National Security and Investment Act 2021 (‘the Act’) (Link)
Whilst there is an express carve-out for administrators and creditors in an administration (or similar proceedings under the insolvency laws of another country) contained within the Act, Insolvency Practitioners (‘IPs’) should still bear in mind the obligations placed upon a third party purchaser with regard to transactions involving 17 high-risk /sensitive sectors subject to mandatory pre-completion notification/clearance and the impact that the requirements under the Act could have on distressed M&A transactions. Further the administrator carve out does not encompass liquidators.
Overview
The Act received Royal Assent on 29 April 2021, albeit the operative provisions of the Act will only come into effect once the necessary implementing regulations have been adopted, expected this year. However, the NSIA will have retrospective effect with respect to any transactions completing from 12 November 2020.
The Act –
1. enables the Secretary of State (‘SoS’) to issue ‘call in’ notices to call in acquisitions of qualifying entities or qualifying assets if there has been a trigger event (‘trigger events’) in order to carry out a national security assessment.
2. A trigger event occurs
a. with respect to a “qualifying entity”(1):
i. on the acquisition of a shareholding/share of voting rights in of more than 25%, 50% or 75%;
ii. on the acquisition of voting rights enabling the holder to secure/prevent the passage of any class of resolution; or
iii. on the acquisition of material influence over the policy of an entity; and
b. with respect on the acquisition of a right/interest in “qualifying assets”(2), on the acquisition of a right/interest in or in relation to the assets enabling the acquirer to use the asset (or use it to a greater extent than previously was the case) or to direct/control how the asset is used (including to a greater extent than was previously the case;
3. Creates a mandatory pre-completion notification system for proposed acquirers of qualifying entities (and potentially qualifying assets) in any of 17 sensitive sectors of the economy perceived to be high risk (including data infrastructure, energy and transport) to seek approval from the SoS before completing their acquisition. For each sensitive sector, the implementing regulations will set out a detailed description of the detailed criteria determining which qualifying entities are subject to the mandatory pre-notification regime (e.g. “Authorised Electricity Operators in Great Britain that provide load via individual assets that would have a total installed capacity greater than or equal to 100 megawatts…“). A draft of the criteria has been put out to consultation, and
4. Creates a voluntary notification system for other trigger events in the sensitive sectors and for all trigger events in other sectors, to provide a mechanism for obtaining pre-completion clearance for the acquirer, in particular where there is a perceived risk that the trigger event may be deemed by the SoS to raise national security concerns.
Obligations
The mandatory notification obligation applies to the trigger events set out in points 2(a)(i) and (ii) above in 17 high-risk /sensitive sectors (“Notifiable Acquisitions”). The Act itself does not provide for mandatory pre-notification of asset deals, however, section 6(6) says that the implementing regulations “may…include…provision about the circumstances in which the gaining of control of a qualifying asset of a specified description is a notifiable acquisition“, so it is possible that the implementing regulations will extend the mandatory pre-notification regime to some asset deals (no draft regulations on this point have been made available). The voluntary notification regime and the SoS’s power to serve a call-in notice post-completion, applies to all trigger events falling outside the mandatory pre-notification regime (see point 2 above – essentially, all share/assets deals other than the acquisition of a pure minority shareholding under 25% in all sectors of the economy are in scope).
The high risk/sensitive sectors will be kept under review and are currently –
Civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; advanced robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; synthetic biology; critical suppliers to Government; critical suppliers to the emergency services; military and dual-use goods/technologies; and satellite and space technologies.
The creation of share security by secured parties will not in itself trigger the application of the mandatory notification regime. However, enforcement of share security, including the appropriation of shares/exercise of voting rights, would be subject to the mandatory pre-notification regime. Here, the trigger event would arise provide the secured party with the right to enforce its security over the shares or to direct the exercise of share voting rights, provided that such circumstances are within the control of the secured party.
Where the mandatory pre-notification regime applies, the obligation to obtain pre-completion clearance falls to the purchaser (i.e. the “acquirer”). However, for trigger events not subject to the mandatory pre-notification regime, any of the acquirer, seller or the target entity are entitled to make a voluntary notification.
Notification
Where a transaction is subject to mandatory notification, the transaction cannot complete until clearance is obtained, which could take anywhere from 30 days (the initial period for the SoS to consider whether or not to serve a call-in notice) up to 105 working days (or more, if agreed by the acquirer) where the SoS does give a call-in notice. The deal will have no legal effect until clearance is obtained (unless and until subsequently cleared).
As noted above, it is uncertain whether or not the implementing regulations will bring any asset deals within the mandatory pre-notification regime. To the extent asset deals in the 17 sensitive sectors are not within the mandatory notification regime, they are still subject to the “call-in” powers of the SoS and the voluntary notification regime is available if pre-completion certainty is required (the acquisition of “qualifying assets” in the sensitive areas which, had they been share deals would have triggered a mandatory notification, is obviously at higher risk of being called-in post-completion).
The same is true of all trigger events of qualifying entities/assets outside the 17 sensitive sectors – they are subject to the “call-in” powers of the SoS and the voluntary notification regime is available if pre-completion certainty is required.
Parties would be encouraged to notify the new Investment Security Unit (“ISU”), set up within the Department of Business, Enterprise and Industrial Strategy (“BEIS”) to enforce the NSIA, of “trigger events” which may be of interest from a national security perspective. The ISU is also available for informal consultation (e.g. to clarify whether a particular transaction is caught by the mandatory regime). Transactions that are not voluntarily notified by the parties can be called-in for review up to five years post-completion (or, within 6 months of the SoS becoming aware of the trigger event, if earlier).
Qualifying assets
(4) A “qualifying asset” is (subject to subsection (6)) an asset of any of the following types–
(a) land,
(b) tangible (or, in Scotland, corporeal) moveable property,
(c) ideas, information or techniques which have industrial, commercial or other economic value.
(5) Examples of assets within subsection (4)(c) include–
(a) trade secrets, (b) databases, (c) source code, (d) algorithms, (e) formulae, (f) designs, (g) plans, drawings and specifications, (h) software.
(6) Land or moveable property situated outside the United Kingdom or the territorial sea, or any asset within subsection (4)(c), is a “qualifying asset” only if it is used in connection with–
(a) activities carried on in the United Kingdom, or
(b) the supply of goods or services to persons in the United Kingdom
Call in period
The SoS has the power to call in transactions which were not voluntarily notified to it, but which may raise national security concerns. The SoS has a window of 6 months to decide whether or not to “call-in” a transaction from the date they become aware that it has taken place, subject to a total 5-year limitation period. The Act has retrospective effect, so any transactions that close on or after 12 November 2020 are at risk of being subject to retrospective review.
On receipt of a mandatory or voluntary notification, the SoS has 30 working days to decide whether to clear a transaction or to call it in for a more detailed review. If the SoS reasonably suspects that there is – or could be – a risk to national security, they have another 30 working days (extendable by 45 working days in exceptional circumstances – and further extendable if the acquirer agrees) to conduct a more detailed review.
Other
The Act does not have any value thresholds beneath which notification is not required. If the transaction exceeds the percentage thresholds, and involves a target sector, then even small transactions could be caught by the notification regime.
There are civil and criminal sanctions for non-compliance with the regime. Fines of up to 5% of global turnover or £10 million (whichever is greater) can be imposed on the acquirer and individuals can be imprisoned for up to five years.
Impact on IPs
The express carve-out for administrators and creditors in an administration (or similar proceedings under the insolvency laws of another country) means that the acquisition of any ‘rights’ that are exercisable by an administrator or creditor in such insolvency proceedings will not constitute a notifiable ‘trigger event’ under the Act. However the carve-out is defined narrowly and does not apply to liquidators or other insolvency processes and would not, for instance, be wide enough to capture enforcement action being taken by a secured party over shares or any enforcement action taken by a secured party (e.g. receivers).
Notwithstanding the carve-out, IPs should still bear in mind the obligations placed upon a third party purchaser with regard to transactions captured by the Act and the impact that they could have on distressed M&A transactions, in particular-
- the additional time it might take to obtain clearance.
- the fact that a Notifiable Acquisition cannot lawfully complete until the acquirer has clearance or, where the transaction is called-in for review, the process has concluded.
- the risk of a transaction being declared void if it involved a Notifiable Acquisition and the purchaser failed to obtain prior clearance. Whilst the notification process is the responsibility of the acquirer, an IP should consider whether the transaction is one that will require clearance to ensure that the acquirer takes the necessary steps ahead of completion to obtain clearance
- the limitation period for the Government’s “call in” power is 5 years, so any decision by an acquirer not to make a voluntary notification may (depending on whether there is any real risk of a post-completion call-in) be subject to a high degree of uncertainty for a significant time period.
R3 opinion
Whilst we are of the view that the Act is not likely to have a significant impact on the profession because the mandatory notification regime applies to very specific, high risk entities and assets and there is a carve out for IPs appointed as administrators, IPs should nevertheless be aware of the requirements of the Act and the impact that it could have on a distressed M&A transactions if the transaction falls within the scope of the mandatory notification regime and clearance is required before completion of a sale. Although the obligation to obtain mandatory pre-completion clearance under the Act will always fall on the buyer, IPs should consider whether a particular transaction could be caught and whether clearance is required to factor that into the process.
The SoS has 30 working days to decide whether to clear a transaction or to call it in for a more detailed review and as members will appreciate IPs do not have the luxury of time when advising a company
(1) Defined as any entity, either formed/recognised under UK law or active in the UK, that is not an individual, including companies, LLPs, partnerships, unincorporated associations, trusts.
(2) Defined as land; tangible moveable property; ideas, information, techniques having commercial value, either located in the UK or used in connection with UK activities.