A new regime

The UK has introduced a new regime which, from 4 January 2022, requires purchasers to obtain prior approval for transactions in certain specified sectors. The new regime, contained in the National Security & Investment Act 2021, also gives the UK government the ability to “call in” for review on national security grounds transactions in all sectors of the economy (with the government having the ability retrospectively to review transactions that have taken place since 12 November 2020).

The new regime is very broad and will affect many transactions. In outline:

• There are 17 sectors for which prior approval is required. These are listed below. They include communications, computer hardware, data infrastructure, defence, energy and transport. The proposed definitions of these sectors are very broad.
• There are no materiality thresholds. If the target has any activities (no matter how big or small) in the UK in one or more of the specified sectors, prior approval will be required.
• Transactions are caught by the regime where the purchaser acquires control over the target, but the test for “control” is very low. The test will be met, for example, by any shareholding over 25% (as well as by certain increases in shareholding thereafter).
• Whilst the regime is intended to enable the UK government to review transactions on national security grounds, transactions in the specified sectors require approval regardless of whether they give rise to any national security issues. The government has estimated that around 1,800 transactions will be notified for approval each year, of which only a very small proportion will give rise to any concerns.
• Failure to obtain approval will render a transaction void and may constitute a criminal offence by the purchaser (and potentially also by its officers). In practice, failing to obtain approval may also lead to commercial challenges on future acquisitions involving the same target (for example, in the event of an exit by the purchaser).
• Where a transaction gives rise to national security concerns, the UK government will have extensive powers to take steps to address those concerns.
• The new regime is administered by a new Investment Security Unit, or ISU, which sits within BEIS.

10 key questions on the application of the Act to acquisitions.

1 What is the purpose of the Act?

The Act gives the UK government the power to investigate a wide range of acquisitions and, if the government decides that a national security concern arises, to impose remedies (such as to impose conditions on the transaction or, if it has not yet completed, block the transaction).

In addition, acquisitions of entities engaged in certain activities must be notified to the government and approval obtained prior to completion of the transaction.

2 Is the Act important?

Yes, the Act will have a major effect on transaction processes.

Many deals will require notification to the government for approval (before the deal may lawfully complete). Most deals that are subject to the Act will not give rise to national security concerns and so will be approved; but those that do give rise to concerns may prompt government intervention.

The government initially estimated that there will be 1,000–1,800 transactions notified each year under the Act, with 70 – 95 of those transactions expected to be called in for a full national security assessment. This compares to 12 transactions that were reviewed by the government since 2003 under the Enterprise Act 2002’s public interest regime.

Underlining the breadth of the regime, there is no minimum threshold, such as a market share or turnover test. Consequently, many small and medium sized transactions that were previously not subject to regulatory review will be subject to the Act.

Finally, a notifiable acquisition that is completed without the required approval is automatically void. Additionally, acquirers may be subject to the imposition of significant fines and even imprisonment.

3 Does the Act apply to all transactions?

The Act applies to the acquisition of a qualifying interest in an entity or an asset that has a connection with the UK. A business acquisition, namely, the acquisition of assets and goodwill but not an entity is treated as an asset acquisition under the Act.

3.1 What does a qualifying interest mean?

This is the extent of the right or interest acquired, and there are four tests.

The first three tests relate to shares (the shareholding tests). In relation to the shareholding tests, for example, if you acquire more than 25% of the shares or votes in a company, this is a qualifying interest. If you already own more than 25% but acquire more shares or votes, then the Act may apply, for example, if you increase your share to more than 50%. Finally, if you acquire voting rights such that you can secure or prevent any class of shareholding resolution, this is also a qualifying interest.

The fourth test is broader. If you are acquiring a bundle of different interests, for example, the right to be an executive director and to own shares, the totality of your acquisition will be taken into account. If as a result of all of your interests and rights you are considered to be able to materially influence the policy of the business, then that will be deemed a qualifying interest. “Material influence” is a concept that has been borrowed from the UK merger control regime and, as a rule of thumb, can exist at shareholdings of 15% and upwards (but, in some circumstances, will apply at even lower stakes).

As noted below, only the first three tests are relevant to the mandatory notification regime. The fourth test, meanwhile, is relevant to whether the government can “call in” a transaction for review of its own initiative.

In relation to an asset, a qualifying interest includes ownership but also includes the right to use an asset, for example, a licence to use intellectual property.

3.2 What does an entity mean?

The term “entity” is defined very widely and includes a corporate entity, an unincorporated entity, a partnership or a trust.

3.3 What does an asset mean?

This includes land, tangible property or intellectual property.

3.4 What does a connection with the UK mean?

An entity or asset located in the UK meets the relevant test. In addition, any entity located outside the UK that supplies goods or services to UK entities meets the test. Any assets located outside the UK also meet the test if used in connection with activities carried on in the UK or in connection with the supply of goods or services to UK entities.

4 Which transactions must be pre-notified?

A qualifying transaction, that meets one of the three shareholding tests, of an entity (not an asset) which is engaged in any of 17 sectors in the UK must be notified to the government and approval obtained before completion of the transaction.

The 17 sectors are listed below. The government’s definitions of these sectors are detailed and at times non-obvious. For example: in relation to Advanced Materials a transaction will be subject to the Act if the target entity is engaged in the activity in the UK of re-using lead; Defence will catch many types of supply to the defence sector (even where the activity itself is not of a military nature – such as the provision of catering or cleaning services); and the activities of many technology companies may fall within the scope of Data Infrastructure and Artificial Intelligence. The 17 sectors are:

• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• 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
• Transport

If you fail to notify a mandatory notifiable transaction, you can be subject to a fine of up to 5% of your global organisation’s turnover or £10 million, whichever is greater. A prison sentence may also be imposed.

5 When can the government investigate a transaction?

The government retains the ability to review even transactions that do not need to be pre-notified. If the Act applies to a transaction the government has five years from when a transaction is completed to investigate, or six months from when the government became aware of the transaction. The government can also investigate a qualifying transaction that is in contemplation. A transaction that does not have to be notified can be voluntary notified to the government.

6 How long does the process take?

If the transaction is notified (whether mandatory or voluntary notification), the government has up to 30 working days (so just under one and a half months) to review the transaction, at the end of which it will either take no further action (approval) or it will decide to undertake a further assessment. Any further assessment will take up to 30 working days which can be extended by an additional 45 working days (making an extended review up to 105 working days or just under five months). Further extensions of time are possible subject to agreement of the notifying party.

If the government investigates the transaction on its own initiative, the initial review period is also 30 working days, while the further review period, if there is one, is up to 45 working days. Further extensions are possible subject to agreement of the notifying party.

The expectation is that the vast majority of transactions will be approved within the initial 30 working day period, with only a relatively small number of deals requiring further review on the basis that they might give rise to national security concerns.

7 What if the government considers a national security concern arises?

Such a determination would be made at the end of the government’s assessment. The government will either impose conditions on the acquisition or block the acquisition partially or completely.

8 Can I appeal the government’s decision?

Yes, a decision by the government to block a transaction or impose conditions is subject to a court appeal. The appeal must be lodged within 28 days from the day after the government’s decision.

9 Do I need to notify the transaction to any other bodies?

Notification under the Act is in addition to any other notifications that should be made. For example, a notification under the Act and under the competition merger control provisions of the Enterprise Act 2002 may be appropriate. A consent obtained in relation to a transaction under another regulatory regime does not mean that approval can be assumed under the Act.

10 Is there a notification fee?

No.