current Competition and Markets Authority guidelines and can trigger a voluntary notification.
• The NSIA doesn’t just apply to arms-length transactions. Corporate restructures or reorganisations can equally trigger notification requirements.
• The regime distinguishes between mandatory notifications, where the obligation to notify is on the acquiror, and voluntary notifications, where either acquiror or the entity being acquired can notify. The path to notification is, however, broadly similar whichever route is taken. Acquisitions of assets are subject to the voluntary notification regime. Acquisitions of entities can fall under either.
• Despite the apparent simplicity of the list of the 17 “sensitive sectors” which the NSIA identifies as, at least in theory, being subject to the notification regime, very careful attention needs to be paid to the detail of the underlying regulations. This is particularly so in the case of the more complex sectors such as Advanced Materials. Moreover, it is often as much about what activities the business in question undertakes, for example development, research, production etc, as what the business produces or sells and the market in which it operates. Consequently, the decision as to whether or not to notify is often made by the business, which has the technical know-how and lawyers, who will review that know-how in the context of the regulations, working in tandem.

Timing is without doubt a concern, particularly when plans for an acquisition or reorganisation start to forge ahead. As awareness increases, NSIA will become less of a last-minute hitch added to which, as time goes on, we will have a much better feel for the extent of BEISs’ likely interest in various types of acquisition, the level of information it needs and so on.

For now at least turnaround times are reasonably good – the 30-day initial review period is holding up, however strain on the system is building. The lack of certainty however means that a more flexible approach is required in transactional work. This is to allow for the possibility that BEIS might require more information or want to undertake more detailed scrutiny – and of course the risk that BEIS might say “no” remains until the last moment.

There also remains the pragmatic issue of the potential clash of interests between acquirer, who is dependent on full and accurate information being provided by a target entity, and the current owners of the entity who will want to adopt a “buyer beware” mentality to the fullest extent possible. This can add further delay and additional rounds of due diligence into the process of any transaction, lengthening timetables and increasing costs for all.

As to the true impact of the regime, details of the number of transactions BEIS calls in are sketchy at the moment. The Impact Assessment undertaken before the NSIA was implemented estimated that fewer than 100 transactions would be called in each year.

We may not learn more until BEIS publishes its annual report after 31 March next year.  Even then the commercial sensitivity around corporate or asset transactions is such that it is likely to be difficult to get any real grasp on exactly how robust BEIS is proving to be in implementing its objectives.

In the meantime, however, this remains an important area to keep under review and a proactive, collaborative approach will be an invaluable tool in covering off any notification requirements at any early stage.