By Tom Whelan, partner, and Emma Weeden, counsel, at Reed Smith
In March of this year, the government published its response to proposed reforms to the National Security and Investment Act 2021 (NSIA), announcing its plans to introduce schedules on critical minerals, semiconductors, and water as well as amendments to the Act’s AI scope and targeted amendments to communications, energy, critical suppliers to Government, and data infrastructure.
However, despite these changes intending to simplify compliance, there is still a risk that dealmakers will be caught out by the regime.
A failure to comply with the NSIA regime can, at best, slow down deals and increase the reporting burden and, at worst, mean the transaction is legally void and result in large fines and criminal liability. Dealmakers must therefore be aware that transactions in certain sectors could be within the scope of the regime and prepare early and thoroughly.
No domestic exemption
Many foreign direct investment regimes, such as CFIUS in the US, do not usually apply to purely domestic transactions (where the buyer is owned/controlled domestically) but, somewhat surprisingly, the NSIA does.
A large proportion of call-ins and final orders are where the target operates in a sensitive sector in the UK and the buyer is Chinese-controlled. Nevertheless, UK buyers still have to report relevant deals and comply with the regulations and the government notably intervened on UK-based private equity firm Epiris’ acquisition of Sepura, a communications business, to impose measures designed to ensure that sensitive information and technology was protected, and to ensure the maintenance of UK capabilities (such conditions have now been revoked).
As a starting point, UK buyers therefore need to be aware of the regime and that it may well apply to them.
Broad scope of sectors and assets
Beyond just failing to realise that the regime applies to them, parties can be caught out by the breadth of the regime. The NSIA’s 17 mandatory notification sectors are broad and uncertainty around the boundaries means that many transactions fall under the mandatory notification requirements without the buyer knowing unless proper due diligence has been done.
Given that transactions within a mandatory notification regime must not be completed without UK Government approval, it is vital to conduct an NSIA analysis early to avoid being unexpectedly caught out.
Acquisition of certain qualifying assets, including IP and development rights, can also fall within the government’s call-in power. In these cases, early voluntary notification is best practice for asset deals that could be linked to sensitive sectors or where there is ‘acquirer risk’ (i.e. national security from the buyer having some control of the target).
Internal restructurings
Even without a change of control, an internal business reorganisation can be caught by the NSIA regime. Should an owner move (or even transfer a proportion of shares or voting rights of) a subsidiary to a different holding company in the corporate chain, even where the ultimately beneficial owner stays the same, this can require mandatory approval before transfer.
Buyers planning post-acquisition integrations should therefore map where the entity will sit within the business structure before completing and make that clear in the initial application to avoid the need for further notifications. However, it is on the government’s policy agenda to create an exemption for internal restructuring in the coming months.
Quality of notifications
Finally, while most transactions receive clearance within a 30-working day statutory period, the clock only starts once the notification has been accepted and if insufficient detail is included in the notification further information will have to be submitted before the notification is accepted (which in straightforward cases without further information being requested takes around five-to-10 working days).
With this in mind, it is important to disclose the right information – including full details of the board and all shareholders with 5% or greater ownership, as well as a watertight pre- and post-acquisition ownership chain. The burden of ensuring accuracy of knowledge falls on the acquirer and providing false or misleading information, either deliberately or without due care, is a criminal offence.
Therefore, it is important to ensure that the notification is properly completed with sufficient detail before the submission is made. This said, unnecessary or unrequired information should be avoided – as it can waste time and costs.
What you should be doing
The key consideration for dealmakers is to build NSIA analysis into their deal process from day one. Identifying whether the target’s activities could fall within any of the 17 mandatory sectors and engaging with the target early to gather sufficient detail on their operational structure as this will reduce unexpected delays down the line.
The UK Government has made it clear that it is willing to use its full toolkit (including prohibitions, remedies, and retrospective call-ins) to address potential national security risks. To ensure no delays – high-quality notifications are a key part of deal execution, which all sellers and buyers should factor in.
