September 28, 2021

Volume XI, Number 271

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September 27, 2021

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The UK Government Shares New Detail Regarding Incoming National Security and Investment Act

In November 2020 the UK Government announced1  a new, much broader regime for the regulation of foreign investment for the protection of national security in the United Kingdom (the UK) under the National Security and Investment Act (the Act).2 The UK government has now confirmed that it expects the regime to come into force on 4 January 2022 and many transactions will trigger mandatory notifications from that date or risk fines and invalid transactions.

Alongside commencement information, the recent guidance publications shed light on what transactions will be caught and how the Secretary of State expects to use the new powers. The updated guidance pages3 answer the following questions:

When Will the Act Come Into Force?

The new regime will commence in its entirety on 4 January 2022.

The Act grants the UK Government a five-year retrospective call-in power for transactions which were not notified, but may give rise to national security concerns. These powers will be applicable for all transactions that took place from 11 November 2020 onwards (the date that the Act was introduced to Parliament). This means that the provisions of the Act should be an active consideration for parties to transactions happening now, whether they are likely to complete before 4 January 2022 and potentially be “called in” retrospectively or whether they may not complete until after commencement and may therefore trigger a mandatory notification.

What Kind of Transactions Will Fall Within the Scope of The Act?

A transaction will be a ‘qualifying acquisition’ regardless of the deal value if it satisfies all of the following.

  1. The acquisition is of a right or interest in, or in relation to, a qualifying asset (i.e. land, tangible movable property, or intellectual property) or entity (i.e. a company, an LLP, a partnership, an unincorporated association, a trust, or any other body corporate),

  2. The entity or asset being acquired is from, in, or has a connection to the UK, and

  3. The level of control being acquired meets one of the defined thresholds (for example, voting rights in a qualifying entity will become more than 25 percent).

An acquisition of a qualifying entity (as opposed to an asset acquisition) triggers a mandatory notification if it relates to any of the 17 stipulated sectors of the UK economy, as follows: 

  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 Technologies

  15. Suppliers to the Emergency Services

  16. Synthetic Biology 

  17. Transport

Even where no mandatory notification is triggered because the transaction is structured as an asset acquisition or does not directly fall within these sectors, the UK Government may “call in” the transaction if it believes it gives rise to, or may give rise to, a risk to national security. The parties may pre-empt this by voluntarily notifying the authorities of the transaction.

Does It Matter Where the Parties to The Transaction Are Located?

The Act is expected to catch a significant number of transactions taking place outside the UK. The only geographical limitation of the Act’s scope is that the qualifying entity or asset is from, in, or connected to the UK. For these purposes, a connection will be found if a business carries on activities or has customers in the UK, or if an asset is used in connection with activities or supply of goods and services in the UK.

This means it is entirely possible for target groups with no UK subsidiaries to fall within the scope of the Act. Furthermore, the nationality of the acquirer is irrelevant when determining whether there is an obligation to file. There are no exemptions for “allied” jurisdictions, although this will be relevant to the substantive assessment.

How Does the Secretary of State Plan to Use the Enhanced Powers?

The review process under the Act will fall within the powers of the Secretary of State for Business, Energy and Industrial Strategy (BEIS), and will be overseen by a new department within BEIS called the Investment Security Unit (the ISU). The ISU is available now and receiving and responding to informal submissions regarding transactions which may be caught by the Act, retrospectively. 

After commencement, the deadline for the ISU review process will be 30 working days from the receipt of all necessary information, with the expectation that many reviews will be concluded more quickly. At the end of this period, the ISU will confirm whether it is satisfied that it need take no further action, or that further investigation (lasting between a further 30 and 75 working days) is required. This legally defined timeframe is intended to offer an improved degree of certainty to transaction timelines when compared with the previous UK rules. No filing fees are payable.

At the end of the ISU review, the ISU may: a) clear the acquisition, b) impose conditions on the acquisition, or c) unwind or block the acquisition. The ISU has confirmed it expects to impose conditions in a minority of cases  and to resort to unwinding or blocking transactions in even more exceptional circumstances.

What Are the Consequences of Non-compliance?

When a ‘notifiable acquisition’ (i.e. a qualifying acquisition of a qualifying entity in one of the 17 defined sectors) is completed without ISU approval, it is considered void under English law. Additionally, the acquirer may be subject to civil or criminal penalties including a civil penalty of up to 5 percent of the organisation’s global turnover or £10 million, whichever is greater.

Parties will be able to apply for retrospective validation, a tool that may be particularly useful for relevant transactions that have already completed since 11 November 2020.

Why Is the Uk Making These Changes?

In keeping with other regimes, for example in the European Union, the UK is seeking to modernise and protect a much broader set of national security interests, such as critical supplies to government and data infrastructure, from passive as well as active investment interference.  However, in establishing a clear and efficient review process, the hope is that the majority of desirable foreign investment will not be deterred.

Protecting the UK’s national security is of paramount importance to this government,” Secretary of State for BEIS Kwasi Kwarteng said.  “Now that our investment screening regime has been strengthened, the government will be able to take swift and decisive action against potentially hostile foreign investment.”


"New and improved National Security and Investment Act set to be up and running"

See our previous alert here.

"National Security and Investment Act

Specifically, the ISU is expecting to receive 1,000-1,830 notifications each year. It is expecting to call in a further 75-90 deals per year. However, the ISU anticipates that it will require remedies in only around 10 deals per year.

Copyright 2021 K & L GatesNational Law Review, Volume XI, Number 211
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About this Author

Jennifer P.M. Marsh IP Lawyer KLGates
Partner

Jennifer Marsh is partner in the firm's London office. She concentrates her practice on all aspects of EU and UK competition law and commercial agreements. 

Ms. Marsh’s work covers merger control, including making submissions to the European Commission in Brussels and coordinating merger filings globally; advising on litigating competition law issues before the English courts, including two appeals before the Court of Appeal; advising on distribution strategies throughout Europe, including online resale policies, marketplace strategies and selective distribution;...

+44.(0)20.7360.8223
Gabriela R. Da Costa, Senior Associate, KL Gates
Senior Associate

Gabriela da Costa is a senior associate in K&L Gates’s London office where she is a member of the antitrust, competition & trade regulation practice group. 

Gabriela advises clients on a wide range of competition matters, including restrictive practices and agreements, abuses of dominance, merger control, procurement and state aid. Gabriela has extensive experience in advising manufacturers in a variety of sectors, including leading consumer electronics, sports and fashion brands, on designing and implementing effective distribution...

+44.(0)20.7360.8115
Michal Kocon Antitrust and Competition Attorney K&L Gates Law Firm London UK
Senior Associate

Michal Kocon is a senior associate in the firm’s London office where he is a member of the antitrust, competition, and trade regulation practice group providing end-to-end antitrust and competition representation before the European Commission, the Competition and Markets Authority and other national competition authorities. Michal advises clients on a wide spectrum of competition issues, including cartels, horizontal and vertical agreements, merger clearance, abuse of dominance, antitrust compliance and competition litigation. His work covers, in particular, bringing...

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Niall J. Lavery Trainee Solicitor London IP Procurement and Portfolio Management
Trainee Solicitor

Niall Lavery is a trainee solicitor in the firm’s London office.

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Trainee Solicitor

Kate McDermott is a trainee solicitor in the firm’s London office.

Prior to joining the firm, Kate served as a programme coordinator for an education start up. Kate additionally was a legal assistant for a compensation law firm, where she drafted court documents, maintained client contact, handled client complaints, as well as performed ad hoc supportive and administrative duties. Kate also completed a two-week placement scheme at an international law firm, in capital markets, IP, and financial institutions litigation and regulation departments.

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