On 4 January 2022, the UK’s new foreign direct investment regime entered into force. The mandatory filing rules set out in the National Security and Investment Act 2021 (“NSI Act”) may apply not only to investments in UK companies but also in non-UK businesses.

The UK follows the global trend towards closer oversight and scrutiny of foreign investments and acquisitions. The national security provisions of the Enterprise Act 2002 provided the government with quite limited powers to intervene on the grounds of national security. The introduction of the NSI Act is intended to broaden and modernize the government’s powers, as well as to bring them into line with recent developments in other countries.

Unlike the old regime, there are no financial thresholds for notification and no exemptions for de minimis transactions. Instead, the government has a broad power to scrutinize acquisitions of control over entities or assets where there is or could be a potential risk to national security. An extensive call-in power has also been introduced in order to catch unnotified transactions.

The broad nature of the new regime makes it likely to affect a large number of transactions. Indeed, the government’s impact assessment estimated that up to 1830 transactions will be notified and up to 95 transactions will be called in, every year.[1] It is the newly established Investment Security Unit (“ISU”), sitting within the Department for Business, Energy and Industrial Strategy (“BEIS”), that will carry out the reviews.

Parties to a transaction that are unsure about the potential national security implications are invited to submit voluntary notifications in order to increase legal certainty. The ISU has indicated a willingness to help parties get to grips with the new regime and stated that advice will generally be provided within 30 days after receiving a request.

The following guide introduces the new regime by setting out questions and elements investors should consider during the transaction process.

[1] NSI Impact Assessment (publishing.service.gov.uk)

1. Early stages and due diligence: determining whether or not to notify the transaction

What is the target of the transaction? Under the new regime, the government has the power to review acquisitions of control of both qualified entities and assets. Qualified entities include any entity established under UK law/entities formed under UK law and entities that carry out activities in the UK or supply goods or services to the UK. Assets include land and tangible property, as well as intellectual property. It is sufficient that the assets are used in connection with activities carried out in or to the UK. In practice, every due diligence process where the target has connections to the UK, should now include a mapping of an entity’s sales to or activities in the UK.

Does the target fall within one of the critical sectors? Mapping the target’s potentially critical products or services is essential to understanding whether notification is mandatory. The new regime specifies 17 critical sectors subject to mandatory approval, including advanced materials, AI, communications, critical suppliers to government, data infrastructure, defense, energy, military and dual-use, and transport. The definitions of all the critical sectors, set out in the Notifiable Acquisition Regulations 2021, are highly technical and should be consulted in cooperation with legal counsel.

What is the stake acquired in the target? The new regime catches any investments resulting in an acquisition of control of a qualified entity or asset within one of the 17 specified sectors. Note that qualifying acquisitions that are part of corporate restructures or reorganizations may also be covered, even if these take place within the same corporate group. Any of the following amounts to a qualified stake:

• The investor acquires at least 25% of shares or voting rights of a qualifying entity.
• The investor increases its interests in a qualifying entity so that it crosses the thresholds of 25%, 50%, or 75%.
• The investor acquires voting rights in a qualified entity enabling it to secure or prevent the passage of any class of resolution. There are currently two classes of resolutions in the UK, ordinary resolutions passed by simple majority and special resolutions passed by a 75% majority.
• The investor obtains material influence over a qualified entity. This can potentially catch investments of less than 25%.
• The investor acquires specified control rights over qualifying assets.

Mandatory notification? If the transaction falls within one of the 17 specified sectors and is for a qualified stake in a qualified entity or asset, it is caught by the mandatory notification regime. In practice, this means that the UK government must be notified, and that clearance is required before completion. This also applies to transactions that have been agreed but not yet completed as of 4 January 2022.

Voluntary notification? If the transaction is not caught by the mandatory notification regime, but the investor is unsure about whether or not it could still give rise to national security concerns, it will be possible to submit a voluntary notification. The procedure allows for investors to contact the ISU in order to obtain greater legal certainty.

2. Review process and standstill

Stand-still obligation. Between notification and clearance, the notified transaction is subject to a stand-still obligation. This means that any form of completion of the transaction before notification of clearance is prohibited.

What is the timeline for review? BEIS has 30 working days to review a transaction after it has been notified. This can be further extended by 45 working days or other period agreed upon by the parties in the case where the initial 30 days are insufficient to complete the review.

What are the possible outcomes following notification? The UK government has wide-ranging powers to block or apply conditions to transactions that it considers to be a threat to national security. Even though blocking is expected to be a rare event, investors should be aware of the possible impact on transaction timelines that could follow from an extended review or the imposition of conditions.

3. Call-in powers and non-compliance

Unnotified transactions. Any unnotified transaction, whether subject to the mandatory notification requirement or not, is subject to a call-in power. The government can exercise this power at any time within the earlier of six months of becoming aware of the transaction or five years after the acquisition of a qualified stake in a qualified entity or asset. However, the five-year limit does not apply to unnotified transactions that were subject to the mandatory notification requirement.

Sanctions. Failure to comply with the mandatory notification requirement leads to the transaction being legally void. Further possible sanctions for non-compliance include fines of up to the highest of 5% of worldwide turnover or £10 million, imprisonment of up to 5 years, and director disqualification of up to 15 years.

Implications in practice

The NSI Act introduces a much more comprehensive regime that will affect that way in which transactions are carried out. Some implications that parties to M&A transactions should be aware of are:

• The potentially extra-territorial scope of the law. Foreign investors should pay particular attention to the fact that a transaction taking place outside of the UK may nevertheless be subject to the mandatory notification requirement if the target supplies goods or services to the UK or if the target asset is used in connection with activities in or to the UK.
• Impact on the transaction timeline. The need to consider FDI filing in the UK and potentially submit a mandatory or voluntary notification may affect the timeline of the transaction process.
• FDI filing analysis to be carried out at an early stage. Any target entity’s subsidiaries and sales, as well as any target asset’s connections, must be mapped out during the early stages of planning the transaction in order to determine whether the UK has jurisdiction.
• Minority acquisitions. The new regime covers all transactions where the investors acquire control of a qualifying entity or asset, meaning that stakes of less than 25% might be sufficient to trigger mandatory filing. Smaller transactions are no longer protected by financial thresholds or de minimis exemptions.
• Structured sales processes. A vendor preparing the sale of a business which falls within one of the 17 specified sectors should consider at an early stage whether any of the bidders could face national security concerns. Although outright prohibitions or conditional clearances are likely to be rare, buyers from certain countries may be more likely to face a call-in order or an extended review process.