After much anticipation, the UK’s National Security and Investment Act (NSIA) entered into force on 4 January 2022, heralding a far-reaching UK investment screening regime. Investors wait to see how the regime’s broad powers will ultimately be substantively exercised in terms of the breadth of application of national security but a material impact on contractual risk allocation, transaction completion timelines and disclosure of investors’ interests should be expected by financial investors.

The NSIA is a hybrid notification and call-in regime: combining mandatory notification (for certain high-risk sectors) and a voluntary/call in regime for all other economic sectors. 

Under the mandatory regime, investors need to make a pre-closing notification for transactions involving one of 17 sensitive sectors (including defence, energy, telecommunications and data infrastructure) and closing will not be permitted until approval from the Secretary of State is received. 

If a transaction does not fall within the mandatory regime, it may still be subject to a broad “call-in” power which the Government can exercise up to five years post-completion. Investors will need to consider voluntarily notifying the UK Government if a transaction may be of interest from a “national security” perspective (despite not strictly falling within the mandatory scope). 

Going forward, financial investors from all over the world (including the UK) need to be mindful of how the NSI Act may impact transactions with a UK nexus from both a substantive and process perspective. 

The following are some of the main practicalities for transaction parties to have in mind.

• How broadly the Government will construe “national security” in relation to M&A activity remains to be seen. The NSIA’s extensive call-in powers outside the mandatory sectors mean greater uncertainty for investors than is the case with foreign investment regimes that require up-front approval for in-scope transactions with no possibility of discretionary review (like the regimes in France and Italy). While the UK Government has indicated it will use its “call in” power sparingly, it resisted calls in the legislative passage of the NSIA to provide a definition of “national security.” 
  
  The Government’s statement on the use of the “call in” power also provides only high-level guidance, citing cases where “there may be a potential for immediate or future harm to UK national security, including risks to governmental and defence assets, the security of the UK’s critical infrastructure, and the need to prevent actors with hostile intentions towards the UK building defence or technological capabilities which may present a national security threat to the UK.” This provides considerable scope for flexible interpretations of “national security”, which potentially leaves the door open for political and economic considerations (e.g. protection of UK employment) to play a part in the assessment. Indeed, while acquisitions involving Chinese acquirers are expected to attract greater scrutiny all else equal, under the previous “public interest” provisions of the Enterprise Act 2002, North American based private equity investors and funds were the subject of numerous intervention notices (including 4 of the 7 most recent public interest intervention notices issued on national security grounds since 2019), most recently in the cases of Parker / Meggitt and Cobham / Advent.
• The risk of delays is significant. The UK Government has set up a dedicated unit within BEIS (the Investment Security Unit) to ensure that non-problematic deals are approved as quickly as possible and the experience of early engagement with this unit has generally been positive. However, all notified transactions will be subject to an initial review period lasting up to 30 working days (from “acceptance” of a filing as complete). As such, investors with a mandatory notification obligation will need to allow at least 2 months for clearance even for cases not expected to raise substantive issues. If the Secretary of State “calls in” the transaction for a more detailed review, this may take an additional 75 working days (subject to further “stop the clock” information requests). The overall duration (up to 105 WDs) could therefore be lengthy and difficult to predict for more complex cases. 
• The jurisdictional scope of the regime is extremely broad. 
  
  - First, unlike most foreign investment regimes, the NSIA does not distinguish between overseas and domestic investors. As such, a UK private equity fund could be subject to a mandatory notification obligation in a similar way to an overseas acquirer. 
  
  - Second, the only UK nexus required for a transaction to be subject to the NSIA is that the target is active in the UK and / or provides goods or services to the UK (although, for a mandatory notification, the relevant activity generally needs a more proximate UK connection). 
  
  - Third, the NSIA regime captures low levels of minority shareholding. Specifically, acquisitions of 25% of an entity may be subject to the mandatory regime and the voluntary regime employs a lower threshold of “material influence” (which, in the UK merger context, may be triggered as low as 10-15% when accompanied by additional governance rights). 
  
  - Fourth, the NSIA encompasses internal reorganisations. As such, if a PE fund restructures the holding or management of an entity within scope of the mandatory, this may give rise to a mandatory notification even if the PE fund remains the ultimate controller both pre and post transaction.
• Application to funds. There remains a degree of uncertainty as to how the NSIA will be applied to fund structures in practice, in particular the circumstances where it will be necessary to “look through” the fund structure to the underlying limited partners when considering notification and/or disclosure obligations. For instance, while the NSIA notification form is not too onerous to prepare as a general matter, acquirers will need to provide details of all shareholders who have share ownership or voting rights of 5% or over. It remains to be seen to what extent the Investment Security Unit will interpret this to require details of limited partners.
• Transaction documents should include NSIA-related conditions. If a transaction is subject to a mandatory notification, then as with mandatory merger control conditionality, a NSIA condition must be included in the transaction documents (and the consequence of getting this wrong is shared for the buyer and seller). Fund investors should ensure that any NSIA condition: (i) only applies to the acquisition entity and not to the fund’s or PE houses’ wider portfolio entities; and (ii) only reflects acceptable outcomes for the transaction to proceed (e.g. unconditional clearance or reasonable remedies). Inclusion of voluntary NSIA filing conditions are likely to be subject to strong negotiation and close consideration will need to be given to the associated risk profile and appropriate allocation between buyer and seller. Conservative bidders pushing for voluntary notification conditions may well end up at a comparative disadvantage in auction processes.
• Co investments and risk allocation: Where an acquisition is being made by a consortium of investors careful assessment will need to be made as to whether any of the co-investors poses a greater risk from a national security perspective. In such circumstances, consortium members will need to consider how to appropriately allocate (as between themselves) the risk of mitigations being required to obtain approval (e.g. providing for certain investors, if considered individually problematic, to reduce their governance rights, lower their stake or take specific measures to allay potential concerns).