A new dimension to doing the deal

The National Security and Investment Act came into effect this week and, with it, extensive powers for the government (acting via the Department for Business, Energy and Industrial Strategy – BEIS) to scrutinise and, if necessary, intervene in acquisitions of businesses or material interests in them where national security is perceived to be at risk.

The below provides a summary of a potentially far-reaching Act, which could have significant repercussions for business in many sectors.

What acquisitions can BEIS scrutinise?

BEIS can scrutinise any qualifying acquisition.  The rules which determine a qualifying acquisition are complex, but in high level terms, all of the following must apply:

• The right or interest being acquired is in, or relates to, a qualifying asset (which includes land, tangible movable property or intellectual property rights) or a qualifying entity (any legal entity other than an individual, including limited companies, partnerships, unincorporated associations etc)
• The entity or asset being acquired is in, or has a connection to the UK
• The level of control being acquired over the qualifying entity or qualifying asset meets or passes specified thresholds (determined according to voting rights/material ability to influence, and whether control is direct or indirect).

Some observations at this point:

• Monetary value doesn’t determine whether the Act applies.
• The thresholds are low, meaning that even minority shareholding acquisitions could be impacted.
• The Act doesn’t just apply to arms-length acquisitions. Qualifying acquisitions can arise within corporate restructures where ultimate ownership remains unchanged.
• The requirement for there merely to be “a connection to the UK” gives the Act wide reach. The Act can apply where the qualifying entity is formed or recognised outside the UK, or if the qualifying asset is outside the UK. What matters is whether the entity or asset is used for/in connection with activities or supply of goods and services in the UK.

How does BEIS learn of a qualifying acquisition?

The acquiror must notify BEIS if it is acquiring a qualifying entity in one of 17 “sensitive areas” of the UK economy. This is a notifiable acquisition.

The 17 sensitive areas are:

• Advanced materials
• Advanced robotics
• Artificial intelligence (AI)
• 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

Categories are therefore exceptionally broad; extensive guidance has been published which must be reviewed to check whether an acquisition is a notifiable acquisition.

In all other instances, notification of a qualifying acquisition is voluntary. But BEIS can still call in any qualifying acquisition for assessment where there is a perceived risk to national security.

When should you tell BEIS about a qualifying or notifiable acquisition?

If you are undertaking a notifiable acquisition, for which notification is mandatory, BEIS must be informed before the acquisition in question completes.  The deal timetable should therefore factor this in.

It would be prudent for voluntary notifications to be made similarly before completion to avoid difficulties further down the line. If no voluntary notification is made, BEIS can still review  an acquisition up to five years after it has completed.

What is BEIS looking for?

The aim is not to produce a new notification regime to police M&A activity across the board, but to give BEIS the ability to identify situations in which an entity or asset might be used in a way which compromises national security. Or where an acquiror has characteristics which might suggest that gaining control of an entity or asset might pose a threat to national security. In reality it is likely that only a small percentage of acquisitions notified to BEIS will generate interest warranting a more detailed review.

How do we notify BEIS of a qualifying acquisition?

There are online forms to complete with information on structure and share ownership of the qualifying entity, the acquirer and the acquisition. Failure to provide full information will delay the review and assessment process.

How long does the notification process take?

Once notification has been submitted, BEIS has 30 days to clear the acquisition or otherwise call it in for a national security assessment. Any assessment should be completed within a further 30 days. However this can be extended by up to another 45 days.

Next steps

Once full information has been provided and the notification considered, the acquisition will either be cleared by BEIS or blocked. If the acquisition is cleared (and it is anticipated that the vast majority will be cleared), conditions may be imposed. If the acquisition has already been completed, BEIS has the power to unwind it in appropriate circumstances.

What if I don’t notify?

If notification is mandatory, you can proceed with the acquisition process but can’t complete without BEIS approval. Doing so will void the acquisition and expose the business to risk of civil penalties (which could be a fine equivalent to 5% of your organisation’s global turnover or £10m, whichever is greater). There is also a risk of criminal penalties.

Critically, civil and criminal penalties can be imposed on individuals found to commit an offence under the Act.

If notification is voluntary, you can complete the acquisition without BEIS approval (though there are plainly risks in doing so if the transaction involves any national security risks).

In summary

This Act is likely to impact on a significant number of acquisitions each year. It is also an Act with teeth.

However, while the mandatory notification requirements in particular look onerous, and whilst it will undoubtedly be sensible to adopt a conservative approach at least while the Act beds in, it is unlikely that BEIS has the resources or the appetite to adopt a ‘nanny state’ approach.

Time will therefore tell what the true implications of the Act are for businesses and for the M&A/restructuring world. In the meantime, we would urge prudence and, if in doubt, recommend you take early legal advice.