Extensive new powers to investigate and intervene in deals that could have national security concerns come into play this month, lenders and borrowers need to understand the implications now.

The National Security and Investment Act (“the Act”) regime came into effect on 4 January 2022. It creates a new national security screening regime for corporate acquisitions in the UK. Certain aspects of the Act apply retrospectively from 12 November 2020.

It is one of the biggest changes to corporate legislation in the UK for decades giving the UK government extensive powers to investigate and intervene in transactions that could give rise to national security concerns. The Act does not only apply to share acquisitions of companies but also to certain asset transactions too - including acquisitions of land and intellectual property, covering a wide range of transactions with a potential national security element.

A new government authority known as the Investment Security Unit (ISU) has been created, and it is the ISU that is responsible for monitoring transactions and handing out approvals under this new regime. The Act does not define what national security means, so it is left to the ISU to interpret it.

The Act introduces a mandatory and voluntary notification system, which we will explore in more detail below.

The regime

Mandatory Notifications

A key part of the Act is a mandatory notification system for certain transactions.  A mandatory notification will be triggered on an acquisition of shares/voting rights of over 25% in companies for transactions within one of the 17 defined specified sectors (“Notifiable Acquisition”) which are set out as follows:

It is unlawful to complete a Notifiable Acquisition without prior approval from the ISU, and any transactions completed without approval will be void. It may also be a criminal offence to complete such transactions without approval, punishable by imprisonment for up to five years plus potential fines up to 5% of total worldwide turnover or £10 million (whichever is higher).

This means that transactions which may fall within the mandatory regime will have to be structured so that completion does not take place until the ISU approval has been obtained.

To give you an idea of timings, the ISU will be working to a 30 working day review period to assess the notification, which can be extended by 30 working days and then by a further 45 working days (with scope for further extensions) if there is a reasonable suspicion national security risks might arise. 

Voluntary Notifications

Beyond the mandatory notification regime, the regime also allows parties to notify a transaction to the ISU on a voluntary basis.

A party may seek to make a voluntary notification in light of the additional powers that the government has under the Act to ‘call in’ a transaction for further review if it considers that the transaction might give rise to national security concerns. This call-in power can be exercised up to six months after the ISU becomes aware of the transaction provided it is within the period of five years from completion of the transaction.

As a result of this ‘call-in’ power of review, parties to transactions which are not Notifiable Acquisitions will need to consider the risks of not making a voluntary notification i.e. if the transaction is ‘called-in’ and national security issues are found then the government could impose remedies to address its concerns (which could include, for example, an obligation on the purchaser to divest the business). So, whilst there is no obligation to make a voluntary notification, a party may want the certainty that the transaction will not be ‘called-in’ (and possibly objected to on national security grounds) at a later date.  It is still be feasible to complete ahead of clearance when a voluntary notification has been submitted unless the government imposes an interim order for the transaction not to complete and the parties might want to make a deal ‘subject to ISU approval’, although in practice most acquirers would want to wait for an approval decision before completing the transaction.

Retrospective Powers

The ISU can call-in for review any transactions, on national security grounds, that have taken place since 12 November 2020. This jurisdiction lasts for five years.

Relevance to banking transactions

Lending and taking security per se are not within the mandatory notification regime, but the nature of the underlying transaction which is being financed needs to be considered when assessing whether a mandatory or voluntary notification should be made. Given the wide range of transactions that could be caught by the regime, the focus will be primarily on the nature of the underlying entity in which the interest is being acquired (and whether it falls into one of the 17 sectors).   When managing the transaction, account needs to be taken of possible time delays whilst waiting for the relevant ISU approval. As inconvenient as the delays may be, the severity of the consequences of failure to obtain approval far outweigh this.

In Asset Finance and Asset Backed Lending deals, we do not currently believe that the transfer of title to the lender or finance company will trigger a mandatory notification, but it could still be subject to ‘call-in’ by the ISU and therefore it would be prudent to consider a voluntary notification and indicative ISU approval on these transactions.

Enforcement of security, such as charges over shares, could be also be a triggering event requiring ISU approval. This will affect the timing of the enforcement of the security as a lender may need to seek approval from the ISU in order to transfer the shares as part of the perfection of its security.

Practical points and what to do now

The Act may impact both existing and upcoming transactions, and the following actions would be prudent:

• reviewing the nature of the transaction to consider whether or not it may trigger a mandatory notification;
• talking with your legal team if you are unsure whether the transaction has potential to be called-in and as such whether a voluntary notification should be made; including specific covenants/undertakings into finance documents around obtaining ISU approvals and continuing compliance with obligations under the Act; including ‘national security’ checks in due diligence on parties and transactions; and allocating time for clearance on transactions or businesses that are high-risk or that may be regarded as of ‘national security interest’. There is no mechanism for expediting clearance applications and as such applications should be made ahead of time, and all parties should be aware of the potential impact on the deal timeframe.

It is important to be aware of what the implementation of the Act means for existing and new transactions so that borrowers and lenders can be as prepared as possible for its potential reach.