National security merger control: UK reform to commence January 2022

The National Security and Investment Act 2021 (NS&I Act) received Royal Assent on 29 April this year, but most of the provisions have yet to come into force – much of the detail of the new regime is to be set out in secondary legislation and the provisions that have taken effect to-date are focused on handing UK government ministers the power to draft those regulations.

Earlier this month the Department for Business, Energy and Industrial Strategy (BEIS) published draft regulations specific to the new mandatory notification requirements under the Act, as well as a raft of guidance relevant to other aspects of the new framework – including the government’s power to ‘call in’ other transactions for scrutiny on national security grounds.

The mandatory notification regime under the NS&I Act represents a new requirement on businesses to proactively notify BEIS of certain transactions taking place in 17 specific sectors of the economy – from civil nuclear, defence, energy and transport, to artificial intelligence, communications, quantum technologies, synthetic biology and critical suppliers to the government.

Paul Williams of Pinsent Masons highlighted that the definitions of each of the 17 sectors had once again been amended by BEIS in the latest draft regulations. He said the definitions are subject to final approval in the autumn but expects the latest definitions to be “near final”.

Examples of the transactions that will require mandatory notification and clearance prior to completion include where there is an acquisition of more than a 25% shareholding or voting rights in an entity or a change in the quality of control, for example increasing from a 25% shareholding to a 50% or 75% shareholding.

“The identity of the acquirer is irrelevant in terms of determining whether the deal they are planning is subject to mandatory notification: it is the target’s activities that are the key factor,” Williams said. He warned of the significant sanctions that could be imposed for non-compliance.

“Businesses that complete notifiable acquisitions without BEIS approval face potential fines and could be ordered to unwind those arrangements, while directors of acquirers might also be prosecuted and face time in prison,” he said.

Williams said businesses whose deals will fall subject to the mandatory notification regime should include conditionality clauses within their sales and purchase agreements and that they will need to factor the time it will take for their proposed transactions to be scrutinised by BEIS into their deal timetables.

Under the NS&I Act, BEIS also has an ability to 'call in' for review any transaction that is not already subject to the mandatory notification regime where it is nevertheless considered to raise national security concerns. A business that has not voluntarily notified its transaction and then completes the deal could be ordered to unwind those arrangements by BEIS if it subsequently 'calls-in' the transaction, having identified a risk to national security.

“This is a catch-all provision enabling BEIS to ‘call in’ any ‘trigger event’ post-completion if it has national security concerns based on the transaction and identity of the acquirer,” Williams said. “The call-in regime applies to a broad range of transactions, including the transfer of assets such as property – including intellectual property – and contract rights. Parties can make voluntary notifications to BEIS where they are concerned about the potential for call-in.”

The ‘call-in’ regime will have retrospective effect, meaning that businesses currently working on a transaction could find that their deal is called in by BEIS once its powers to ‘call in’ take effect after 4 January 2022.

Richard Snape of Pinsent Masons said: “BEIS has also published detailed guidance on how the regime will apply to higher education and research intensive sectors. It clarifies that an investment in a qualifying entity could include a private or charitable university, university subsidiary or spin-out, or research institution. The call in regime will apply to all asset transactions where there is a change in control in land, tangible, moveable property, and IP – including designs, software, trade secrets, databases, algorithms and formulae. BEIS has published a number of helpful scenario-based examples. Further sector specific guidance is expected in the coming months.”