New legislation gives the government power to intervene in corporate transactions, writes MORAG WALLER
Those in the business of dealing with corporate transactions, or companies looking for investment or acquisition, will have to take heed of a recently introduced piece of legislation that allows the UK government to scrutinise and to potentially block such deals in certain sectors.
The National Security and Investment Act (NSIA), which came into force in January 2022, has far reaching effects and is designed to enhance government power to review and intervene in transactions involving sensitive assets on the grounds of UK national security.
So, 18 months on from its introduction, what are the practical impacts of the Act’s key provisions, on corporate transactions?
Essentially, the NSIA applies to transactions involving the acquisition of ‘control’ over specific qualifying entities or assets. The concept of ‘control’ is very broadly defined and includes the acquisition of shares or votes in a qualifying entity exceeding a 25, 50 or 75% threshold.
The Act sets out 17 specified ‘high risk’ sectors (including, defence, energy, transport, and AI) and where an entity operates within one of those sectors there is a mandatory requirement to notify the government in advance of a proposed transaction, and to obtain authorisation from the Secretary of State, before its completion. Failure to comply with these requirements renders such a transaction void and involves possible grounds for civil and criminal penalties for the acquirer or investor, about which more later.
But it does not end there because the NSIA also allows the government to ‘call in’ and review a wider range of transactions which involve a change of ‘control’ of entities or assets, which do not fall within the mandatory notification regime but, nevertheless, are considered a threat to national security, and if found to be so, force any such completed transaction to be unwound.
To give the parties to any transaction comfort, a voluntary notification system has been established, to encourage them, if they have concerns that the proposed transaction may have an impact on national security, to notify the government in advance and obtain clearance on a voluntary basis.
Where a transaction does not neatly fall within the mandatory regime, the parties, and their legal advisers, will need to spend time and incur cost to determine whether to make a voluntary notification, always weighing the risks of non-notification.
To Notify or Not?
The NSIA has been deliberately designed to capture a wide range of transactions that could potentially pose a national security risk, and it’s not always obvious whether a potential transaction will be subject to mandatory notification and, if not, whether a voluntary notification would be prudent.
While the answer to whether the target operates in one of the 17 designated high-risk sectors. may at times be obvious, in some cases it may require a more detailed analysis.
Fortunately, the Cabinet Office has recently published the second edition of market guidance on the operation of the NSIA. This includes guidance on how best to engage with the government where there is significant uncertainty as to whether a transaction is within the scope of the mandatory notification regime, a breakdown of the information which should be provided when seeking the government’s view on whether notification is required, and guidance as to when during a transaction it is appropriate to notify.
Longer Timeframe to Completion
The requirement for mandatory notification, and indeed the question of whether to voluntarily notify, has led to longer timeframes for deals to complete. Once a notification is submitted, it will either be accepted or rejected (for example if insufficient information has been provided) and this initial stage is likely to take 3 to 4 working days.
The government then has up to 30 working days to decide whether to intervene in a transaction.
Additional advisory work
While the Act places the responsibility on the investor/acquirer to determine if a mandatory notification is required, or for that matter if a voluntary notification should be made, our experience so far suggests that detailed input is also required from the company/seller.
Consequently, there are increased costs to professional advisers for all the parties involved in the transaction. Not ideal, but the price to pay for getting it wrong is even greater because the government can impose fines or other penalties if parties fail to notify transactions that fall within the scope of the Act.
Completing a transaction which should have been notified without obtaining the necessary clearance can attract fines of up to the greater of 5% of worldwide turnover and £10 million, and a prison term of up to five years and, of course, the transaction will be unwound.
We are just beginning to see the full effect of the NSIA in practice, but early indications suggest it has had a major effect on investments and acquisitions because of the breadth of activities covered and the harsh consequences of not making a notification where required.
Additionally, the potential for UK government intervention has led to increased uncertainty, particularly in the identified high-risk sectors, about whether a proposed transaction will be able to complete at all. That, of course, may impact the valuation of the company or assets, which is not what a seller or company needs.
As ever, it pays to be prepared and any company looking to sell, or seeking investment, should engage early with their legal advisers to assess the identities of potential investors/acquirers, and whether the Act affects them. And, if so, to prepare for the inevitable questions that an investor or acquirer will have.
In that way, the potential impact on value can be minimised as much as possible and the timetable shortened.
Morag Waller is a legal director at Vialex