The National Security and Investment Act 2021 (Act) demonstrates the biggest change to the government’s screening powers for mergers and acquisitions in twenty years and it doesn’t stop there. The powers given to the Secretary of State extend to the purchase of land and intellectual property as well as companies and other entities.
The Act introduces a requirement for transactions within specified sectors to be approved prior to the acquisition taking place. Whereas previously the Secretary of State could investigate mergers & acquisitions of concern above certain thresholds or meeting certain criteria, all relevant acquisitions must now be notified to them for approval.
The Secretary of State can choose to approve the acquisition or, if it believes there may be a threat to national security, impose conditions or prohibit the acquisition altogether.
The new rules only apply to qualifying acquisitions. These are referred to as trigger events.
Acquiring a right or interest (or in relation to a qualifying entity or asset) will be covered by the Act if it meets the following thresholds:
It is important to note that acquisitions of this type that are carried out as part of a restructuring exercise within a group of companies could be caught by the Act.
The acquisition must be of a right or interest in, or in relation to, a qualifying asset or qualifying entity and such asset or entity is either based in or have a connection to the UK. It does not even have to have a presence in the UK, the acquisition could be covered if the target entity has customers in the UK or, if an asset, is used in connection with supplying customers in the UK.
A qualifying entity is any entity other than an individual, including:
Qualifying assets include:
There are seventeen affected sectors which are:
The list is wide and some of these seem more obvious than others. There are, however, some useful exclusions such as widely used consumer goods being excluded from the definition of Advanced Robotics.
Although some of the sectors have thresholds of turnover or volume to be met before the acquisition is caught by the Act, for example Energy and Communications, it is important to note that, for most of the sectors, there is no such threshold.
The key thing to remember is if the company being sold might perform any activities within one of the sectors above it could be caught by the Act and advice should be sought.
Further guidance can be found here on each of the sectors.
When negotiating a sale or purchase of a company performing activities in the sectors mentioned above, or assets associated with those sectors, notification must be made. This is known as a mandatory notification.
The buyer may also choose to make a voluntary notification if unsure whether it would be caught.
It is essential that a buyer undertakes a thorough due diligence exercise to ensure it understands the precise activities of the business and whether any notification is required.
The seller should also carefully consider the warranties they are being asked to give and whether there could be any risk of a breach of warranty and subsequent warranty claim if notification has not been made when it should have been.
Once notification has been made, the Secretary of State has 30 working days (the “review period”) in which to approve the acquisition, request further information or continue to the assessment period (known as the acquisition being “called in”). If the acquisition is called in a full national security assessment will take place. During the assessment period they have a further 30 working days, which can be extended by 45 working days if certain conditions are met, or longer if agreed by the buyer.
Although the notification requirement does not come into force until 4 January 2022, the Secretary of State can review past acquisitions as far back as 12 November 2020.
If a required notification is not made the buyer’s directors could be sentenced to up to 5 years in prison.
There could also be a fine of up to 5% of the company’s worldwide group turnover or £10 million, whichever is higher.
In addition, any transaction completed without the required approval is automatically void, although it is possible to apply for retrospective approval.
Should the Secretary of State become aware of a notifiable acquisition where notification was not made, it can issue a call-in notice at any point for six months from the date it became aware of the trigger event or five years from the date of it took place.
Simply put, make sure you check the rules carefully before completing a transaction to make sure you are not caught out.
For more information on investment and any advice you may need for you or your business, contact Gail Vallis