- A new regime granting the government the right to scrutinise transactions came into force on 4 January 2022. The regime also applies to foreign entities that operate in the UK or supply goods or services to the UK in addition to foreign assets that are used in connection with activities carried out in the UK.
- Under the regime, certain transactions are subject to a mandatory notice requirement and require government approval. The government also has wide powers to investigate other transactions it considers a potential threat to national security. The concept of national security has been left vague, and many transactions may fall under the government’s call in right.
- The regime is retroactive, and any transaction that has been implemented since 12 November 2020 can be investigated by the government.
- The value of the transaction, or for example the revenues of the parties involved do not affect the assessment of whether a transaction is subject to the mandatory notice requirement.
- In addition to the transaction becoming null and void, non-compliance with the notice requirement may result in imprisonment of up to five years and/or a significant fine.
Similarly to several other countries, over the past few years, the UK has put a new focus on its capability to scrutinise and intervene in transactions that could have an effect on national security. The new National Security and Investment Act (the “NSI”), which came fully into force on 4 January 2022, addresses this need by granting the government wide powers to investigate, set conditions to and even block business transactions based on national security concerns.
The NSI applies to both foreign investments and domestic ones. The NSI is also wide in the sense that it applies not only to transactions relating to UK companies or assets but also to foreign entities that carry out activities in the UK or which supply goods or services to the UK in addition to foreign assets that are used in connection with activities carried out in the UK.
As the powers granted to the government are broad in scope and, for example, the definition of the concept of national security is left open, investors face the need to more deeply assess whether their dealings with a UK connection fall under the scope of the new national security regime, and what its key implications could be. We discuss the key effects of the new act below.
Mandatory notice requirements
Certain transactions require a mandatory notice to be submitted to the Secretary of State and government approval. The obligation to submit a notice triggers when a transaction exceeds thresholds of a 25%, 50% or 75% stake in a British entity that is active in the 17 defined sensitive sectors, including e.g. artificial intelligence, data infrastructure, defence, energy, and transportation.
The value of the transaction or, for example, the revenues of the parties involved do not affect the assessment of whether a transaction is subject to the mandatory notice requirement. On the other hand, the mandatory notice requirement may only come in question in connection with certain transactions relating to entities. Thus, for example, real estate transactions even within the sensitive sectors are not considered notifiable acquisitions, but they are subject to the government’s call-in power that is described below.
After accepting the mandatory notice, the Secretary of State has 30 working days to either give a call-in notice or confirm that no further action will be taken in relation to the transaction. If a call-in notice is given, the Secretary of State has 30 working days to either provide conditions for the transaction or confirm that no further action will be taken. Furthermore, the Secretary of State may, on certain grounds, use an additional 45 working days to carry out its assessment.
If a transaction subject to the mandatory notice requirement is completed without the approval of the Secretary of State, it will be considered void and may lead to the consequences specified below.
The NSI gives the government extensive power to “call in” transactions for review on national security grounds. The call-in power applies to transactions relating to both entities and assets such as land, tangible moveable property and intellectual property rights, and the review can be carried out over a period of five years after the completion of the transaction. The NSI also has a retroactive effect, and any transaction completed since 12 November 2020 can be investigated by the government.
As the definition of national security is left vague, the NSI allows the government to investigate a wide range of transactions and impose conditions on such transactions. However, the government has issued a statement about the exercise of the call-in power which clarifies how the Secretary of State expects to exercise the call-in power.
For example, transactions relating to entities operating in the 17 defined areas of economy are more likely to be called in even if they are not subject to mandatory notification. Decisions on whether a specific transaction should be called in will be made on a case-by-case basis, but it is explicitly stated that the call-in power “can only be used for the purpose of dealing with risks to national security”.
Failure to comply with the mandatory notice requirement is subject to severe consequences. A person that has committed such an offence may be sanctioned with imprisonment for up to five years and/or a fine of up to GBP 10 million or the higher of GBP 10 million or 5% of the total value of the turnover of the business if the offence is committed by an entity. In addition, any transaction that is completed in breach of the requirements established in the NSI will be considered null and void.
As the NSI gives the government extensive opportunities to intervene in a wide range of transactions and the key term “national security” is left vague, investors face the risk of a transaction being called in on national security grounds even if a mandatory filing is not required.
Companies considering transactions in the UK should carefully assess if the transaction could be seen as posing a threat to national security. Especially transactions that involve any of the 17 sensitive sectors should receive particular attention, and parties may also want to submit a voluntary notification to the Secretary of State in order to avoid a possible later review.
Borenius’ representative office in London and our extensive international network of experts ensure that we are best suited for addressing any concerns you may have over how this act will impact your UK-related business. Please do not hesitate to contact us with any questions. You can also read more about similar developments in Finland and in the US.