National Security and Investment Act 2021
The National Security and Investment Act (Act), which came into force on 4 January 2022, created a new standalone regime for the government to intervene in a broad range of transactions on national security grounds.
Distinct from the UK’s voluntary merger control regime, the Act establishes a mandatory notification requirement where a change of control occurs in relation to an entity with “specified activities” within any of 17 designated sectors, ranging from transport and advanced robotics to cryptographic authentication and synthetic biology.
Over 800 cases have been reviewed to date since the Act came into force, with five outright prohibitions. Since its inception, the practical application of the Act has highlighted concerns, including the broad scope of the Act and the lack of transparency in the review process. In response, the UK government has now published the second edition of its Market Guidance Notes (MGNs) in an attempt to provide further clarity on the NSIA regime and how the assessment process operates. While the MGNs provide welcome guidance for practitioners on certain procedural issues, they do not seek to address these more substantive issues.
Uncertainty about whether an acquisition is notifiable
Since coming into force, a frequent criticism of the Act has been that it is not always possible to determine whether a transaction is subject to mandatory notification. The updated MGNs clarify that parties can contact the Investment Security Unit (ISU) to get its view if there is significant uncertainty about whether a transaction is notifiable.
In seeking the view of the government, the relevant parties should include as much detail as possible about the potential qualifying transaction, explaining the uncertainty about the application of the Act and setting out any relevant timing considerations.
While this is a welcome step, any views expressed by the government shall not amount to legal advice and there is no indication about how long the ISU has to respond to any such queries. In addition, it is also noted that there will be circumstances in which it may not be possible or appropriate to give a substantive response, in particular where queries relate to hypothetical scenarios or where insufficient information has been provided.
Timing of notifications
On the timing of notifications, the updated MGNs indicate these can be made when “there is a good faith intention to proceed”. This may be evidenced by, for example, the existence of heads of terms, financing arrangements or a public announcement of a firm intention to make an offer or the announcement of a possible offer.
A signed document is not therefore required and parties may decide to notify at an earlier point in an attempt to minimise the period between signing and completion of a transaction. However, the updated MGNs highlight the risks associated with premature notifications. Should the terms relating to the transaction change, a re-notification may be required in respect of the revised terms and a hasty notification may also lead to further information requests, which can cause delay, and rejection of the notification for being incomplete.
When parties are in financial distress and require a quicker decision, they should bring this to the attention of the ISU as soon as possible. The updated MGNs indicate that, in exceptional situations, the ISU may be able to expedite a transaction, provided the parties can demonstrate that the material financial distress gives rise to genuine urgency. The ISU will consider what evidence is appropriate on a case-by-case basis but relevant evidence of urgent financial distress is likely to include:-
- confirmation of restructuring and insolvency adviser engagement, alongside their analysis and advice;
- a 13 week cash flow statement evidencing a deficit and breach of facilities;
- current balance sheet and profit and loss account, including projections;
- evidence that no support is available from lenders, shareholders, suppliers or creditors; and/or
- correspondence with suppliers/creditors evidencing debt demands.
NSIA process and procedure
The NSIA guidance has been updated to reflect current practice and changes made to government departmental structures, including that:-
- the ISU is now in the Cabinet Office and the decision-maker is the Chancellor of the Duchy of Lancaster, the Secretary of State in the Cabinet Office. The former Department for Business, Energy and Industrial Strategy is no longer responsible for the NSIA;
- the ISU generally accepts, rejects or returns a notification form within five working days (although this may be longer if there are complicated issues). If a notification is returned, the parties should address any questions they have to the general ISU email address;
- the IU shares details of the acquisition with relevant government departments and will make its assessment once the departments have provided their assessments. If the acquisition is "called in" for assessment, the ISU will continue to work with relevant departments, although it will remain the primary point of contact for the parties; and
- where the government is considering issuing a final order, it must consider any representations made by the parties, but is not bound to accept any alternative remedies proposed. The parties may identify potential remedies to mitigate any national security risk at any point in the process.
Given the wide reach of the Act and its substantial knock-on implications for the UK M&A market, the updated MGNs provide helpful insights for practitioners into how to navigate the NSIA regime. However, many concerns remain and there is no doubt that we can expect updated guidance in the future as ISU gains greater experience of the regime with further refinements of the notification process expected. The first full NSIA annual report is due to be published shortly, providing details about cases dealt with by the ISU between 1 April 2022 and 31 March 2023. Further updates will follow as and when any future guidance is released.
If you would like any further information or advice, please contact Paul McGuickin from the Corporate team.
*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.