Since 4 January 2022, under the new National Security and Investment Act 2021 (NSIA), a new, hybrid scheme has been introduced which allows the Government to scrutinise, and intervene in, acquisitions and investments where it is deemed necessary in order to protect national security in the UK.
The Secretary of State can produce what is known as a “call-in” notice if it reasonably suspects that a trigger event has taken place in relation to a qualifying entity or qualifying asset, or, if there are arrangements in contemplation, which, if affirmed, will result in a trigger event taking place in relation to a qualifying entity or qualifying asset. Service of a call-in notice by the Secretary of State opens an initial 30 working days’ assessment period during which the Secretary of State will investigate the transaction.
What is a "trigger event" under NSIA?
A trigger event takes place when either:
- 1) a person gains control of a qualifying entity; or
- 2) a person gains control of a qualifying asset.
What is a "qualifying entity"?
The definition of a ‘qualifying entity’ is broad and includes a company, a limited liability partnership, a partnership, an unincorporated association and a trust. Entities formed or recognised under the law of a country or territory outside the United Kingdom, are also recognised as such if the entity conducts activities in the United Kingdom, or if the entity supplies goods or services to persons in the United Kingdom.
What is a "qualifying asset"?
A qualifying asset includes:
- tangible (or, in Scotland, corporeal) moveable property;
- Ideas, information or techniques, which have industrial, commercial, or other economic value. For example:
- trade secrets,
- source code,
- plans, drawings and specifications,
A qualifying asset will only be classed as such if it is used in connection with activities carried out in the United Kingdom, or, if used in connection with the supply of goods or services to persons in the United Kingdom.
When does a person gain "control" of a qualifying entity under NSIA?
A person gains control in a qualifying entity if they acquire a right or interest in the entity, which satisfies one of the following criteria:
- 1) The percentage of the persons shareholding or voting rights held increases:
- from 25% or less to more than 25%;
- from 50% or less to 50% or more;
- from less than 75% to 75% or more.
- 2) Where the person acquires voting rights in the entity and as a result is able to secure or prevent the passage of any class of resolution governing the affairs of the entity.
- 3) Where the acquisition, whether alone or together with other interests or rights held by the person, enables the person to materially influence the policy of the entity.
If any of the circumstances in (1) or (2) above apply, notification of the acquisition to the Secretary of State is mandatory as this is what is known as a “notifiable acquisition” and will therefore require clearance before completion can take place.
How is "control" of qualifying assets defined under the National Security and Investment Act?
A person gains control of a qualifying asset if the person acquires a right or interest in the asset and as a result the person is able to use the asset (or acquire greater use prior to the acquisition), or, is able to direct or control how the asset is used (or do so to a greater extent prior to the acquisition). The term "use" includes the ability to alter, dispose of, or destroy the asset.
Is notifying the Secretary of State mandatory or voluntary?
For transactions which amount to a notifiable acquisition, notifying the Secretary of State for approval is mandatory. Any transaction which amounts to a notifiable acquisition and that is completed without the Secretary of State’s prior approval is void.
Notification to the Secretary of State is also mandatory where a qualifying entity conducts specified activities in one of the 17 sensitive sectors. At present, the sensitive sectors include:
- Advanced materials
- Advanced robotics
- Artificial intelligence
- Civil nuclear
- Computing hardware
- Critical suppliers to Government
- Cryptographic authentication
- Data infrastructure
- Military and dual-use
- Quantum technologies
- Satellite and space technology
- Suppliers to the emergency services
- Synthetic biology
If a transaction is held to be void due being a notifiable acquisition and completing without prior approval, it is possible for parties to apply for retrospective validation.
The Secretary of State can then either accept the validation application by serving a validation notice. The Secretary of State can also select notifiable acquisitions using its own initiative and approve such transactions retrospectively much in the same way discussed above. The effect of retrospective approval is that the notifiable acquisition is no longer held as being void.
Parties also have the option of submitting the transaction for review by the Secretary of State by following the voluntary notification procedure. Voluntary notification covers situations where a trigger event has taken place in relation to a qualifying entity or a qualifying asset, or arrangements are in progress or contemplation which, if carried into effect, will result in a trigger event taking place in relation to a qualifying entity or a qualifying asset. If parties wish to follow the voluntary notification procedure, they will serve the Secretary of State with a voluntary notice. The Secretary of State can then accept or reject the voluntary notice. If it is accepted, the Secretary of State must notify each relevant person and within 30 working days either serve a call-in notice to investigate further, or notify the relevant people that no further action will be taken.
What powers does the Secretary of State possess under NSIA?
The Secretary of State can serve an information notice on a person requiring them to provide any information which may assist the Secretary of State in exercising its powers or functions under NSIA.
The Secretary of State can also serve an attendance notice on a person which can require a person to attend at a time and place specified in the notice and to give evidence.
Note that for the purposes of an attendance and information notice, ‘person’ includes:
- a United Kingdom national;
- an individual ordinarily resident in the United Kingdom;
- a body incorporated or constituted under the law of any part of the United Kingdom; or
- a person carrying on business in the United Kingdom.
If the Secretary of State is provided with any false or misleading information in response to persons served with any of the notices mentioned throughout this article, the Secretary of State retains the ability to reconsider and can either affirm, vary or revoke such decision. If varied or revoked, the Secretary of State will give notice to that effect to the persons concerned. If revoked, the Secretary of State may issue a further call-in notice, a fresh six-month time frame for consideration is commences on the date the Secretary of State was aware the information became false or misleading.
The Secretary of State can make an interim order if it is felt to be necessary and proportionate to prevent or reverse any action which might prejudice the exercise of the Secretary of State’s functions under NSIA in regard to a call-in notice, or to mitigate its effects. The interim order may compel a party to take specific action, or refrain from taking certain action, or appoint a person to conduct or supervise the conduct of certain activities.
What are the main concerns for lenders?
If you are a lender providing finance for an acquisition of shares or an asset then parties should be mindful as to whether the acquisition will trigger either mandatory notification, or, alternatively, whether it would be appropriate to opt for voluntary notification given the criteria discussed above. If the acquisition in question appears likely to trigger either criteria, it may be appropriate to make the transaction conditional upon obtaining clearance from the Secretary of State. Furthermore, the transaction documentation may need to incorporate specific representations and undertakings to address issues raised by the National Security and Investment Act. Parties should also be mindful if/when there are changes to the purpose of a loan, particularly if a borrowing entity changes its business activity and ventures in to one of the 17 sensitive sectors (either through business activity or change of use of qualifying assets). This stresses the importance of ongoing monitoring throughout the duration of a loan.
It is common for lenders to take security over shares in a transaction as part of their security package. A borrower granting security over shares is unlikely to trigger the mandatory notification requirement, even where the qualifying entity conducts activities within one of the 17 sensitive sectors. This may be called in to question where, if, for example, the security package is heavily weighted and it could be said that the lender qualifies under the ‘material influence’ criteria (which encourages voluntary notification). To warrant ‘material influence’ we would expect the loan documentation to go above and beyond the standard LMA drafting and entitle a lender to materially influence a borrower’s policy and behaviour. A distinction can be drawn between the taking of security and enforcement. The latter likely would see a notification requirement arise as it is at this moment where we see a lender take ‘control’ within the meaning of NSIA.
Under NSIA, rights that are exercisable by an administrator or by creditors while an entity is in relevant insolvency proceedings are not to be regarded as held by the administrator or creditors even while the entity is in those proceedings. However, it is important to note that this does not apply to rights that are actually being exercised, such as appointing an administrator (but an administrator disposing of assets during administration could be within the scope of NSIA depending on the circumstances). It is also worth noting that rights held by liquidators or receivers are not affected. Therefore, it is possible that the appointment of either of these parties could result in a notification requirement if, for example, a liquidator or receiver finds themselves inheriting voting rights during the relevant process.
Furthermore, rights attached to shares held by way of security provided by a lender are to be treated as held by the borrower where, apart from the right to exercise them for the purpose of preserving the value of security, or of realising it, the rights are exercisable only in accordance with the borrower’s instructions. In addition, where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security or of realising it, the rights are exercisable only in the borrower’s interests.
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