View from 30,000 feet: Issue 4

When advising new US clients on their investment and divestment transactions, we often encounter points of English law and practice that our clients find surprising.

While such issues are always surmountable, we find that prior familiarity with the key points can allow for superior transaction planning, outcomes and a reduction in timelines and costs.

The purpose of the “View from 30,000 feet” series is to provide a brief, high-level introduction to the key issues our US clients encounter on a regular basis with a view to reducing the number of surprises. The first notes will focus on some key UK purchase agreement points and subsequent editions will branch out into other areas relevant to institutional US clients.

These notes are not exhaustive (nor are they intended to be) as each transaction will turn on its facts. We are always available to discuss and engage with any follow up questions and we hope you the series useful.

Issue 4: National Security & Investment Act Considerations on an M&A Deal with a UK Target

The National Security and Investment Act 2021 (NSIA) has introduced significant changes to the landscape of mergers and acquisitions in the UK. For US investors eyeing UK targets, understanding the implications of this Act is crucial to ensure compliance and avoid potential pitfalls.

This article provides a brief explanation of the key aspects of the NSIA, including what it captures, the 17 sensitive sectors, timelines and filing requirements, insights on blocked transactions, and the necessity of NSIA analysis for all UK deals.

What the NSIA captures

The NSIA grants the UK government extensive powers to scrutinise and intervene in transactions that may pose a risk to national security. This includes acquisitions of shares, voting rights, or control over entities and assets. The Act applies to both UK and non-UK investors.

The NSIA distinguishes between:

• mandatory notification for acquisitions of “control” of entities that have activities in the UK in one or more of 17 specified sectors – these acquisitions must be notified for clearance and must not be closed until clearance has been obtained; and
• no notification obligation for other transactions, but scope for UK government to review of its own initiative (with parties having the option to submit voluntary notifications to head-off the possible of a later review).

The “control” test under the NSIA is a low one. For the purposes of the mandatory notification regime, acquiring more than 25% of the votes or issued shares in the company confers control (with acquiring more than 50%, or 75% or more, also triggering notification obligations).

The sensitive sectors

The NSIA mandates mandatory notification for acquisitions in 17 specified sectors deemed potentially sensitive to national security. These sectors include:

1. Advanced materials
2. Advanced robotics
3. Artificial intelligence
4. Civil nuclear
5. Communications
6. Computing hardware
7. Critical suppliers to government
8. Cryptographic authentication
9. Data infrastructure
10. Defence
11. Energy
12. Military and dual-use
13. Quantum technologies
14. Satellite and space technology
15. Suppliers to the emergency services
16. Synthetic biology
17. Transport 

Each of the above sectors is specifically defined for NSIA purposes. The above headings hint at their meaning, but some of the sectors are considerably broader than the headings might suggest.

Timelines and filing requirements

If a transaction falls within one of the 17 sensitive sectors, a mandatory notification must be submitted to the UK government before the transaction closes. The filing is typically made by the acquirer, although the seller or target can also submit the notification. The government has up to 30 working days to review the notification, with the possibility of extending the review period if further assessment is needed.

It is common to submit notifications as soon as possible, with a view to obtaining clearance before the transaction signs. Where that is not possible, the parties will need to agree that closing will be conditional on clearance. Failure to comply with the mandatory notification requirement can lead to severe consequences, including the transaction being declared void, and potential criminal and monetary penalties.

Insights on blocked transactions

Under the NSIA, most notified transactions are cleared within the 30-working day review period without further ado.

Since its implementation, the NSIA has seen a few transactions blocked due to national security concerns. Five deals have been prohibited, all involving investors from Russia or China. The government has restricted deals in various sectors, including telecommunications; semiconductors; dual-use electronics; and the licensing of dual-use vision sensing technology. These actions reflect the government's aim to protect critical infrastructure and technology from foreign control, particularly from countries identified as potential security risks.

Summary

In conclusion, the NSIA represents a critical consideration for US investors in the UK M&A market, principally because of the timing implications if clearance is required. Understanding its scope, the sensitive sectors it covers, the timelines and filing requirements, and the potential for government intervention is vital for successful deal execution. By incorporating NSIA analysis into their due diligence, investors can safeguard their transactions and align with the UK's national security priorities.

Previous issues

Issue 1: “Locked Box” purchase price adjustment mechanics

Issue 2: Conditionality provisions in a UK purchase agreement

Issue 3: Warranties, representations, indemnities and disclosure in a UK purchase agreement