On 4th January 2022, the National Security and Investment Act 2021 (the Act) came into force, which allows the government to assess and intervene in investments and other acquisitions of control that may give rise to national security risks.
Having assessed an acquisition, the government can impose conditions that allow it to continue, or under certain circumstances block the acquisition entirely or even unwind a completed acquisition.
Whilst such moves to block or unwind an acquisition are unlikely, it is not beyond the realms of possibility – the buyer of Nexperia’s site in Newport has recently been ordered to sell it’s 86% stake. Additionally, the sanctions for failing to comply with the rules with regard to the duty to notify the Investment Security Unit (ISU) of a relevant acquisition can be relatively draconian.
A buyer will need to have a clear understanding of the sectors covered by the Act and the definitions used to define the degree of acquisition that would trigger interest from the government. Additionally, anything less than full cooperation with the ISU could disrupt the deal timeline and delay transaction execution.
The new legislation applies to any acquisitions that are in progress, are being contemplated or have been contemplated, with only acquisitions completed before 12th November 2020 exempt.
Subject to certain criteria, the proposed buyer is legally obliged to tell the government about acquisitions of certain entities if they fall within sensitive areas of the economy, which will be outlined in a follow up article.
The government will take 30 working days to assess any notification received, known as a ‘review period’. This is then followed by a period of 30 working days (which can be extended by an additional 45 working days) which enables the government to carry out a national security assessment – the ‘assessment period’.
If in doubt ask, warns Government
Upon launching the scheme the government estimated that annually 1000-1830 notifications will be made and that in addition to voluntary notifications, it expects to call in between 75-90 deals which haven’t been notified, of which it predicts that only 10 will require remedial action.
Acquisitions requiring mandatory notification should be easy to identify (as set out in our follow up article), but anyone uncertain of the status of a planned or completed acquisition can submit a voluntary notification to discover whether the government is likely to call the acquisition in.
The Secretary of State for BEIS (Business, Energy and Industrial Strategy) can call in any transaction up to six months after becoming aware of it, up to five years following the completion of the acquisition. Making a voluntary notification to the ISU prior to an acquisition, rather than risk disruption during or after acquisition, clearly makes sense.
Serious consequences for those that ignore legislation
During the review and assessment periods, the acquisition can progress to the point of completion, unless the government has forbidden this with an interim order. Such an order could involve immediate and temporary controls to prevent the parties taking actions that may undermine conditions the government could later impose.
If the notification is mandatory, the acquisition should not be completed until clearance has been given, as it will be legally void. If the notification is voluntary, the acquisition can complete, but it is important to note it could be unwound if the government decides there are legitimate national security concerns.
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 corporate penalties for breaching any provisions set out in the Act include a maximum fine of 5% of a business’ turnover or an amount up to £10 million, whichever is higher and for individuals the amount will be based on income, up to maximum levels set out in the Act – in the majority of cases the maximum penalty is £30,000.
It should be noted that the Act also contains provisions for people completing a notifiable acquisition without approval or failing to comply with an order, to be liable for not only a fine, but a prison term, which could be as much as 5 years.
Practical examples demonstrate the legislation in practice
The application of the Act in practical terms can be seen in recent cases which had differing results.
Example 1 – Purchase of shares in BT
In May 2022, the government decided to call in a deal when billionaire Patrick Drahi, who holds French, Israeli and Portuguese citizenships, launched a bid through his company Altice, to buy a further 5.9% in BT, taking its overall holding to 18%.
This decision was doubtless prompted by the fact BT controls a large percentage of the UKs fibre broadband network, thus meaning the acquisition fell within the ‘data infrastructure’ area of the economy as set out in the Act. Having assessed the deal, the ISU opted to take no further action.
Example 2 – Sale of IP
Whereas, in July 2022, the then-business minister Kwasi Kwarteng issued an order under the Act which blocked Beijing Infinite Vision Technology Co. from buying intellectual property (enabling the buyer to develop, test, manufacture, use and sell licenced products in the field of vision sensing technology) from the University of Manchester on the basis that the technology being purchased could have been used to build defence or technological capabilities and presented a national security risk to the UK.
Example 3 – Sale of assets owned by Truphone
In May 2022, TP Global Operations Limited offered to buy the assets of the Truphone group for £1, following sanctions being imposed on the ultimate owner of Truphone. However, on 6 July 2022 (a day before the transaction was due to complete), ISU called in and blocked the acquisition via an interim order whilst the government conducted a national security probe.
However, in December 2022 and following the national security probe, the government approved the deal so long as a number of conditions are met.
Whilst it’s impossible to extrapolate the likely application of the Act on the basis of a particular case, this example does demonstrate that the government is able to assess an acquisition and come to a decision in a relatively short period of time.
If you or your business have questions concerning whether any acquisition you are involved with requires either a mandatory or voluntary notification, we have prepared a further article expanding on this article or you can speak to a member of our Corporate & Commercial Department. Please contact Toby Walker via email or call 01582 731161.