National Security and Investment Act: the new rules

The National Security and Investment Act (NSI Act) is a package of new rules on corporate acquisitions and transactions aiming to give the government new monitoring and intervention powers. They are rules designed to improve national security protection, allowing the authorities to safeguard everyone’s interests.

The decision-maker will be the Secretary of State; however, the ISU (Investment Security Unit) inside BEIS (UK Department for Business, Energy and Industrial Strategy) will be managing the NSI Act. In fact, the BEIS has already published detailed features of the National Security and Investment Act 2021, showing with an in-depth guide how this new instrument works.

The National Security and Investment Act UK allows the government to control and intervene, in certain circumstances, in acquisitions performed both by companies and investors. This power is granted when the transaction could damage the United Kingdom’s national security, with a series of specific rules that determine which transactions could be considered risky.

Both mergers and acquisitions are subject to the National Security and Investment Act, including transactions that marginally involve the United Kingdom when they include people and acquisitions outside of the United Kingdom that in some way also concern the country. The law includes a series of requirements that must be respected, and it also determines the scope and methods of implementation of the government’s new powers.

The National Security and Investment Act will come into effect from the 4^th of January 2022, introducing the new legal provisions that companies and investors will be required to follow. The measure was approved in April 2021, integrating the previous rules established by the Enterprise Act 2002 and introducing new provisions on investment screening.

The National Security and Investment Act applies to both foreign investors and UK citizens and businesses. It is a novelty compared to investment screenings adopted in the past, since it widens the pool of investors that are potentially subject to the NSI Act’s new rules.

One of the main concepts of the National Security and Investment Act is the definition of a series of critical sectors under which businesses and investors will be required to notify each qualifying transaction involving one of these sectors:

• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• Civil Nuclear
• Communications
• Computing Hardware
• Critical Suppliers to Government
• Cryptographic Authentication
• Data Infrastructure
• Defence
• Energy
• Military and Dual-Use
• Quantum Technologies
• Satellite and Space Technologies
• Suppliers to the Emergency Services
• Synthetic Biology
• Transport

Investments deemed to be sensitive, in the sense that they put the United Kingdom’s national security at risk and are tied to one of these sectors, are subject to mandatory notification. This notification involves suspending the transaction until specific approval is given, with a ban on continuing and completing the investment prior to approval.

In any case, the government can also exercise its right to ask for a voluntary review, even on transactions that aren’t subject to obligatory review and even if the investment is performed in a non-critical sector outside of the new Regulation’s list. This intervention can be requested up to five years after the transaction. Therefore, it is recommended that investors ask for a voluntary review to avoid future problems.

Obligatory review applies to transactions that involve an investor acquiring an equity share of 25%, 50% or 75% or voting rights. The voluntary review regime applies to transactions that allow an investor to influence a company’s strategic decisions or when they acquire the right to use or control company assets.

The NSI Act will come into effect from the 4^th of January 2022; however, it will be retroactive and will allow the government to request the review of past transactions starting from the 12^th of November 2020. Approval will also be necessary for transactions subject to obligatory review should they not be completed by the 4^th of January 2022.

Transactions subject to review and auditing that appear to be potentially dangerous for the United Kingdom’s national security, may be authorized, banned or subject to the conditions set by the relevant bodies. Restrictions could include:

• A maximum limit of shares an investor can purchase
• A limit to purchasing property and voting rights for the investor

Lastly, the National Security and Investment Act includes sanctions for transgressors: any violation of the NSI Act is eligible for a fine of up to 5% of the overall turnover or a limit of £10 million, whichever is higher, as well as up to five years in jail. Civil and criminal sanctions will be applied when, for example, approval is not requested for transactions subject to obligatory review.