UK National Security and Investment Act 2021

UK National Security and Investment Act 2021

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This information is offered on the basis that it is a general guide only and not a substitute for legal advice.

We cannot accept any responsibility for any liabilities of any kind incurred in reliance on this information.

UK National Security and Investment Act 2021 The UK National Security and Investment Act 2021 (the Act) received Royal Assent on 29th April and is anticipated to become law later this year. The Act introduces a new standalone regime in the UK for the review of transactions and investments on national security grounds (NSI Regime).

Johnathan Rees Partner | Head of Corporate & Commercial johnathan.rees@laytons.com +44 (0)20 7842 8000

UK National Security and Investment Act 2021

Key Aspects The NSI Regime will replace the national security aspects of the government's current powers of intervention under the Enterprise Act 2002. Its key provisions are summarised below:

Purpose

The Act establishes a new, standalone statutory regime for government scrutiny of, and intervention in, acquisitions and investments for the purposes of protecting national security

Scope

The NSI Regime will apply to “trigger events” –acquisition of control of a “qualifying entity” or “qualifying asset” - where the acquisition potentially gives rise to national security concerns in the UK

Effective Date

The commencement date will be later this year (date to be confirmed).

The regime will have “look-back” provisions enabling the government to call in for review any qualifying transaction completed between 12 November 2020 and the Act’s commencement date

Application

The NSI Regime will apply equally to both UK and non-UK investors

and may capture cross-border transactions even if the target has no UK subsidiary (see Qualifying Entity below)

Mandatory notification

A mandatory notification obligation will apply to certain transactions involving target entities involved in specified sensitive core sectors.

Government approval will be required before the completion of such transactions

Voluntary notification

Investors will have the option to voluntarily notify a qualifying

Call-in-powers

The government will have the power to call in qualifying transactions

Remedies and sanctions

The imposition of conditions, prohibiting or unwinding the transaction,

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transaction to obtain clearance

for review - regardless of sector or materiality thresholds

fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of up to five years

UK National Security and Investment Act 2021

Trigger Events

Qualifying entity

The Act applies to 5 categories of transaction that involve

This concept includes companies, limited liability

the acquisition of control over certain qualifying entities or qualifying assets (referred to in the Act as “trigger events”).

The first 4 of these events relate to the ways in which an acquirer may obtain control over a qualifying entity. These events comprise the acquisition of a right or interest in a qualifying entity which results in any one or more of the following: • The percentage of shares held increasing to more than 25%, 50% or 75%.

• The percentage of voting rights held increasing to more than 25%, 50% or 75%.

• The acquisition of voting rights enabling the blocking/ passing of corporate resolutions.

• The acquisition of “material influence” over a qualifying entity’s policy. Relevant government guidance indicates this may include the acquisition of a shareholding of less than 15% when accompanied by other factors e.g. board representation.

The fifth category of trigger event concerns an acquirer gaining control of a qualifying asset and occurs where there is an acquisition of a right or interest in (or in relation to) an asset which gives the acquirer the ability to: • use the asset, or use it to a greater extent than prior to the acquisition (“use” includes references to its exploitation, alteration, manipulation, disposal or destruction); or • direct or control how the asset is used (or to a greater extent than prior to the acquisition)

partnerships and any other bodies corporate, partnerships, unincorporated associations and trusts. It is important to note that an entity formed or recognised outside the UK is capable of constituting a qualifying entity for the purposes of the Act if it: • carries on activities in the UK or • supplies goods or services to persons in the UK So e.g. an acquisition of a French target by a German acquirer will be caught if the French entity supplies customers in the UK.

Qualifying assets These comprise: • land (real estate) • tangible moveable property • ideas, information or techniques which have industrial, commercial or other economic value (e.g. trade secrets, databases, source code, algorithms, designs and software) Again, land or moveable property located outside the UK is a qualifying asset for the purposes of the new regime if it is used in connection with: • activities carried on in the UK or • the supply of goods or services to persons in the UK The extension of the NSI Regime to include assets is designed to prevent parties from circumventing the regime by purchasing assets rather than shares in the company that owns them.

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UK National Security and Investment Act 2021

Notification The NSI Regime establishes 2 routes for acquirers to notify acquisitions to the Government for the purposes of obtaining a decision on whether the transaction gives rise to national security issues: • A mandatory notification procedure will apply to certain types of acquisition (“notifiable acquisitions”) of qualifying entities that operate in specified sectors (to be specified in secondary legislation) where it is considered that national security risks are most likely to arise. A notifiable acquisition must be notified and cleared before the acquisition occurs. A “standstill” obligation prohibits the parties from completing the transaction prior to obtaining clearance breach of which will result in the transaction being treated as automatically void and of no legal effect.

A notifiable acquisition occurs where both of the following criteria are met: • The subject of the acquisition is a qualifying entity that undertakes particular activities in the UK within a specified sector • As a result of the acquisition, the acquirer gains control of a qualifying entity by either: • increasing the percentage of shares (or votes) that it holds in the entity to more than 25%, 50% or 75%; or • acquiring voting rights in the entity that enable it to block or pass resolutions.

Acquisitions of qualifying assets are not caught by the mandatory notification regime.

• A voluntary notification system where parties are encouraged to notify trigger events that, whilst falling outside the mandatory regime, may nevertheless raise national security concerns. This process applies to share and asset deals and will help parties gain deal certainty.

Notification Process • Notifications must be made by the acquirer and will be made via an online portal to a new Investment Security Unit (ISU) housed within the Department for Business, Energy and Industrial Strategy (BEIS). The decision-maker will be the Secretary of State for BEIS. • BEIS is required to decide as soon as reasonably practicable after receiving a notification of a trigger event whether to accept or reject (e.g. insufficient information provided) the notification. Once BEIS gives notice of acceptance it has an initial 30-working day period to: • clear the notified transaction; or • exercise its call-in power to initiate a full national security assessment of the transaction

Pre-Notification Discussions The government has indicated that it will establish a process where parties can take informal non-binding guidance from BEIS as to whether their proposed transaction falls within the scope of the NSI Regime. In advance of the implementation of the Act BEIS encourages parties to contact the ISU (email investment.screening@beis.gov.uk) for such guidance on the likelihood of their transaction being called in for a national security assessment.

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UK National Security and Investment Act 2021

Retrospective clearance Where a notifiable transaction has been completed without the requisite clearance (and so is void) the parties may apply for the transaction to be retrospectively validated subject to an application being made in accordance with the applicable procedure.

Call-in powers • The government is given power to call in a trigger event for a full national security assessment irrespective of whether it has been formally notified.

• To exercise the power the Secretary of State must

• The Secretary of State has an initial assessment period of 30 working days (beginning on the day the call-in notice is given) to determine whether to issue: • a final order imposing remedies (for the purpose of preventing, etc. the national security risk) or • a final notification clearing the trigger event.

That initial assessment period can be extended by an additional 45 working days if the government believes that there is a national security risk.

• The call-in power can be used in relation to transactions involving non-UK companies or assets. It is sufficient if:

reasonably suspect that:

• the target entity supplies goods or services to

• A trigger event has occurred or is in progress or

• the target’s assets are used in connection with

contemplation; and • That trigger event has given rise to or may give rise to a national security risk.

• The power extends to any trigger event that takes place between 12 November 2020 and the day before

persons in the UK; or activities carried on in the UK or the supply of goods or services to persons in the UK.

National Security

the Act comes into force - it cannot be exercised in

Given the concept’s central significance, rather unhelpfully

relation to a transaction that completed on or before

the Act does not define “national security” for the purposes

11 November 2020.

of the NSI Regime. Factors expected to be taken into account will be set out in a statutory statement in due

• The call-in power must be exercised in accordance

course. In mitigation, the flexibility which the government

within strict time limits. In essence, BEIS has up to 5

has created recognises the complex and dynamic nature of

years after completion to call-in the deal reduced to 6

the threats to national security that the UK could face.

months if it has become aware of the transaction.

The retrospective call-in power may be exercised at any time up to 6 months after the commencement of the Act or 6 months after the date on which BEIS becomes aware of the transaction whichever is later (subject to a longstop of five years after completion of the transaction).

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UK National Security and Investment Act 2021

Sanctions Sanctions for non-compliance with the NSI Regime will be severe: • where the mandatory notification obligation applies, the transaction is void if completed prior to clearance • fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) • imprisonment of up to 5 years and/or • director disqualification for up to 15 years

Key points for investors There are a number of key take-aways for investors including:

Transactions not yet signed

Consider the inclusion of an appropriate condition precedent in the

Transaction signed but not completed

Obtain informal guidance from the ISU if there is any risk of a potential

Future transactions

transaction documents

national security issue. This will reduce to 6 months what would otherwise be a 5 year call-in risk following completion

• Consider whether the deal raises any substantive NSI issues –

consider impact on transaction costs, timetable and management of any notification process

• Overseas counterparties consider implications where target group carries on any part of its business in the UK

• Consider obtaining informal guidance from the ISU

• Enhanced due diligence on any target activities likely to be national security related

• Consider specific NSI conditions precedent and impact on long stop date

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UK National Security and Investment Act 2021

Closing thoughts • The Act represents a radical overhaul of the UK’s approach to scrutiny of transactions on national security grounds and has material significance for foreign investment in the UK. Despite assurances from government as to the likely number of transactions to be called-in and those that are being cleared quickly, the impact of the NSI Regime on investor sentiment is uncertain.

• The mandatory notification and standstill obligations may impact M&A auction processes involving the relevant sectors.

• The extra territorial aspects are significant and should be considered carefully by overseas counterparts where the target group carries on any part of its business in the UK. • The NSI Regime represents a significant new transaction execution risk which parties will need to incorporate into their processes and timetables.

Sanctions are severe –civil and criminal – meaning the regime poses a buyer and seller risk.

If you are contemplating an investment or acquisition which may fall within the NSI Regime we would be pleased to help with any questions you may have.

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UK National Security and Investment Act 2021

Expertise

Mergers & Acquisitions Our team has extensive experience in M&A transactions both in the UK and internationally.

We have considerable experience with complex and high profile transactions, as well as crossborder transactions. Our lawyers provide legal advice for public and private corporate clients, institutional investors and private individuals.

We provide the full range of services for an M&A transaction and work alongside our lawyers from our specialist multi-disciplinary groups.

Johnathan Rees

Cameron Sunter

Partner johnathan.rees@laytons.com +44 (0)20 7842 8009

Partner cameron.sunter@laytons.com +44 (0)20 7842 8036

John Gavan Partner john.gavan@laytons.com +44 (0)20 7842 8000

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This information is offered on the basis that it is a general guide only and not a substitute for legal advice.

We cannot accept any responsibility for any liabilities of any kind incurred in reliance on this information.

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