As touched upon in our previous article relating to the National Security and Investment Act 2021 (the Act), a buyer is legally obliged to tell the government about acquisitions of certain entities if they fall within sensitive areas of the economy, subject to certain criteria.
These ‘notifiable acquisitions’ correspond to 17 areas of the economy as outlined in the Act:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
- Military and Dual-Use
- Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
The definitions used for each of these sectors can be found in The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021.
The trigger events to consider within those sectors to qualify as a notifiable acquisition, are:
- The entity or asset being acquired is from, in or has a connection to the UK.
- The level of control to be acquired over the entity or asset in question has to meet or pass a specific qualifying threshold, which encompass a shareholding stake or voting tights increasing from 25% or less to more than 25%, from 50% or less to more than 50% and from 75% or less to 75% or more.
- The acquisition means that you acquire voting rights via which you can either pass or block resolutions which govern the affairs of the entity in question.
- The acquisition means that you can materially influence the entity in question. Examples would include being able to appoint members of the board and thus influence strategic decision making.
- The acquisition means that you can use or directly control the use of a qualifying asset or are able to do so more than was the case prior to the acquisition.
If in doubt ask, warns Government
Whilst acquisitions requiring mandatory notification should be easy to identify, you may still be uncertain of the status of a planned or completed acquisition – in such cases, you can submit a voluntary notification to discover whether the government is likely to call the acquisition in.
When assessing the potential national security risk of a notifiable event, the ISU has broken down the criteria it will use into three categories:
- Target risk – relates to the asset or entity that is the subject of the event which triggers notification. Those target entities operating within the 17 defined sectors will potentially be regarded as a risk to national security. Acquiring control over an asset could also prompt national security concerns, in cases where the asset in question is integral to the activities of an entity within one of the 17 sensitive sectors, or where land being acquired is used for a sensitive purpose or is in a sensitive location.
- Trigger event risk – refers to cases when the acquisition would place a hostile actor in the position of being able to undermine national security. A trigger event of this kind might be one which means the acquirer can enjoy leverage over a specific sector, control of a critical supply chain or access to a sensitive site.
- Acquirer risk – involves an assessment of the specific investor involved in an acquisition. The assessment would include an examination of any parties ultimately controlling the investor, their known affiliations, other holdings in the relevant sector and acquisition track record.
The ISU will take a holistic view of the target risk, trigger event risk and acquirer risk when determining whether to intervene in an acquisition, and parties would be wise to make a similarly rounded analysis when deciding whether to make a voluntary notification.
When a notification is received, the government will take 30 working days to assess the notification, known as a ‘review period’, followed by 30 working days (which can be extended by an additional 45 working days) to carry out a national security assessment – the ‘assessment period’.
Once the review period has passed, the government will clear the acquisition to proceed or call in the acquisition for a full assessment.
If the ISU requests further information during the review period the “30-day deadline” clock will stop and will not restart (from the day on which it stopped) until the information has been supplied.
Once a transaction is assessed, within 30 working days the government will do one of the following:
- Inform the party the acquisition is cleared and can go ahead
- Inform the party the acquisition can go ahead subject to specific conditions
- Inform the party the acquisition has been blocked and cannot proceed
- Inform the party the assessment period is to be extended for another 45 working days
This last option implies a reasonable belief that the acquisition raises or would raise a national security risk, and another period of more detailed assessment is required.
As set out previously, the acquisition can progress to the point of completion during the review and assessment periods, unless the government has forbidden this with an interim order (such as example 3 in the previous article).
After assessment, the relevant parties will be informed what the decision is, including any conditions imposed by the government and the consequences if those conditions are breached. The conditions could be both ‘structural’ and ‘behavioural’ in nature.
Structural conditions relate to the corporate structure of an organisation and the conditions imposed could involve excluding certain assets or aspects of an entity from the acquisition or government approval being needed before proposed business locations can be used.
Behavioural conditions relate to the behaviour of organisations or individuals, are imposed without altering the corporate structure and could involve regular reviews and interviews with members of staff, or on-site security inspections, for example.
An order stays in place until the Secretary of State varies or revokes it. In some cases the entire order or conditions within the order have an expiry date and the government may require that some or all of the terms of the order be kept private.
Any final order will include details of how the parties concerned can demonstrate their compliance with the conditions, which could take the form of a compliance schedule setting out the evidence that needs to be provided and when it must be provided.
Anyone given a compliance schedule should ensure their evidence is clear and unambiguous. They should also inform the ISU of any changes that may impact their compliance or their ability to demonstrate compliance.
Under the terms of the Act, the following could constitute an offence leading to enforcement action:
- Completing a notifiable acquisition without approval and without reasonable excuse
- Failing to respond to an information notice or attendance notice, or providing incomplete information
- Deviating from the terms of the compliance schedule, such as changing the specified point of contact, without first consulting the ISU
- Failing to submit evidence of compliance within the specified timeframe
- Obstructive conduct, such as unexplained complications or delays in providing evidence of compliance with interim or final orders
- Failing to comply with the terms of an interim or final order, for example, submitting late or incomplete statements of compliance
- Using or disclosing information in contravention of disclosure of information provisions
The previous articles set out the potential penalties, including but not limited to:
- a maximum fine of 5% of a business’s turnover or an amount up to £10 million for corporate entities, whichever is higher.
- a fine based on income for an individual, up to maximum levels set out in the Act – in the majority of cases the maximum penalty is £30,000.
- a potential prison term, which could be as much as 5 years.
If you or your business operates in one of the 17 sensitive areas of the economy and have questions concerning whether any acquisition you are involved with requires either a mandatory or voluntary notification, you should speak to a member of our Corporate & Commercial Department. Please contact Toby Walker via email or by calling 01582 731161.