On 4th January 2022, the government brought in a new National Security Law, known as the National Security and Investment Act (NSI). Previously, the UK government followed the Enterprise Act (2002) which allowed national security issues to be reviewed by the government but applied to a minimal amount of transactions. However, the new law gives the government increased powers to scrutinise acquisitions made by any investors and businesses and impose conditions on non-conforming parties. The risk factors that the government are using to assess the extent of the security risk have remained largely the same and can be summarised into three categories: target risk, which is whether the target could be used in a way that poses a risk; acquirer risk, which analyses whether the acquirer has any characteristics which may pose a risk such as technological capabilities; and control risk, since a higher level of control may increase the level of threat. This article will first outline the features of the law, and then discuss the potential impacts on commercial law firms and businesses.
WHAT IS THE NSI
The NSI is a new screening regime for business transactions that aims to intervene in acquisitions that may harm the UK’s national security in the face of new threats. It reflects a global trend towards greater government intervention and away from the laissez-faire attitude that has dominated for several decades. The NSI includes both mandatory and voluntary notifications for acquisitions that could harm the UK’s national security. In terms of the mandatory notifications, it applies to a greater variety of transactions across 17 sectors: advanced materials, civil nuclear, communications, computing hardware, critical suppliers to government, cryptographic authentication, data infrastructure, defences, energy, military and dual-use, satellite and space technologies, suppliers to emergency services, synthetic biology, transport, advanced robotics, quantum technologies, data infrastructure, and Artificial Intelligence; irrespective of whether that specific transaction actually raises national security concerns. Compared to previous legislation which only covered mergers and acquisitions, the NSI act includes a broader range of deals including acquisitions of voting rights, acquisitions of assets such as IP and land, and minority investments. These are described by the government as “trigger events” which are defined as: acquisitions of more than 25%, 50% and 75% of the votes or shares in an entity (compared to 15% under the Enterprise Act 2002); any acquisition of voting rights that enables or prevents the passage of any class of resolution governing the affairs of the entity being acquired. As well as current deals, any transactions are subject to a 5 year period where the governments can raise concerns about security risks even after the deal is finished. However, this retrospective power only applies to acquisitions that took place after 11th November 2020 which was when the Act was first introduced to Parliament, and this will allow businesses and investors some certainty about deals done prior to this point. There are also significant sanctions for failure to notify the government of deals that come under these sectors including fines of 5% of turnover or £10 million (whichever is greater), and even imprisonment of individuals for 5 years.
HOW WILL THE NSI AFFECT LAW FIRMS
It is expected that the government will receive 36 notifications a week that need to be investigated and approved. Given how many transactions will be scrutinised by the government, it is inevitable that many of these will be for law firms’ clients. Law firms may be increasingly asked by clients to advise on transactions that may be at risk of being called for pre-completion clearance. However, since many transactions will be delayed by up to 30 days for the government’s approval, it could slow down large-scale deals that require numerous transactions and this could be frustrating and complex both for the parties involved in the deal, and the lawyers working for them. Compared to the old regime where less than 25 transactions have been reviewed by the Government since 2003, the NSI is estimated to lead to 70-95 transactions annually being called in for a full national security assessment. This is particularly likely in sectors such as Intellectual Property, energy and infrastructure projects. It is possible that more deals will get blocked under the NSI Act, such as takeovers that are deemed to breach any aspect of security, which results in an added element of risk to clients, but also to law firms who will need to ensure contracts cover situations where the final deal is blocked and clients do not make expected profits. Moreover, although complete blocking of deals will be rare, requirements to make some changes such as restricting access to sensitive sites, blocking access to confidential information etc will all require time to adapt while these changes are incorporated. Controversially, the government claims that the NSI Act will increase certainty for investors and cement the UK’s reputation as a ‘global champion of free trade’ however over time it will become clear whether the law will actually put investors off from investing in the UK. What is interesting to note, however, is that the previous powers the government had over national security did not have a strict timeline of 30 days written into law, and were determined on a case-by-case basis which does suggest the new legislation brings some level of certainty to businesses. Overall, businesses will need to factor approvals into their deal timelines and make sure appropriate documentation is provided so that risks of delay are minimised.
The NSI Act will undoubtedly increase security for the UK, as such a broad range of sectors and transactions are required to get clearance from the government. However, the effects on businesses are likely to be stark as delays in transactions and the potential for deals to be blocked may be a deterrent to investors in the UK. Despite this, we are still at such an early stage, and over time businesses and law firms are likely to generate new rapid processes to deal with the NSI Act in the most time and cost-effective way.