New Year: New powers for the UK Government

Investors and businesses may be legally required to tell the UK Government about certain sensitive acquisitions under the National Security and Investment Act 2021 ("The Act"), which came into force on 4 January 2022.

The scope of the Act and the power to call a transaction in for a review is wide (and retrospective). However, the UK Government has made efforts to assure businesses across the globe that these powers will be used sparingly and that the UK is still an attractive place to do business.

Our view is that investors should hold fast to that assurance because whilst having to navigate regulatory hurdles is far from ideal, the powers in 'The Act' are unlikely to be used in the draconian way many feared when the draft Bill was going through the UK Parliament.

What has happened?

The National Security and Investment Act 2021 has come into force on 4 January 2022.

The UK Government has provided the link to the online notification form that parties must use when discharging their legal obligation to notify the UK Government about certain in scope transactions.

This notification must be accompanied by a 'Declaration' and allows for certain required information about the structure and nationality of pre-completion and post-completion entities (and shareholders) to be uploaded.

Start page (beis.gov.uk)

Which transactions are in scope?

The power to call in a transaction is wide. The Government may call in any transaction where it reasonably believes there may be a risk to the UK national security.

We have previously outlined how the Act will operate here.

The Act is administered by the Investment Security Unit (ISU) in the Department for Business, Energy and Industrial Strategy (BEIS) and the decision maker is the Secretary of State for BEIS.

The Act creates a two-tiered system for notification.

Acquisition of sufficient control in an entity operating in one of 17 sectors of the economy adjudged to pose the greatest risk to the UK's national security, triggers the mandatory notification rule.

Acquisition of an asset or an entity operating beyond one of these 17 sectors means that notification may be made on a voluntary basis.

An acquisition is a qualifying acquisition if all the following apply:

• The acquisition is of a right or interest in, or in relation to, a qualifying asset or qualifying entity (these terms are explained below)
• The entity or asset you are acquiring is from, in, or has a connection to the UK
• The level of control you acquire over the qualifying entity or qualifying asset meets or passes a certain threshold (for example, your stake or voting rights in a qualifying entity becomes higher than 25%)
• The acquisition was not completed before 12 November 2020

If the Government reasonably suspects that an acquisition meets the above criteria and that it has given rise to, or may give rise to, a risk to national security, it can be scrutinised by the Government.

What about acquisitions of entities or assets outside or not from the UK?

If an entity is formed or recognised under the law of a country or territory outside the UK, it is a qualifying entity if it either:

• Carries on activities in the UK
• Supplies goods or services to people in the UK

For land or a tangible moveable property situated outside the UK or its territorial sea, or for any intellectual property, it is a qualifying asset if it is either:

• Used in connection with activities carried on in the UK
• Used in connection with the supply of goods or services to people in the UK

Read further guidance on how the rules work for entities and assets outside or not from the UK.

Does this apply if the transaction relates to an asset?

Yes.

If your clients are acquiring a qualifying entity or asset that is from, in, or has a connection to the UK, you will need to check if the level of control they have acquired, or will acquire, over it could bring it in scope of the rules.

Your client's acquisition is in scope of the rules if they acquire a right or interest in, or in relation to, a qualifying entity or asset, and the level of control you acquire meets any of the following thresholds:

• Shareholding stake or voting rights in a qualifying entity meets or crosses certain percentage thresholds (for example, it becomes higher than 25%)
• Acquire voting rights in a qualifying entity that allow the client to pass or block resolutions governing the affairs of the entity
• Ability to materially influence the policy of a qualifying entity, for example acquiring the right to appoint members of the board of the entity that enables you to influence the strategic direction of the entity
• Ability to use a qualifying asset, or direct or control its use, or are able to do so more than they could prior to the acquisition

Compliance and enforcement

Any deal completed without approval which was subject to the mandatory reporting regime will be void.

In our earlier article we highlighted the civil and criminal sanctions that will apply where a transaction has completed without approval where subject to the mandatory reporting requirement.

The UK Government has made it clear in the below that offences may be committed in respect of:

• Completing a notifiable acquisition without approval
• Failing to comply with an interim or final order
• Failing to comply with an information notice or attendance order, and various associated offences
• Using or disclosing information in contravention of disclosure of information provisions

The responses available to the Government in dealing with non-compliance and offences range from supportive intervention through to penalties for individuals or businesses. These may include:

• Advice, guidance and warnings
• Agreeing actions with parties
• Applying for civil injunctions
• Imposing civil penalties
• Instituting criminal proceedings

Conclusion

This is a significant development when it comes to the UK Government's power of supervision of a transaction.  It would be understandable if overseas investors became anxious at the prospect of having to deliver up a great deal of information to the UK authorities prior to a transaction and, even after crossing that hurdle, face the risk of having the UK Government refuse to allow the deal to complete.

However, in our experience the Information Security Unit has been responsive and has struck a pragmatic note in their dealings with us and have gone to great lengths on behalf of the Government to re-assure businesses that the power of call in will in fact be deployed sparingly and in a targeted and focussed manner.