National Security Regime (“NSI Regime”) – and the unintended scope of the legislation which could catch companies out

In January 2022, the National Security and Investment Act (NSI) came into force, and this was designed to strengthen national security by allowing the Government to scrutinise, impose conditions and even prohibit the sale and purchase of companies and businesses (and investment in them) where those businesses or assets owned by those businesses are of critical national interest. Whilst the legislation may give the impression that it is primarily intended to capture large transactions and foreign investments into UK companies, it can have a significant impact on SMEs and owner-managed businesses directly involved in or even remotely connected to the 17 industries considered key to national security.

The wide-ranging applicability of the NSI regime has attracted criticism and led to a Government Call for Evidence on how the regime can be improved. So far only limited changes have been adopted to the call-in regime and Market Guidance Notes.

The NSI Regime

The application of the NSI regime is split into two parts: mandatory notifications and voluntary notifications. All notifications are made to the Investment Security Unit, which is part of the Department for Business, Energy and Industrial Strategy.

Mandatory Notifications

Mandatory notifications become a legal requirement when a company trading in one of the 17 qualifying sectors is subject to a change in “control”. The sectors are very widely drawn and so, for example the provision of software into an ambulance trust, or to a facilities management organisation which manages MoD sites would be included. The trigger events include the acquisition of more than 25% of the shares in a company. If a mandatory notification is not made when legally required, the transaction can be void. In addition, there are criminal and civil penalties which apply including substantial fines and imprisonment for individuals.

Voluntary Notifications

Voluntary notifications are relevant to transactions which may have a national security component or perhaps a remote link into the 17 qualifying sectors which causes concern to the parties. Since 2022, M&A professionals have become skilled at spotting situations where a voluntary or a mandatory notification should be made, where there is an outright sale. However, there are often smaller scale changes in shareholdings which also fall into the notification regime which may well not be immediately apparent. For example:

• Intragroup transactions or group reorganisations can trigger the NSI regime even though the ultimate owner of the group remains the same.
• Company buybacks, which are often used when a shareholder retires from an owner managed company, can fall within the NSI regime if the proportionate increase of the shares held by existing owners crosses the thresholds for a trigger event.

Given the relatively low- key nature of these transactions, it is likely that many notifiable transactions are falling through the net – which may become an issue on any later sale of the company where those transactions will be scrutinised heavily by M&A professionals during the due diligence process.

• The appointment of a trustee in bankruptcy – if the individual declared bankrupt holds shares in a solvent company, these shares will be transferred to the trustee in bankruptcy which may trigger the NSI notification, if the necessary requirements are met. Insolvency professionals will need to be aware of it – but, given the vesting of the shares in a trustee in bankruptcy is automatic, notification and the typical 30 day waiting for “clearance” before the shares vest is unworkable. The same argument applies to liquidators, official receivers and administrators.

In the year since the legislation was implemented a lot of questions have been raised around the exact remit of the NSI regulations and it seems that the broad scope of the trigger events and the definitions may have resulted in unintended burdens over the deal market.

In November 2023, the Government published a Call for Evidence which sought to gather evidence on the effects of this regime from stakeholders. The consultation process ended mid-January 2024, and after a thorough review of the responses received, the Government has published its conclusion.

Whilst a considerable number of stakeholders provided detailed feedback regarding the impact of the current legislation on group reorganisations and intragroup transactions, the Government explained that further work needs to be undertaken to fully consider the impact exemptions may have on national security before any can be adopted. So, it appears the Government is determined to remain cautious.

No particular mention was made of company buybacks; however, the Government did commit to adopting new legislation to exempt the appointment of liquidators, official receivers and special administrators in the autumn of 2024.

Updated guidance on the NSI regime

The Call for Evidence has so far resulted in the Government publishing updated versions of the following key documents for assessing how the regime may apply to transactions:

• an updated Section 3 Statement which sets out how the Secretary of State expects to exercise the power to give a call-in notice; and
• updated Market Guidance Notes which seek to improve the understanding of the regime and compliance with it.

This guidance follows the Government’s response to the Call for Evidence.

Updated Section 3 Statement

Under the regime, the Secretary of State has the power to issue a call-in notice to investigate a transaction whereby a party acquires “control” of a target if it raises potential national security concerns. The refined Section 3 Statement includes:

• further guidance on the three primary risk factors the Secretary of State will take into account when deciding whether to exercise the call-in power (being target risk, acquirer risk and control risk). In particular, the guidance on how acquirer risk will be assessed and the characteristics of the acquirer which will be taken into account have been expanded;
• improved examples of how the Government will assess these three risk factors;
• a short paragraph which points out situations where outward direct investment (i.e. transactions involving the acquisition of an entity or asset outside of the UK) could constitute an acquisition under the regime (for example, the transfer of technology, intellectual property or expertise as part of the investment or when forming joint ventures overseas).

Updated Market Guidance

The updated Market Guidance includes:

• further guidance on how long assessments under the regime will take in practice;
• new (albeit limited) guidance on how the regime can apply to cases of outward direct investment;
• tips on completing notification forms correctly; and
• detail on how the regime applies to the higher education and research-intensive sectors.

If you would like any advice regarding the NSI regime please contact a member of the Corporate team. To find out about the full range of corporate services we can help you with, visit the Corporate Law pages of our website.

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