New law: Business transactions may need to be vetted on grounds of national security

The new laws, in effect from 4 January 2022, apply when a person gains ‘control’ (or proposes to do so) of a ‘qualifying entity’ or of a ‘qualifying asset’ through a ‘trigger event’. The person who gains such control is referred to as the ‘acquirer’. The value of the deal and the nationality of the acquirer are irrelevant.

Qualifying entities include UK limited companies, Limited Liability Partnerships, ‘ordinary’ partnerships, unincorporated associations, and trusts, and also some non-UK entities - for example, entities that carry on activities or supply goods and services in the UK.

Qualifying assets include ‘ideas, information or techniques which have industrial, commercial or other economic value’, wherever situated (such as trade secrets, databases, designs, software, and source code, algorithms, and formulas); land and moveable property in the UK; and non-UK land and moveable property used in connection with UK activities or the supply of goods and services in the UK.

Trigger events include a wide range of transactions, such as:

• increasing your shareholding stake or voting rights beyond 25%, beyond 50%, or to 75% or more (including by increasing an existing holding);
• acquiring an ability to materially influence a qualifying entity’s policy;
• acquiring a right or interest to use (or direct or control the use of) a qualifying asset, or to do so to a greater extent than before.

Where an acquirer proposes to gain control of a qualifying entity (but not of a qualifying asset) as a result of certain trigger events (but not all of them), and the entity is in one of 17 specified industry sectors, it is mandatory for the acquirer to notify a new Investment Security Unit (ISU) of the transaction. This can be done digitally and there is no fee. Note that a transaction may be notifiable even if it is made as part of a corporate restructuring or reorganisation within the same group of entities.

The relevant sectors include defence, communications, energy, nuclear, transport, data infrastructure, artificial intelligence, quantum technology and synthetic biology.

The ISU will assess the notification and vet the acquisition for national security risks. The notification stops the acquisition in its tracks – a ‘standstill’ applies - until the ISU makes a final order. If the acquisition is found to be a risk to national security the final order can be to block it (or unwind it if it has already taken place), or clear it, subject to conditions. If not, it is cleared.

The government also has a ‘call-in’ power enabling it to insist on vetting an acquisition or proposed acquisition even if it is not caught by the mandatory notification requirement, if it considers the acquisition gives rise to a risk to national security, subject to certain conditions and time limits.

During those time limits it can request information from all parties, require them to take steps to address any concerns and impose restrictions on them, such as not to reveal information to others or progress the transaction.

Acquirers who are not required to make a mandatory notification can make a voluntary notification to the ISU if they consider their acquisition may give rise to national security concerns. So can a seller, or the relevant qualifying entity itself. If they do, the Secretary of State (SoS) will either call the acquisition in to vet it or indicate that they will take no further action.

An acquirer whose acquisition does not have to be compulsorily notified, and which the acquirer does not consider needs to be notified voluntarily, should consider whether the government might disagree and call it in, or a seller or the entity itself refer it. If that might happen, it may be prudent to make a voluntary notification anyway.

Importantly, the government’s call-in powers are retrospective. Once the new laws come in on 4 January 2022, they can be exercised in relation to completions that have taken place between 12 November 2020 and 3 January 2022 inclusive.

Businesses, investors and other stakeholders can access online guidance and information to help them prepare for the new rules.

Operative date

• Now

Recommendations

• Businesses, investors and other stakeholders should check the online guidance on the GOV.UK website.
• Acquirers concerned that an acquisition scheduled to complete before 4 January 2022, which would be a notifiable acquisition if it took place from that date, should consider making an informal submission to the ISU now, before completing the transaction, for guidance and help.
• Parties due to complete notifiable acquisitions on or after 4 January 2022 should consider rescheduling them to ensure there is time for the relevant mandatory notifications to be made.