Since the United Kingdom implemented the National Security and Investment Act in January 2022 ("NSI Regime"), there has been a significant increase in state intervention in, and review of, business transactions in the United Kingdom, including for international transactions involving targets with limited activities in the United Kingdom.

Although the NSI Regime is often described as the United Kingdom's foreign direct investment law, it is limited neither to transactions involving foreign entities (like CFIUS in the United States), nor to direct investments. Indeed, the coverage of the NSI Regime is broader than transactions that might ordinarily be considered "investments" because it may require a filing for certain license agreements, financing arrangements, and insolvency proceedings, among others. Instead, the NSI Regime is a broad investment control regulation.

Over the last year, the UK government has extensively deployed its new powers, reviewing many hundreds of mandatory notifications, calling in dozens of deals for detailed national security assessments, imposing conditions on nine transactions, and prohibiting three. Some of the matters that have attracted the most attention from the UK government are those you would expect-deals in the defense and national security sectors. However, other deals-including one in which the UK government imposed remedies involving an acquisition of an equity interest of just 12.1%-might come as a surprise to many businesses.

This White Paper provides an overview of the NSI Regime and lessons from transactions that have been called in over the last year. It also highlights implications for a range of specific client sectors that we have seen commonly arise since the introduction of the regime.

OVERVIEW OF NSI REGIME

The NSI Regime introduced a mandatory and suspensory preclosing notification requirement for acquisitions of corporate entities carrying on specified activities in any one of 17 UK industry sectors considered to be "sensitive." The NSI Regime also established a broad "call-in" power that authorizes the UK Secretary of State ("SoS") to intervene in acquisitions of both corporate entities and assets in any sector for which there is sufficient nexus to the United Kingdom. Where a transaction gives rise to risks of a potential call-in, parties can choose voluntarily to notify the SoS. The UK Department for Business, Energy and Industrial Strategy has also established a new regulatory team, the Investment Security Unit ("ISU")1, to administer the NSI Regime.

The new regime applies to a wide range of corporate transactions, including:

  • Minority investments above certain thresholds (including additional notification requirements for further increases in shareholdings or voting rights between thresholds);
  • Acquisitions/gaining of voting rights above certain thresholds (even where no underlying equity is acquired);
  • Acquisitions of interests in assets, including intellectual property rights (e.g., licensing agreements);
  • Financing arrangements; and
  • Internal corporate restructurings.

Unlike many foreign direct investment regulations, the United Kingdom's mandatory notification rules are agnostic as to the nationality of the acquirer. Therefore, even acquisitions by UK-headquartered companies of foreign entities with activities in the United Kingdom can be subject to notification requirements. However, the nationality of the acquirer is relevant to the ISU's analysis of national security risks.

The jurisdictional requirements of the NSI Regime can be met even if the target does not have a subsidiary or physical presence in the United Kingdom. Instead, the jurisdictional test will be met if:

  • In the case of acquisitions of entities, the target carries on any activities in the United Kingdom or supplies goods or services to the United Kingdom; or
  • In the case of assets, the asset is used in connection with activities carried on in the United Kingdom or used in connection with the supply of goods or services to people in the United Kingdom, even if the asset is located overseas.

There are significant consequences for noncompliance with the NSI Regime. If parties fail to make a necessary mandatory notification, the consummated transaction is deemed to be void as a matter of UK law. In some cases, parties can remedy such a mistake through a retrospective notification. The NSI Regime also features potential fines of up to 5% of worldwide turnover or £10 million (whichever is greater) and, in extreme cases, risk of imprisonment for up to five years for senior managers. No penalties have been issued to date, and in practice, we expect that the largest fines and criminal sanctions will be reserved for the most serious violations-for example, intentional non-filing or repeat offenders

WHEN MANDATORY NOTIFICATIONS MIGHT BE REQUIRED

The NSI Regime introduces a mandatory notification requirement if:

The following trigger events can give rise to a mandatory notification requirement:

  • The acquisition of more than 25%, more than 50%, or 75% or more of the shares or voting rights in a target entity (including acquisitions that cause moves between the thresholds so multiple notifications may be required for an acquisition conducted in multiple stages); or
  • The acquisition of voting rights enabling or preventing the passage of any class of resolution governing the affairs of the target entity.

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Footnote

1. While the SoS is the final decision-making authority under the NSI Regime, the ISU conducts reviews with input from other government agencies and prepares recommendations that carry significant weight in the SoS's decision-making process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.