New law grants Government the right to take action in technology firm investments

EMW

23rd December 2021

The new National Security and Investment Act regime (NSI), coming into force on 4 January 2022, allows the Government scrutiny of, and intervention in, business investments that trigger a risk to national security.

If a national security risk is found to exist, the Government has a wide discretion to impose measures for the purpose of preventing, remedying or mitigating that risk, provided those measures are necessary and proportionate. Although expected to be a last resort, this could involve the Government blocking an investment or acquisition or even requiring it to be unwound.

The list of sensitive sectors that companies might be operating in includes advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to the government, cryptographic authentication, data infrastructure, defense, energy, military and dual use, quantum technologies, satellite and space technologies, suppliers to the emergency services, synthetic biology and transport.

What transaction does the NSI apply to?

It applies to any transaction where “control” is acquired of a “qualifying entity” or a “qualifying asset”. The law calls these “trigger events”. A qualifying entity is anything other than an individual. So it applies to companies, partnerships and trusts.

Control of a qualifying entity is acquired if shares or voting rights held by the acquirer exceed 25%, 50% or 75%, or if someone acquires the right to pass or block company resolutions, or the ability to materially influence policy.

A qualifying asset could be land, physical moveable property and even ideas, information or techniques. Control is acquired by obtaining the right to use or direct how the qualifying asset is used, either absolutely or to a greater extent than before the acquisition.

Notifying the Government

Certain trigger events have to be cleared by the Government before they can be entered into. The NSI refers to these as “notifiable acquisitions”, where the subject of the acquisition is a qualifying entity undertaking particular activities within the specified sectors and as a result of the acquisition, the acquirer gains control of the qualifying entity by  increasing the percentage of shares or votes it holds (to more than 25%, 50% or 75%) or by acquiring certain other types of voting rights.

Completing a transaction without the approval will leave it void and of no legal effect. In addition, if a person completes a notifiable acquisition without obtaining prior clearance and without reasonable excuse, they commit a criminal offence and will be liable to a fine of up to the higher of £10 million and 5% of worldwide turnover and for individuals, up to 5 years in prison.

In circumstances where there is no firm requirement to notify, the new law provides a mechanism to voluntarily notify a trigger event to the Secretary of State in order to obtain a call-in decision one way or the other (rather than just waiting for one to possibly arise).

Informal Advice

In practice, only a small proportion of deals being transacted are likely to give rise to national security concerns for the Government. To give that some context, a government impact assessment estimates that between 1,000 to 1,830 notifications will be made each year but only 70 to 95 transactions being called in for a full national security assessment.

However, the government is encouraging all parties to contact the newly formed Investment Security Unit for informal advice regarding the implications of the new regime for their transaction.

Get in touch

Unfortunately, there is no de minimis level below which the Government is not interested, so the new law could affect you, regardless of how big or small your transaction or your company might be.  

If you have any questions or concerns relating to the new NSI regime, please do not hesitate to Paul Bevington, or click here to read our full update on our website.

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