On 4 January 2022, a new regime under the National Security & Investments Act 2021 came into force, which governs particular acquisitions. The regulations enable the government to review and scrutinise both contemplated and previously completed transactions on the basis that they may have a detrimental impact on the UK’s national security.
On the face of it, the new regime appears to only regulate those transactions which pose a risk to national security. However, the drafting of the regulations and supporting guidance means that they will likely apply to a much broader spectrum of transactions, and even cover transactions where there appears to be no national security issues or concerns. It is, therefore, vitally important that the new regulations are considered at the outset of any transaction.
The regulations create a mandatory notification system where a proposed purchaser is required to obtain the prior written approval of the newly created ‘Investment Security Unit’ (ISU) for any transaction falling within the scope of the regulations. This approval must be sought before completion of the transaction and if it is not obtained, the transaction will be declared void (and the purchaser will have committed a criminal offence). Any failure to obtain approval (even if this is later rectified) will also likely affect any future disposals of the target entity as the breach will be identified by the future buyer as part of their due diligence into the target entity.
When the regulations apply:
In order to be caught by the new regulations, the particular transaction must involve the acquisition of “control” of a qualifying entity or asset that operates in a relevant sector within the UK. This article will focus solely on the acquisition of “control” over the shares in a target company.
The most common type of “control” which will be caught by the regime will be the acquisition of more than 25% of the shares and/or voting rights in a target company. In such a case, provided that the target operates in a relevant sector, a notification will need to be made.
The regulations also require a new notification to be made for any future acquisitions which increase the purchaser’s “control” in the target above 50% and above 75%. If the transaction is structured in a way that further tranches of shares are acquired at different times, this could result in multiple notifications being required.
Given the “control” mechanism used in the new regime, corporate restructures could also fall within the scope of the regulations, even where the ultimate parent company remains the same.
The second requirement to be caught by the notification regime is that the acquisition will need to concern a target company which operates in one of the specific 17 sectors of the UK economy. This list includes: Artificial Intelligence, Communications and Computing Hardware. The full list of specified sectors can be found on the government website: https://www.gov.uk/guidance/national-security-and-investment-act-guidance-on-acquisitions and the definitions of each sector can be found at: https://www.gov.uk/government/publications/national-security-and-investment-act-guidance-on-notifiable-acquisitions/national-security-and-investment-act-guidance-on-notifiable-acquisitions.
It is important to note that the guidance relating to how each sector is defined is fairly broad, so a wide variety of target companies may be considered as operating within a relevant sector. Furthermore, the regulations also do not contain a minimum threshold for the amount of business which the target company must be carrying out in the relevant sector.
Using the sector of Artificial Intelligence as an example, the guidance states that the target company will be deemed to be operating within this sector if it uses or produces software which uses artificial intelligence and the work in respect of artificial intelligence is used in respect of either identification or tracking, advanced robotics or cyber security. Given the wide definition, a car manufacturer developing software to allow self-parking could be deemed to be operating in the Artificial Intelligence sector as the technology is developed to identify objects and then make decisions to enable the vehicle to park itself.
The need for caution
It is also important to highlight that this does not only apply to transactions which have completed after 4 January 2022, as the ISU also has the right to retrospectively review transactions that completed after 12 November 2020. It is, therefore, imperative that any businesses which have recently completed any acquisitions in the relevant 17 sectors review those transactions in light of the new regime and assess the risk of them being called in for review.
Given the potentially severe ramifications of any failure to obtain prior approval for an acquisition which is caught by the regulations, it is essential that due consideration is given to whether the new regulations will apply at the outset of the transaction. A timely application should also be made to avoid any unnecessary delays to completion. Even in straightforward applications, it can take up to 30 working days to receive approval. However, it is likely that the ISU will see a far greater number of applications than the 1,000 to 1,830 applications per year that are currently anticipated by the Department for Business, Energy and Industrial Strategy. If you are contemplating acquiring shares or voting rights in a company operating in any of the 17 sectors, or restructuring your group companies where a member of the group operates in a relevant sector, it is important to take advice as early as possible to ensure that the possibility of a mandatory notification is considered at the outset to avoid any delays or consequences for breach.
If you would like to discuss the above, please contact Jason Varney (email@example.com) or Joseph Hartland (firstname.lastname@example.org).