The National Security and Investment Act 2021: The first market guidance notes

While the regime is still young, its impact on deal making is being felt. Determining whether a filing is required can be complex, and while the process of filing has so far been relatively smooth, the impact on transaction timelines and the negotiation of risk allocation for process overrun and/or adverse outcomes is a hot topic on deals.

The UK government has now published the first of its “Market Guidance Notes” (MGNs) with guidance on notifications received and experience of the system over the last six months. MGNs will be published periodically to advise on issues experienced in the operation of the regime.  The first MGNs, in particular, focus on commonly raised process and interpretation issues. We pick out the key takeaways.

Notification forms should be detailed but comprehensible

The 30 working day review period will only begin once the Investment Security Unit (ISU) has accepted a notification as complete. The ISU is not subject to a statutory time limit, but in practice acceptance has been taking place on average within 3-4 working days of submission. Completing the forms correctly and with the appropriate level of detail will clearly ensure a faster assessment.

The MGNs encourage notifying parties to provide as much detail as possible in a clear way. Setting out examples, the MGNs request that parties provide clear and full details on the relevant sectors, including the activities of the entity being acquired or how the asset is used that brings an acquirer in scope of the mandatory regime, while avoiding the use of overly technical language.

The MGNs also call for more complete descriptions of the “trigger events” applying to the acquisition, including exact details of the shareholding and/or other rights being acquired. More complex trigger events should be set in the context of any wider transaction.

Notifications submitted without detailed structure charts risk being rejected. The MGNs note the requirement for the inclusion of the ultimate beneficial ownership of both the qualifying entity and the acquirer, the nationalities of named individuals, the country of incorporation, any subsidiaries and the percentage of ownership rights between entities.

Our experience shows that notifications that are complicated but explained clearly, including by providing full details on the qualifying entity’s activities and linking the acquisition back to the mandatory sectors and trigger events under the legislation in a straightforward way, are accepted as complete more quickly.

Scope for a single notification covering multiple acquisitions

The MGNs clarify that a single notification may be appropriate for certain acquisitions, including in two specific scenarios:

1. where multiple qualifying entities or assets are being acquired by a single acquirer from a single seller; and

2. when the internal restructuring of an entity or corporate group containing multiple qualifying entities or assets does not involve any new shareholders from outside the corporate group acquiring control of share or voting rights.

While helpful, there is still uncertainty about whether single notifications can be made in “joint control” situations. Further clarification of best practice in this situation would be welcome, though for practical reasons our experience is that multiple notifications may be preferred in such instances.

The appointment of liquidators and receivers could require mandatory notification

The MGNs confirm that the mandatory notification carve-out for rights exercisable by administrators or creditors while an entity is in "relevant insolvency proceedings" (briefly, administration and certain foreign insolvency proceedings) does not extend to rights held by liquidators or receivers. This means that, depending upon the facts, the appointment of a liquidator or receiver to a holding company which has a subsidiary active in a sensitive sector could require mandatory notification.

The MGNs set out two scenarios that could require mandatory notification:

1. a liquidator is appointed in respect of an entity which has a shareholding of over 25% in an entity which has activities in a sensitive sector and, during the insolvency process, the liquidator acquires control of the voting rights over these shares; or

2. an individual (for example, a director) is declared bankrupt and has a shareholding of over 25% in an entity which has activities in a sensitive sector and, during the insolvency process, the trustee in bankruptcy acquires the shares.

Insolvency practitioners and restructuring teams should be aware of this given the implication of having a void legal transaction step in any insolvency or restructuring process.

The granting of share security does not require mandatory notification

The MGNs confirm the generally accepted view that whilst the grant of security over shares by a borrower to a lender (or a security trustee on behalf of a number of lenders) could create an equitable interest in the shares, it would not in itself grant any control over them and it is therefore not mandatory to notify the government before granting share security.

However, mandatory notification to and prior approval from the Secretary of State may be needed if legal title is transferred or control otherwise passes. The analysis is also different for share security governed by Scots law, where legal title does pass on the grant of security and so mandatory notification and approval is required.

Minority investor contractual rights require careful assessment

Minority investors, especially those involved in early-stage investment, often seek strong contractual protections.

Where a minority investor is acquiring in excess of 25% of the shares or voting rights in a qualifying entity, mandatory notification is likely to be required. Significantly, however, the MGNs suggest that investors may not be required to make a mandatory notification where they obtain interests below 25% and the protections or rights that they have are contractual (eg in a shareholders’ agreement):

• “There are circumstances where parties have contractual rights that may have the effect of securing or preventing the passage of a class of resolution […] The government considers that such contractual rights are not covered by the NSI Act under section 8(6) on the basis that such contractual rights are not themselves voting rights [...] provided that such contractual rights do not amount to control of such voting rights under paragraph 5 of Schedule 1”

Not all minority investments are off the hook, however. The MGNs note that contractual rights ‒ alone or together with other interests or rights ‒ could give an acquirer “material influence” (which is a trigger event allowing for a call-in notice to be issued even where no mandatory notification is required). Acquisitions of below 25% interests, or other controls on the exercise of voting rights such as those commonly required by project financiers, need therefore to be assessed carefully to check both whether a mandatory notification is required and, if not, whether there remains a call-in risk (which can exist for up to five years from the day the transaction takes place).

No carve-out for internal corporate reorganisations

The government confirms that internal reorganisations may be subject to suspensory mandatory notification ‒ even if the ultimate beneficial owner of a qualifying entity remains the same. This applies to corporate reorganisations as well as fund restructures.

The government’s approach is based on the possibility of “rare” cases where an acquisition of control by another “link” in the corporate structure ‒ particularly one where the ultimate beneficial owner is passive ‒ could enable a hostile actor to pursue malign actions over the entity. While we therefore expect few call-ins with respect to reorganisations, anyone contemplating a restructure should be aware of the timing impact that seeking approval could have.

Limited transparency on reviews and decisions

The MGNs state that the government will not publish information on the receipt (or not) and acceptance or rejection of individual notifications.

The government is also not required to publish information on call-in notices or clearances following a review or assessment period, though in practice the government has publicised some (but certainly not all) call-ins; it is most likely to opt to do so where the parties have disclosed the information or the acquisition is otherwise in the public domain and the Secretary of State considers it to be in the public interest.

The government will not publish information on the specific content of an interim order made following a call-in, but could state that one has been made. Final orders made with respect to called-in transaction will be made public.

Parties can generally expect to receive advance notice of any proactive announcement.

Look out for future MGNs

The additional guidance on the scope and workings of the new regime is welcome, especially as to determining whether an acquisition is subject to mandatory notification. Significant grey areas and uncertainty remain, however, and questions continue to arise, particularly with novel transaction structures. 

The government recognises this and, in response to our feedback, has promised to consider further market updates that address more detailed points in due course. We will continue to engage with government on these issues and future market guidance topics, with the next set of notes expected to be published in early 2023.

Please get in touch with your usual Allen & Overy contact if you would like to discuss the implications of the regime for your business.