The impact of the National Security and Investment Act (NSIA) on M&A

January 29, 2024

The National Security and Investment Act (NSIA) was introduced in early 2022. to safeguard national security interests in the context of corporate transactions.

If you are considering selling all, or some, of your company (share sale) or your business (business/asset sale), an understanding of NSIA is important. Birketts has advised on a number of notifications since the introduction of the NSIA.

The NSIA regime has fast become one of the first considerations arising in the context of the merger and acquisition (M&A) process and it is important to address it early. Something to note is that the NSIA regime can have cost and timing implications on your M&A process and, given the lengthy timescales involved, an early notification will minimise the chance of a notification delaying the deal timetable.

 

When does the NSIA regime apply?

At first glance, you may consider that your proposed transaction is not within the scope of the NSIA, but it can extend to transactions which do not have an obvious national security aspect.

In addition to applying to wide range of share sale and purchase transactions where all or a majority of the shares are sold, it may also apply to a sale of a minority shareholding, a group reorganisation or an asset sale transaction.

The NSIA regime is broadly divided into two parts: the mandatory regime and the voluntary regime. Under the mandatory regime, the transaction must be approved by the UK Investment Security Unit (ISU) (an agency within the Department for Business, Energy and Industrial Strategy (BEIS)), before it can be completed. Under the voluntary regime, the transaction can be notified to the ISU by the parties and such transactions can be “called-in” by the ISU if not so notified.

 

Mandatory regime

If the transaction in question is a share sale/purchase, the first consideration is whether the transaction constitutes a trigger event. A trigger event occurs where the shareholding stake or voting rights to be acquired cross certain thresholds – i.e. the shareholding or voting rights exceed 25%, 50% or 75%.

The second consideration is whether the target company performs a sensitive activity, which are set out in detail under 17 broad sectors[1]. Whilst in the case of many of these sectors, it is the service or goods that the target company provides or produces that will be under consideration, in certain sectors it is the entity to whom the services/goods are provided and/or the location where such services/goods are provided that determines whether a notification is required or advisable. The target could provide seemingly innocuous services (for example, catering services), but if such services are provided to a government entity at a sensitive government defence site, a mandatory notification might be required under the “defence” sector heading. A tech company providing software services used by the NHS or the emergency services could also be caught.

If there is both a trigger event and the target performs one of the sensitive activities in question, a mandatory notification to the ISU is required.

 

Voluntary regime

 Even where there is no trigger event in a share transaction, the voluntary regime might apply where what is being acquired is “material influence” (e.g. where you have veto rights over strategy issues like business plans/budgets and the make-up of the board) over an entity which performs one of the sensitive activities.

In addition, the regime applies to asset sales/disposals. Where a person is acquiring control of an asset which is used in the performance of one of the sensitive activities, consideration should be given as to whether a voluntary notification should be made. This involves assessment of whether the target’s or the acquiring company’s activities could result in national security concerns and the amount of control that the acquirer will assume.

Even if your company is not carrying out a sensitive activity, a voluntary notification to the ISU may be advisable where the proposed deal gives rise to national security concerns.

 

What is the notification process?

Mandatory: if the transaction requires a mandatory notification, the transaction cannot close until the BEIS decides not to “call” the transaction in. The proposed buyer will make the notification through the ISU online portal. Once accepted, ISU has a 30-working day screening period. After this, ISU either clears the transaction or issues a ‘call in notice’ (giving at an additional 30-working days, which can be extended by an additional 45-working days).

Voluntary: if a voluntary notification is advised, any party can make a notification through the ISU online portal. Once accepted, the same timescales as above apply.

Care should be taken with the application itself. In particular, the applicant should ensure that their notification does not inadvertently include information which is classified above OFFICIAL according to the Government’s classification. This might not always be clear on the face of things. For example, the very fact of target performing a seemingly innocuous service without obvious national security implications (e.g. lift maintenance services) for a particular government body at a sensitive government site might itself constitute information classified above OFFICIAL.

The Government application portal itself is extremely sensitive and can (for example) reject the supporting documents that do not conform to the form that is required e.g. the headings of any PDFs attached must not contain certain characters.

 

What are the penalties?

If a mandatory notification is required but is not made, the transaction it relates to is legally void. Civil penalties (up to 5% of group worldwide turnover or £10m, whichever is higher) and criminal penalties apply.

For voluntary notifications, a deal can be called in for up to six months after BEIS becomes aware of it and any time up to five years after the deal closes.

 

Get in Touch

For further advice or support, please contact Matthew Stratton at matthew-stratton@birketts.co.uk or Matthew Ratcliffe at matthew-ratcliffe@birketts.co.uk

[1] Advanced materials, advanced robotics, AI, civil nuclear, communications, computing hardware, critical suppliers to government, crypto authentication, data infrastructure, defence, energy, military/dual-use, quantum tech, satellite and space tech, suppliers to the emergency services, synthetic biology and transport.

If you’re interested in further information on a share sale, get in touch with us here.

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