The UK National Security and Investment Act (the Act) came into force on 4 January 2022, and applies to transactions that completed as of 11 November 2020. The Act is designed to govern arrangements that may give rise to UK national security concerns.
For a summary and brief overview of the Act, please see our alert published in July 2021.
The declining value of the pound sterling means there is likely to be more foreign investment into the United Kingdom, so the Act needs to be considered when organising UK acquisition transactions or secured financings. In addition, the economic distress that the United Kingdom is facing means that insolvency practitioners and secured lenders also need to be aware how their transactions could be captured.
The Act applies to not only share sales but also in relation to sales of assets. Any transaction with a UK connection could be caught.
While the UK government can “call in” any transactions that it foresees as a national security risk, it anticipates that mainly activities in the 17 sectors (listed below) will be captured (the Sectors).
The Sectors are as follows:
- Advanced materials
- Advanced robotics
- Artificial intelligence
- Civil nuclear
- Computing hardware
- Critical suppliers to the UK government
- Cryptographic authentication
- Data infrastructure
- Military and dual-use
- Quantum technologies
- Satellite and space technologies
- Suppliers to the emergency services
- Synthetic biology
An administrator’s appointment over an insolvent company will not trigger a notification under the Act. However, an administrator subsequently selling shares owned by that company may trigger a notification if the relevant company is involved in one of the Sectors. There is no such statutory exemption for receivers or liquidators, but we will discuss below how it is unlikely that their appointment alone would trigger a notification.
The UK government has indicated that asset sales will rarely be "called in," and there is most risk for a "call in" if the sale is within one of the Sectors or a closely linked activity. An asset sale triggers the Act whenever a person gains any interest, right, or control over an asset located in a Sector. Note that while it will be triggered by an outright sale of an asset, licensing agreements and contracts which give the purchaser a greater degree of control over the asset will also be caught. In any event, notification of an asset sale is always on a voluntary basis.
Land falls outside of the exclusions of the Act, provided it is purchased outside of the individual’s business. Therefore, a personal acquisition of real estate could trigger a voluntary notification if the land is located in close proximity to real estate that falls within one of the Sectors. Further guidance is needed to establish what the Investment Security Unit (ISU) (the department set up to review transactions potentially falling within the scope of the Act) considers to be close proximity.
The Act will apply to any asset that is used in connection with either (i) activities carried on in the United Kingdom or (ii) the supply of goods or services to people in the United Kingdom. Therefore, even a transaction involving two foreign entities can still be captured by the Act if (for example) machinery by one of the companies is used to produce a product that is used in the United Kingdom. However, even if an asset is sensitive, it is unlikely the UK government will “call in” the transaction unless there are no alternatives. Consider hypothetical company x (Company X) that supplies sensitive software to the UK government. Company X would like to license the software to a third party who may pose a security risk. When deciding if this transaction should proceed, the ISU will consider factors such as, if the UK government can obtain the software from another company.
That being said, the UK government has already blocked a licensing agreement between a Chinese owned company and a UK university. A certain technology developed at the university was found to have dual-use capabilities (civilian and military) that could present a national security risk to the United Kingdom, and the agreement was blocked from proceeding.
If the share sale falls within one of the Sectors, it will trigger a notification if:
- Any person or entity acquires (or increases their existing shareholding) to more than 25% in a qualifying entity (this is a mandatory notification);
- Any person or entity acquires voting rights that are able to pass or prevent resolutions of a qualifying entity (this is a mandatory notification); or
- Any person acquiring a “material influence” of a qualifying entity’s policies (this is a voluntary notification). It is indicated that this could be found with shareholdings as low as 15%.
Similarly to a qualifying asset, a qualifying entity is one that (i) carries on activities in the United Kingdom or (ii) supplies goods or services to people in the United Kingdom. For example, a company incorporated in Canada that supplies transport services used in the United Kingdom would be captured by the Act. If a share sale in that company requires notification and it completes without the UK government’s approval, then the sale is automatically void.
In August 2022, the UK government blocked the acquisition of a UK company by a Chinese chip manufacturer. The ISU concluded that the products the target produced could be used in civilian or military supply chains.
Considerations for Secured Lenders and Insolvency Practitioners
Lenders may continue to take security over shares in an obligor’s group if it operates in one of the Sectors. However, additional consideration will be required if the lenders wish to enforce their security over those shares.1 A prudent lender may even consider a legal opinion as to the applicability of the Act on their transaction. If the relevant obligor falls within one of the Sectors, it is likely the lenders will need to declare a mandatory notification prior to enforcing their rights, and given the timeframes (as indicated below), it is recommended notification is provided as soon as they are made aware of an event of default.
The same will be true for a receiver or a liquidator (the IP) who is attempting to sell a company (whether by way of a share or asset sale). The IP will not be able to make any notifications until appointed. Further guidance is required for understanding if an IP will gain “control” of an asset or shares upon appointment. Instead of obtaining a right in the asset or shares, it could be argued that an IP receives the benefit of such asset or shares by way of security (via a secured lender), court order, or statute, which would allow them to manage the asset or shares since the IP is appointed as an agent of the underlying company. Only the subsequent sale of the asset or shares would trigger such notification.
Notifications will either be mandatory or voluntary. The only mandatory notifications fall within items 1 and 2 listed in the share sales paragraph (above), and all other notifications are voluntary. The ISU has 30 business days to carry out an assessment of the proposed transaction. If a more detailed review is required, they will give themselves a further 30 business days (which they can extend again by an additional 45 business days). If a full review period is required, it could delay a transaction by up to 21 weeks, so approval should be sought as soon as possible.
There are serious implications for not providing a mandatory notification, including (but not limited to) a five year prison sentence and large fines. A voluntary notification (or if a transaction is subsequently “called in”) could result in (among other things) requiring a person to take (or not to take) certain actions, restricting access to supply chains or unwinding the transaction.
A transaction can only be “called in” (i) within six months from the date the secretary of state became aware of the transaction and (ii) after five years from the transaction’s completion.
While the two recent examples of the Act in action relate to Chinese investors, acquisitions from France, Australia, Canada, and the United States have also been reviewed by the ISU. It is therefore important for secured lenders, IPs, administrators, and anyone looking to conclude a transaction or contract to consider (i) if there is any relation to the United Kingdom (even products that will be used in the United Kingdom) and (ii) if the transaction falls within one of the Sectors - if it does, or if you are uncertain, please take legal advice. Given the criminal and financial sanctions available to the ISU, it is better to be overly cautious and report a proposed transaction than fall foul of the Act. Remember to add in an extra buffer for the transaction to complete in case the ISU decides to examine the proposed transaction in further detail.