The National Security and Investment Act 2021

This guide addresses 10 key questions on the application of the Act to acquisitions of non-UK based businesses and assets. An introductory guide to the Act is available here.

1 Does the Act apply to all non-UK transactions?

The Act applies to the acquisition of a qualifying interest in an entity or an asset that has a connection with the UK.

2 What does a connection with the UK mean?

An asset or entity located in the UK meets the relevant test. In addition, any entity located outside the UK that supplies goods or services to UK entities meets the test. Any asset located outside the UK also meets the test if used in connection with activities carried on in the UK or in connection with the supply of goods or services to UK entities.

3 Would the acquisition of a non-UK entity that has a UK branch be a qualifying transaction?

Yes. It follows that the acquisition of a non-UK company that has a UK subsidiary is also a qualifying acquisition and so caught by the Act.

If the non-UK target entity has a UK hub which acts as an exporter of goods supplied by the non-UK target entity, this might not be a qualifying acquisition. However, if those goods were modified or used while in the UK, this might be a qualifying acquisition.

4 Would the acquisition of a non-UK entity that only has employees who work from time to time in the UK be a qualifying acquisition?

If the employees are there to conduct market research or are part of a sales team, this is not likely to be a qualifying acquisition. However, if the employees are performing services for a UK client on a regular basis, this might be a qualifying acquisition.

If the non-UK entity has UK based employees that are working remotely for a non-UK office, this might not be a qualifying acquisition.

5 When does the Act apply in relation to an acquisition of a foreign subsidiary?

The Act has a focus on the target entity. Therefore, if a French entity T which has no links to the UK is acquired by P from the German group company S, this is not a qualifying acquisition. It is not relevant to the analysis, for example, that the seller S also owns an Austrian company Q which is engaged in the sale to the UK of, for example, Advanced Materials.

However, the Act might apply if the target entity T is engaged in research and owns intellectual property that is used by Q to produce the Advanced Materials that are sold into the UK.

6 What is the situation for assets located outside the UK?

Even though the land, moveable property or intellectual property is located outside the UK, it will be a qualifying asset if the asset is used by someone in the UK, or to supply goods or services into the UK, or to generate energy or materials that are used in the UK.

7 Must the transaction be notified?

A qualifying transaction that meets one of the three shareholding tests (see introductory guide) of an entity – not an asset – which is engaged in any of 17 sectors in the UK must be notified to the government and approval obtained before completion of the acquisition. Note that there are no materiality thresholds, so any level of activity (no matter how small) will be sufficient to trigger mandatory notification.

If the qualifying acquisition is outside of the 17 sectors, or is engaged in any of the 17 sectors* but control is deemed to arise due to material influence held by the purchaser (see introductory guide), it will not need to be notified. However, it will be a qualifying transaction and the government still has the power to review the transaction of its own initiative and could seek to block the transaction or require divestment if the acquisition is completed. Consequently, if there is the possibility of a national security concern arising, voluntary notification to the government is possible as a precautionary action.

Transaction parties should be aware that the definitions relating to the 17 sectors are relatively complex and are not absolutely clear. The government has indicated that acquisitions in areas of the economy which are closely linked to these 17 sectors but are not subject to mandatory notification (for example, they are related to transport but are not strictly within scope of the definition of transport) could be of interest to the government, and acquisitions in these areas could be more likely to be called in than other sectors of the economy.

*The 17 sectors

• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• Civil Nuclear
• Communications
• Computing Hardware
• Critical Suppliers to Government
• Cryptographic Authentication
• Data Infrastructure
• Defence
• Energy
• Military and Dual-Use
• Quantum Technologies
• Satellite and Space Technologies
• Suppliers to the Emergency Services
• Synthetic Biology
• Transport

8 Is the Act only concerned with the target entity or asset?

No, whilst the nature of the target entity or asset will be relevant to assessing whether there is a national security risk, the identity of the purchaser will be an important factor. Thus, for example: T is a FMCG warehouse in the UK which is located next to a sensitive military site. P acquires shares in T that is at a level below a 25% acquisition of shareholding stake or voting rights, but P is able to materially influence the policy or activities of T. The government has concerns that the activities of P may be linked to hostile activity. This is a qualifying transaction (not exceeding 25% but nevertheless conferring material influence). The target risk is low (its activities are not within any of the 17 sectors). However, the acquirer risk is high as P may be linked to hostile activity and may trigger an assessment by the Government to identify possible national security risks. Therefore, this acquisition is likely to be subject to a review by the government.

9 What if an acquisition is not notified?

If a transaction should have been notified but has not been the acquisition is void under UK law. In addition, the purchaser can be subject to a fine of up to 5% of the global organisation’s turnover or £10 million, whichever is greater. A prison sentence may also be imposed. In some circumstances, officers of the purchaser (for example, its directors) may also be at risk of criminal prosecution.

10 Is the Act consistent with international law?

The Act applies only if an acquisition has a connection with the UK. On this basis the argument under international law is that as the effect of the acquisition could be felt in the UK, the UK can legitimately seek to regulate the acquisition.

This power to regulate, however, is not unlimited. For example, assume the following is caught by the Act and should have been but was not notified: a French company enters into a French law agreement to buy from a German company one of its German subsidiary companies which supplies goods to the UK. Under the Act the transaction would be void, but it is void under UK law, not under French law. If the French and German companies have no presence or other activities in the UK, the UK government would face obstacles to enforcement of its powers to require the production of information and to enforce any remedies or fine that may be imposed. Additional legal and practical difficulties in relation to the imposition of penalties or prosecution would arise where the purchaser is a government entity.

However, information could be demanded by the UK government from UK customers. In addition, the government could through orders on UK entities, for example, UK customers, frustrate the UK business of the otherwise foreign-to-foreign transaction.