The National Security and Investment (NSI) Act seeks to
"make provision for the making of orders in connection with national security risks arising from the acquisition of control over certain types of entities and assets".
This legislation will allow the United Kingdom's government to potentially block investments in sectors that could impact national security. The regime will apply to the acquisition of material influence in a company which may be considered below 15 percent and will apply to both UK and international investments.
The UK government has officially set the date of the implementation of the NSI Act for 4 January 2022. Although the NSI Act does not commence until the beginning of the new year, the legislation allows the government to investigate transactions from 12 November 2020.
The Investment Security Unit (ISU) is a new unit within the Department for Business, Energy and Industrial Strategy which will be tasked with identifying and mitigating potential risks to national security to the UK under this legislation. This team will examine cases that are submitted based on a two-leveled notification system:
Mandatory Notification Regime
Certain acquisitions crossing pre-established thresholds are required to notify the ISU before they can be completed. If the transaction is completed without approval, there will be penalties, possible criminal charges and the transaction will be voided. The Mandatory Notification Regime only applies to those within 17 key sectors identified by the UK Government as areas where changes in control could pose a national security risk. These sectors include areas as broad as advanced materials and communications as well as niche sectors such as cryptographic authentication, data infrastructure and space technology.
Voluntary Notification Regime
Acquisitions crossing pre-established thresholds which are not subject to the Mandatory Notification Regime are able to complete a notification voluntarily. If the investor does not submit a notification but they present a national security concern, they could subsequently be called for a national security assessment which would result in the same outcomes as the Mandatory Notification Regime (penalties, criminal offenses, and voided transactions). Parties involved in a deal are encouraged to submit a voluntary notification to have definite clearance in their transaction.
After receiving notifications, the ISU will examine the transaction in order to determine if it is a national security risk. The assessment of risk is based on three categories:
Target risk: an asset or company involved in the transaction that could pose a risk to national security. These are generally directly related to the investment being within one of the seventeen key sectors identified by the UK Government.
Control risk: a transaction that creates a change in control and poses an increased risk to national security. The risk can stem from control of the use of an asset or from the ability to direct the activities of an entity.
Acquirer risk: an acquirer that appears as though it is or could become a risk to national security. The history of investments will be examined to help determine whether there is a high or low acquirer risk.
The Government’s Impact Assessment states that they anticipate roughly 1,000-1,830 notifications to be made each year. Beyond this, it is anticipating to have an additional 75-90 non-notified deals per year that require attention. From this total, only about 10 deals per year are expected to require action or remedies.
Overall, though the government has significantly increased its ability to intervene in private sector investments, it is expected for the blocking of transactions to be a rare occurrence. Although the legislation can be useful to protect national interest, it will require corporations to comply with submitting notifications.