The National Security and Investment Act 2021 (NSI) has recently been implemented in the UK for the purposes of protecting national security by enabling the government to analyse and, if necessary, intervene in investments or acquisitions which could threaten national security.

The NSI predominately applies to entities undertaking activities in the UK within seventeen (17) specific core sectors (noted below) where, as a result of an acquisition or investment, if the acquirer/investor obtains control of an entity by:

• increasing their shareholding above 25% (if their holding prior to the transaction was 25% or lower);
• increasing their shareholding above 50% (if their holding prior to the transaction was between 25.01% - 50%);
• increasing their shareholding above 75% (if their holding prior to the transaction was between 50.01% - 75%); or
• acquiring voting rights which enable the acquirer/investor to secure or block the passing of resolutions.

The NSI has updated certain features of the Enterprise Act (which previously governed this area of law), with four predominant changes investors and companies seeking investment or founders considering an exit should be aware of:

Mandatory notification system

The NSI requires those who are due to gain control of qualifying entities or assets in the “Core Sectors” (outlined below) to notify the Secretary of State prior to completion of such transactions. For example, an investor must notify the Secretary of State prior to making an investment where that investor will obtain more than a 25% shareholding in an entity that operates in one of the Core Sectors. If consent is not obtained prior to investment, the transaction risks becoming void and having no legal effect in the event that approval is not ultimately obtained from the Secretary of State.

Core Sectors

• 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

The Core Sectors are deliberately broad (particularly Artificial Intelligence, Communications, Cryptographic Authentication) and so where the control thresholds are triggered by an investment or acquisition and your business even remotely operates in one of these sectors, we would suggest notification is made to the Secretary of State.

Voluntary notification system

For transactions which do not fall within the mandatory notification system, but which may cause concern for national security, investors may use the voluntary notification system. A notification submitted to the Department for Business, Energy & Industrial Strategy by completing a form, supplied by the government website.

Investors may wish to voluntarily notify the Secretary of State of transactions to avoid potential scrutiny under the government’s call-in powers (discussed below) at a later stage.

Government call-in powers

The NSI also enables the Secretary of State to ‘call-in’ a transaction which raises national security concerns, irrespective of whether the transaction falls within the mandatory or voluntary notification requirements. The Secretary of State may call for a transaction to be scrutinised for a period of up to 6 months after the Secretary of State becomes aware of the transaction, provided that this is within five years of completion of the relevant transaction. However, this five year long-stop does not apply where there is a failure to notify an event pursuant to the mandatory notification scheme.

Sanctions

Finally, the NSI enables the Secretary of State to impose fines and other sanctions in response to any risk posed to national security by investment or acquisition transactions. This can include fines of 5% of the company’s turnover or £10 million, whichever is greater. In more serious circumstances, an imprisonment of up to five years may be imposed for officers of the company.

Commentary:

Retrospective Powers: Although the NSI only came into effect on 4 January 2022, it enables the Secretary of State to retrospectively call-in transactions which raise concerns around national security which completed between 12 November 2020 and 3 January 2022. The 6 month and 5 year long-stop time limits apply from the date of implementation of the NSI (4 January 2022) for these transactions, instead of the time limits running from completion or from the Secretary’s awareness.

Domestic Investment/Acquisitions: A common misconception is that the NSI only applies to foreign investment or foreign acquirors. This is not the case. The NSI applies to all transactions, including domestic investors and domestic acquirors where there is a potential risk posed to the UK’s national security and/or the transaction is within one of the Core Sectors.

Delays to transactions: If an acquirer/investor is required to make a mandatory notification (or elects to make a voluntary notification) the transaction will be delayed whilst awaiting authorisation from the Secretary of State. The Secretary of State typically has 30 working days to respond to notifications.

This is a new area of law and there may be serious consequences for getting it wrong. MBM works closely with many entities in the Core Sectors and so are well placed to advise on the requirements under the NSI.