Press enter to search, esc to close
It came into effect on 4 January 2022, with retrospective effect from 12 November 2020.
There is no exemption for insolvency sales and the need for approval and the potential for delays will need to be taken into account as part of the insolvency process and any negotiations of proposed transactions.
A detailed FAQs has been prepared by our corporate team, and can be found here. We have summarised the headline issues for insolvency practitioners below.
Additionally, BEIS guidance on the notices and orders which may be issued pursuant to the Act was issued on 11 April 2022 and should be taken into account when assessing potentially affected acquisitions and disposals.
The Act establishes a new regime for the scrutiny of and intervention in acquisitions and investments in order to protect national security. It relates both to transactions involving one or more of 17 specific areas of the economy – which, for share sales, trigger a mandatory notification to the Secretary of State (SoS) – and also more generally to any transaction that may fall outside of these sectors but still raises national security concerns.
The areas of the economy where transactions are most at risk of being “called in” for investigation by the SoS are: advanced materials; advanced robotics; artificial intelligence; civil nuclear; communications; computing hardware; critical suppliers to government; cryptographic authentication; data infrastructure; defence; energy; military and dual-use; quantum technologies; satellite and space technologies; suppliers to the emergency services; synthetic biology; and transport. These are described in more detail in the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (the Notifiable Acquisition Regulations). The Government has also published user friendly guidance on these sectors.
Although the regime came into effect on 4 January 2022, the UK Government can look back at relevant transactions that have taken place since (or not completed by) midnight on 11 November 2020.
There is no exemption for sales of the business or assets of a company in an insolvency process. Sales of shares (although rare in insolvency proceedings) need to be analysed to consider whether a mandatory notification is required, as would debt-equity swaps and any form of exercise of voting rights in shares. For asset sales, if the assets being sold and the transaction being contemplated qualifies for the purposes of the Act then, until further guidance or case law is forthcoming, a voluntary notification will be advisable to prevent the transaction being subsequently “called in”.
The SoS “expects to call in rarely acquisitions of assets compared to acquisitions of entities”. He has confirmed that asset acquisitions are most at risk of being “called in” if the assets are (or could be) used in connection with the 17 areas of the economy set out in Notifiable Acquisition Regulations or closely linked activities. This guidance is set out in a Government statement dated 2 November 2021.
The new regime will be operated by the Investment Security Unit (ISU), which sits within the Department for Business, Energy and Industrial Strategy.
If the transaction looks to fall within the voluntary notification regime, ideally the seller will make a notification, which should be vetted before submission by the putative insolvency practitioner (if not already in office). The purchaser may also need to contribute information to the notification where not publicly available and, in any event, may wish to review the notification before it is filed to ensure it is correct and accurate. The advantage of making a voluntary application is certainty: if the ISU approves a transaction in advance it will not issue a “call-in” notice after completion.
If the transaction will – or might – trigger a mandatory notification (because, for example, the sale involves the shares of a “qualifying entity”) the proposed buyer must submit a clearance application to the ISU, otherwise the sale will be void. Only a buyer can submit a mandatory application although, again, in practice all parties are likely to want to review and contribute to the application.
The ISU has 30 working days beginning on the date the SoS informs the applicant that the notification has been accepted to decide whether to clear the transaction or give a call-in notice and undertake an in-depth review. If the SoS decides to undertake a review there is a second 30 working day period to carry this out. This can be extended unilaterally by a further 45 working days. There is no mechanism for expediting clearance applications. The timetable may also be paused either by agreement between the SoS and the applicant, or if the SoS issues an information gathering request.
Voluntary notification of an asset sale precludes the SoS from subsequently “calling in” the sale.
However, if a business or asset sale is not notified, the orders which the SoS may make on a subsequent calling in include ordering a person “to do, or not to do, particular things”, or imposing supervision of specified persons’ conduct which are most likely to affect the purchaser’s use of the relevant asset rather than the seller’s position (although we are yet to see how these powers will be exercised by the SoS). The SoS may issue an “information notice” at any time (whether before or after notification or call in) requiring the recipient to provide further information to support the SoS’s consideration of a potentially qualifying acquisition.
If an acquisition is called in, the SoS may also issue an attendance notice (requiring people involved in the transaction to attend a meeting with the SoS) and/or an interim order (which is intended to prevent the parties to a transaction taking any steps which could undermine the conditions the SoS may impose in a final order). Non-compliance with attendance notices could lead to fines or criminal proceedings. Interim orders could include a prohibition on the exchange of confidential information or access to sensitive sites or assets, and IPs would need to carefully consider the impact this could have on management of the insolvency process. Again, non-compliance could lead to fines or criminal proceedings.
Although the orders made will be necessary and proportionate, if the SoS decides that a risk to national security has arisen, a final order will be issued imposing conditions which BEIS guidance indicates could include:
Placing conditions on an acquisition prior to completing;
Unwinding the transaction if it has already completed; or
Blocking the acquisition from taking place.
If a sale triggers the mandatory notification regime but completes without approval it will be automatically void. This raises complexities and uncertainties if a sale is declared void after completion, including where any secured lender has released its security as part of the transaction. It also, potentially, affects the ability of the officeholder to distribute realisations or, if distributions have already been made, could put the officeholder in a difficult situation. There are also financial and criminal sanctions for the proposed buyer. Enhanced post-completion contractual protections in sales of shares are therefore expected to become the norm.
The appointment of administrators will not of itself constitute a “trigger event” for the purposes of the legislation (although a subsequent disposal of shares owned by the insolvent company may do so). There is no such exemption for the appointment of receivers or liquidators.
Without further guidance from the Government, we are left with a common sense interpretation of the legislation, under which a “trigger event” occurs when a person gains “control” of a qualifying entity or asset. “Control” is in turn defined as acquiring “a right or interest in or in relation to” an entity or asset, where as a result, that person is able to use it to a greater extent than prior to the acquisition, or to direct or control how the asset is used, or to direct or control how it is used to a greater extent than prior to the acquisition.
We would suggest that neither receivers nor liquidators acquire a “right” or “interest” in an asset or entity over which they are appointed. Rather, they obtain the benefit or powers conferred by either security, court order or statute, which in turn permits them to manage the asset or entity. The asset or entity in question, however, remains owned by the same person(s).
On balance, it appears likely that only the subsequent sale of the asset or entity gives rise to a trigger event, but further guidance and/or a course of conduct by the ISU will be needed to provide absolute certainty.
As might be expected, there are still some unanswered questions in respect of the taking and enforcement of security.
The Government has confirmed that “loans, conditional acquisitions, futures, and options are unlikely to pose a risk to national security and so are unlikely to be called in”. There is not however a blanket exemption for lenders, and no guidance has been given to date on the implications of the Act when enforcing security. Accordingly, it is not possible to state definitively that lending (or, more likely, taking security) will not result in acquisition of control of an asset or entity. All depends on the nature of the asset/entity and the type of security taken.
That having been said, it is difficult to see how lending alone would give rise to a notifiable event. And the taking of security (an equitable charge where legal ownership and physical possession remains with the borrower) also seems to be low risk, given that in most charges the taking of security neither grants the lender greater use of the asset, nor the ability to direct or control how it is used (other than through restrictive covenants) prior to enforcement of the security. However, “legal” security, where the assets is either transferred into the name of the lender, or physical possession of it delivered, might prove more problematic. Security over shares (particularly where the shares have to be transferred into the name of the lender) poses the greatest risk, through a mandatory notification event.
What is clear is that the enforcement of any type of security interest involving a sale of the underlying assets, most definitely raises the prospect of a notifiable event, and specifically the sale of shares via security may result in a mandatory notification. It is also conceivable that taking possession of secured assets by a lender could also result in a change of control, leading to the call-in power becoming exercisable.
The need for approval and the potential for delays in high risk scenarios will need to be taken into account as part of any insolvency process and the negotiation of proposed transactions. Appropriate contractual protections to guard against subsequent calling in should now be built into asset purchase agreements for all sales in “sensitive sectors”. Until further guidance or a clear course of dealing has been established we expect that insolvency practitioners will exercise a high degree of caution where an appointment or transaction may fall within the regime.
Contributor: Tessa Durham
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.
21 April 2022