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With a broad scope, the regime goes beyond M&A and can capture minority investments, asset transfers and corporate restructurings. In this insight, we focus on the implications for scaling businesses looking for investment.
The UK Government has made clear that “the UK economy thrives as a result of foreign direct investment” but states that “an open approach to investment must include appropriate safeguards to protect our national security”.
With this in mind, the UK’s National Security and Investment Act 2021 (NSIA) has come into force. For a detailed overview of its provisions, please look at our FAQs published here.
Set out below are our particular comments from an investment perspective.
The first thing to flag is the NSIA’s focus on 17 sensitive sectors of the UK economy. If your business or idea involves products, services or assets (even if only at a very developmental stage) in one of these sensitive sectors, it will be vital to check whether your proposed investment or other transaction (for example, granting a technology license to a university spin-out) is a trigger event where a notification to the UK Government must be made or is recommended.
The 17 sensitive sectors are as follows:
Many of the above are areas where the UK is an innovation leader, with high levels of activity coming out of our universities. For this reason, the UK Government has provided bespoke Guidance for the Higher Education and Research-Intensive Sectors. This sets out useful examples of when the NSIA regime may apply, amongst other things, to university spin-outs and research collaborations.
It is also important to think about both the existing and potential applications of the products or services of the company being backed by the investment. Do they have a dual-use nature i.e. both civilian and military use? If so, they may well be caught by the regime, even if current use is purely civilian. Particular examples include robotics, artificial intelligence, “advanced materials” and synthetic biology.
Before moving on to discuss the trigger events most likely to be relevant to investments, it should be flagged that the NSIA regime applies equally to foreign and domestic investments and assets. Even if your transaction involves only UK parties and UK assets (including shares), it can still be caught by the regime.
If your business operates in a sensitive sector (or if you think the investment might otherwise raise national security concerns), you must see if the proposed investment constitutes a trigger event.
Listed below are the key types of transaction caught by the regime, with a note against each confirming if they trigger a mandatory or voluntary notification:
|Trigger event||Mandatory or voluntary notification|
|A person acquiring (or increasing an existing shareholding to) more than 25%, more than 50% or 75% or more of the votes or shares in a qualifying entity1||Mandatory|
|A person acquiring voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity||Mandatory|
|A person acquiring “material influence” over a qualifying entity’s policy, without necessarily having the number of votes or shares to reflect this (this may be relevant to the acquisition of smaller shareholdings of less than 25%)||Voluntary notification advisable|
|A person gaining certain rights, interest or control over a “qualifying asset”– this could be a right to use an asset or use it to a greater extent or control how it is used||Voluntary notification advisable|
Depending on the nature of the investment, you may be caught by one or more of the above trigger events. For example, venture capital investments may tip the 25% shareholding threshold and transfers to university spin-outs are likely to involve “qualifying assets”.
“Qualifying assets” fall into key three areas: (i) land, (ii) tangible moveable property and (iii) “ideas, information or techniques which have industrial, commercial or other economic value”. A detailed summary of what these capture can be found in our FAQs. It could include:
It should also be noted that, even where the target company doesn’t operate in a sensitive sector, the UK Government can still call the transaction in for review if the Secretary of State reasonably suspects:
So even if neither your business nor the investor operates in a sensitive sector but there are other reasons why the investment may be of interest to the Government, a voluntary notification (or at least preliminary discussions with the Government’s Investment Security Unit) may be advisable.
A trigger event of particular interest to investors will be that relating to “material influence” over company policy as an investor’s consent rights, reserved matter protections and board representation could lead to an investor gaining “material influence” over the target, even with a relatively small shareholding.
Where there are factors other than just an investor’s shareholding which indicate an ability to exercise material influence over policy, even shareholdings of less than 15% may attract scrutiny (although we would expect most cases of material influence to arise in the ≥15% and <25% shareholding bracket).
The UK Government’s assessment of whether an investor will gain the ability to materially influence policy relevant to the behaviour of the target company will be considered in the light of the Competition and Markets Authority (CMA) guidance on this issue which was produced in the context of UK merger control. Broadly, the CMA guidance indicates that a finding of material influence may be based on:
Situations where an investor’s industry expertise might lead to its advice being followed to a greater extent than its shareholding would seem to warrant, should be critically assessed.
The variety of commercial arrangements entered into by businesses makes it difficult to state categorically what will (or will not) constitute material influence for the purposes of the NSIA. Investors will need to look at their influence over any investee company on a case-by-case basis.
Over time, we hope that the Government’s approach to “material influence” will be further clarified as submissions in this space are made and reviewed. Until then, case law in UK merger control cases can provide some guidance to the practical application of material influence.
It could be.
If your investment falls within the mandatory notification regime (see table above), then the investor must submit a clearance application to the UK Government’s Investment Security Unit (ISU). You cannot complete the investment without the ISU’s go ahead. Doing so has serious implications, including:
If the investment triggers only a voluntary notification obligation (see table above), you should consider making a clearance application to the ISU. The benefit of making a voluntary submission is that, assuming your investment gets the green light, the ISU won’t then issue a “call-in” notice after completion.
If the ISU does issue a “call-in” notice and decides that a national security risk has arisen, it can impose necessary and proportionate remedies for the purpose of preventing, remedying or mitigating that risk. What that practically means is likely to vary across the risks identified. A final order might, among other things, include provisions:
Please see our FAQs for more detail on this.
It is worth noting that, unusually, the NSIA has retrospective effect which means a transaction can be called in for review by the ISU if it took place after 11 November 2020. The ISU expects to use this power in a very limited way advising that the power was included to ensure parties did not accelerate transactions to avoid scrutiny.
However, companies looking for further investment or a potential sale may want to seek retrospective clearance from the ISU for previous transactions, to ensure its “call-in” powers cannot subsequently be exercised. This is likely to be something investors and acquirers look at in their future due diligence.
 A “qualifying entity” is defined as an entity that is not an individual, so it includes companies, LLPs, partnerships, trusts and unincorporated associations.
17 March 2022