The National Security and Investment Act 2021 (the “Act”) is the UK’s most recent piece of legislation to protect sensitive sectors of the UK economy which are relevant to UK national security.
Why does the Act matter to you?
At first glance, the Act may be perceived as governing high-risk national security deals with foreign investors. However, the scope of the Act is much wider: it will apply to education and research institutions, charities and not-for-profits as well as for profit organisations of the private sector. It will apply to ‘investments’ by national and foreign parties. There are no safe harbours for smaller levels of turnover or market share.
It remains to be seen how the Government will apply the Act in the future, and in particular, as far as education and research are concerned. BEIS have recently published guidance specifically focused on the higher education and research-intensive sectors which provides useful information and practical examples (listing, in particular, examples of collaborations, industry partnerships, endowment of professorships and donations) indicating that the Government clearly considers the Act relevant to the sector.
What areas of the UK economy are within the scope of the Act?
As the term “national security” is not defined, the Government’s powers will extend over acquisitions of any qualifying entities or qualifying assets which are from, in or have a connection with the UK and that they consider to be an actual or potential threat to national security.
Government power to “call-in”. The Government will have the power to “call-in” for review any qualifying transaction (e.g. an acquisition of a qualifying entity or a qualifying asset). The Secretary of State will be exercising their power to call-in transactions for review within the framework of a “NSI Section 3 Statement”, which will set out the factors that the Secretary of State will take into consideration when applying their “call-in” powers. A public consultation on the draft NSI Section 3 Statement remains open until the end of August 2021 and can be accessed here. Even if the Government doesn’t use any powers under the Act to impose conditions on or block a transaction that it calls in for review, such call-in may delay completion of the acquisition. The parties will need to consider whether any contractual protections ought to be included in their transactional documents to allocate the risk of any pre or post-completion call-in.
Mandatory notifications. An acquisition is ‘notifiable’ where the acquisition falls within one of the 17 sensitive areas of the UK economy (see below) and gives rise to a “trigger event” allowing the acquirer to gain control, as defined in the Act. Such triggers include:
- the total number of shares or voting rights of the acquirer in the entity aggregates to over 25%, 50% or 75%;
- negative voting control rights are gained in the entity; or
- the acquirer can influence materially the policy of the entity.
Acquisitions of qualifying assets (as opposed to entities) do not fall within the mandatory notification system, although they can be “called in” or notified on a voluntary basis (see below).
The parties may not complete the acquisition before the Government has provided their express or deemed approval. If the Government has national security concerns, it may impose various protective measures which including requiring certain conditions on an acquisition, or in more extreme circumstances, blocking or unwinding it.
Parties who do not notify the government where there is a mandatory requirement may be subject to civil or criminal sanction. It is irrelevant at this point whether the qualifying acquisition actually gives rise to a risk to national security.
Voluntary notifications. Parties can volunteer to notify the government where a transaction does not require mandatory notification but falls within the scope of the Government’s call-in powers. Parties can be guided by the NSI Section 3 Statement in trying to assess how likely the Government is to call-in their transaction. Following receipt of a completed voluntary notification, the Government has 30 days to decide on whether to clear the transaction or call it in for a full review. If the Government clears the transaction, it will not be able to investigate it again in the future, unless the voluntary notification contained false or misleading information.
17 defined sensitive areas
As a starting point to identifying high risk targets and transactions which fall within the mandatory notification system, a list of sensitive areas will be set out in regulations which will be published later this year. Extensive consultation has already taken place on these regulations listing and describing the envisaged sensitive areas (which can be found here). The 17 sensitive areas which have been identified are expected to include the following: advanced materials, advanced robotics, artificial intelligence, communications, computer hardware, energy, quantum technologies, synthetic biology, and transport. Any party acquiring a “qualifying entity” which falls into one of these 17 sensitive areas of the economy is legally obliged to notify the Government of the intended acquisition and obtain Government approval prior to completing the transaction (see mandatory notification regime below).
We would advise that institutions (especially large, multi-disciplinary organisations) carry out an internal review in order to establish which departments, schools or faculties carry out activities, which fall within these 17 sensitive areas. This will allow you to ensure that any future acquisitions can be dealt with in compliance with the Act.
Timing. Where the Government undertakes a risk assessment of an acquisition, either as a result of a call-in, a mandatory or voluntary notification, the Government will have 30 days to carry out the review and it has the right to extend this delay once by 45 days. Any additional extension of this timeframe needs to be agreed with the acquirer.
When will you need to be ready?
The Act will come into force on 4 January 2022. However, once in force, the Government will have the power to call-in, and potentially unwind, acquisitions that have taken place since 12 November 2020.
The Government’s powers to review an acquisition of which it has not been notified or of which it should not have become aware (e.g. because it was not publicised) will be subject to a 5-year longstop date, except in the case of mandatory notifications, which will not be time-restricted.
What to do now?
These are some of the key steps institutions should be taking now:
- raise awareness about the Act across senior management, senior academic staff and relevant operational teams (e.g. commercialisation offices, incubators etc);
- carry out an internal audit to establish which research or other activities fall within the 17 sensitive areas governed by the Act; and
- where a qualifying acquisition is envisaged, consider (i) whether it is subject to the mandatory notification regime, or (ii) whether it may be advisable to report it on a voluntary basis, and (iii) how the parties can allocate/manage risks associated with the Government’s “call-in” powers through contractual arrangements.
Our team is advising on several transactions which fall within the 17 sensitive areas and is helping clients adapt their practices to the application of the Act. Please contact Simon Elsegood or Nathalie Jacoby-Danesh if you would like to explore how we can help you.