The National Security & Investment Act: implications for restructuring

In doing so, the government has oversight of the identity of the parties gaining ownership or control over businesses or assets with national security significance. Although the Act came into force on 4 January 2022, the regime also operates retrospectively, catching any relevant transactions that have completed since 12 November 2020. Now the regime has been in operation for over six months, there are a number of lessons that have been learned, as well as some continuing questions as to its effect on restructuring.

Overview of the Act

The regime established by the Act applies to certain in-scope transactions – trigger events – that give the acquirer control over certain assets or entities. As a result, the scope of the Act is wide, covering not just notable foreign investment but any transactions with a UK nexus within certain set sectors or otherwise which raise national security concerns.

The regime is purchaser agnostic. Accordingly, trigger events are defined by reference to the level of control acquire over the target entities or assets and not by reference to the identity or jurisdiction of the purchaser. The shares or assets being purchased need not be in the UK provided the relevant entity supplies to the UK or the assets are concerned with activities in the UK.

The Act applies to transactions at all levels, including at the intra-group level. Trigger events defined by the Act include:

• The acquisition of votes or shares in a qualifying entity exceeding, from the current shareholding, 25%, 50% or 75% as appropriate.
• The acquisition of voting rights that enable or prevent the passing of resolutions governing the affairs of the qualifying entity.
• The acquisition of material influence over the qualifying entity’s policies.
• The acquisition of the right to use the qualifying asset to a greater extent than before the acquisition, or to direct or control how the asset is used.

The regime is two-pronged. It consists of a mandatory notification system and a catch-all voluntary regime, which allows parties to alert the Department for Business, Energy and Industrial Strategy (BEIS) of relevant transactions.

Implications for restructuring transactions

While the Act contains a ‘safe harbour’ for the appointment of administrators, no notification is triggered by the appointment. There are no such carve outs for receivers, liquidators or any foreign insolvency officeholders. Guidance issued by BEIS in July 2022 confirmed that the appointment of liquidators could trigger the mandatory notification requirements if within the nexus of the Act. As such, restructuring professionals will need to consider whether a notification is required prior to an appointment of a liquidator or receiver. Certain actions of insolvency practitioners, including administrators, may also be caught.

Where shares are sold out of administration, for example where those shares meet the control threshold and sector requirements, there would need to be a notification under the Act. A purchaser of assets out of administration may also consider that a voluntary notification is required. The application of the Act to sales in an insolvency context adds timing concerns, particularly where a business is distressed and needs a quick sale to allow new funding and rescue. While the onus is on the purchaser to obtain clearance, the risk for insolvency practitioners would be if a transaction is subsequently deemed to be void after the have distributed the proceeds and they are caught in the middle.

According to the first annual report on the implementation of the Act, published in June 2022, the average decision time for clearance was 24 working days for transactions called in by the secretary of state. This timeline is likely to have a significant impact on any time-sensitive distress sales and may also have consequences in situations of default. There is currently no set mechanism for expediting clearance applications. However, we have seen examples of a speedier clearance where the message was conveyed that speed was critical to rescue the business and preserve jobs.

It may be that insolvency practitioners need to consider disposing of specific subsidiaries or assets which are within the nexus of the Act separately from other businesses within a group, so that the restructuring of the rest of the group is not delayed by the timelines required for notification.

Implications for lenders

The BEIS guidance published in July 2022 confirms that “loans, conditional acquisitions, futures and options are unlikely to pose a risk to national security and so are unlikely to be called in.” Furthermore, the same market guidance notes state that “the granting of types of share security where title to the shares is not transferred to the secured lender (or its nominee) is not a notifiable acquisition requiring mandatory notification.”

As the grant of any such security merely creates and equitable interest in the shares, no control is granted over the shares “until the happening of an even that would provide control”. As such, most English law share charges would not be caught by the Act as title does not immediately transfer on entering into the share charge – though Scots law share charges where title does transfer may be caught.

The enforcement of security may constitute a trigger event if the lender acquires control over the assets or shares or transfers them to a third party. There is ongoing debate in the market about whether standard share charge provisions which allow lenders to exercise voting rights in shares once there has been an even of default would be caught by the Act immediately on the event of default or not until the lender chose to use those rights. We are seeing amendments to share security to ensure those rights are not exercisable until any required notification has been made under the act.

Lenders may find themselves in a difficult position where a transaction is declared void after completion. For instance, a secured lender who has released security as part of the transaction may find themselves without the protection of charged assets and have to seek recovery of advanced funds. A lender that has taken security over assets, following a transaction that is declared void, could be at risk of losing those assets.

Given the current uncertainty around the impacts of the Act on finance transactions, lenders are increasingly looking for protection through appropriate amendments to the transaction document and for specific advice prior to lending. In particular, lenders may seek representations from borrowers that any notification requirements have been complied with. Lenders may also seek protection by including further conditions precedents such as NSIA clearance or compliance with the regime imposed by the Act.

Market developments

According to the 2022 annual report, covering the first three months of the regime’s implementation, BEIS received 222 notifications, with the most voluntary notifications being made in the data infrastructure, energy, computing hardware, ‘professional, scientific and technical activities’ and ‘other service activities’ sectors. Of the 222 notifications, only 17 were called in for further assessment. The report said the government is taking between three and four working days to accept filings, and call-in reviews occurred on average within 23-24 days after the notifications were accepted.

In July 2022, the UK government issued a final order notice, marking the first time a deal has been blocked under the regime, in relation to a licensing deal for vision sensing technology. The government also launched a full national security probe into the proposed foreign acquisition of the UK’s largest semiconductor manufacturer. Recently the government has indicated it will accept remedies and commitments to protect national security. Following certain undertakings and public interest promises, BEIS has provisionally cleared the acquisitions of a UK-based submarine supplier and an aircraft part manufacturer.

Although much of the regime remains uncertain, recent market developments are consistent with the BEIS guidance that the majority of reviewable transactions will either fall under, or closely relate to, the 17 mandatory-notification sectors. While the government continues to publish guidance in relation to the Act, businesses can mitigate some of the uncertainty and reduce the risk of delays or transactions being called in, and subsequently unwound or voided, by making a notification under the voluntary regime where appropriate.

Conclusions

It is still relatively early days in the life of the Act and as practice and precedent develop, clearer parameters will emerge, and practitioners will become more comfortable in assessing when – and in what circumstances – notifications should be made. For the time being, restructuring professionals should consider the potential applicability of the Act in any restructuring and factor in the additional time required to make appropriate clearances.