The National Security and Investment Act 2021 (the Act) comes into force on 4 January 2022. The Act sets out the UK’s new national security screening regime. The Act replaces, and significantly extends, the UK government’s power to investigate and intervene in transactions which pose, or could pose, threats to the UK’s national security (see our earlier related blog post). Insolvency professionals will need to be conversant in the regime, in particular to check at the outset of any restructuring whether the regime applies and what this may mean for contingency planning purposes (in particular as regards the timing of any appointments or restructurings).
Mandatory notification regime
The Act introduces a mandatory notification regime which covers transactions which must be notified and cleared by the Department for Business, Energy and Industrial Strategy (BEIS) before completion. A notifiable transaction is one where a person gains control of a corporate entity, based in the UK or which either carries on activities in the UK or supplies goods or services to the UK (a qualifying entity). The qualifying entity must also operate in at least one of 17 strategic sectors.
There are three trigger events which indicate when there has been a change of control under the mandatory regime:
- Shareholding: if the percentage of shares that a person holds in the qualifying entity increases through a statutory threshold of either 25, 50 or 75 percent;
- Voting rights: if the percentage of voting rights that a person holds in the qualifying entity increases through a statutory threshold of either 25, 50 or 75 percent ; or
- Passing resolutions: if the person acquires enough voting rights in the qualifying entity to block resolutions governing the company’s affairs.
There is detailed guidance on when a qualifying entity is considered to operate in one of the 17 sectors (see here). Broadly, this covers qualifying entities which provide:
- critical national infrastructure;
- advanced technology;
- critical supplies to the government or emergency services; and
- military and/or dual use technology.
Voluntary notification regime
The UK government has a wider “call-in power” where there is a risk to national security but where the mandatory regime is not applicable. It is therefore possible to voluntarily notify BEIS of these events, which reduces the time that the UK government has to call in (essentially review) the transaction. The voluntary regime is again concerned with the acquisition of control of a qualifying entity. As well as the three trigger events mention above, a person can acquire control under the voluntary regime if they are able to materially influence the policy of a qualifying entity.
The voluntary regime also covers the acquisition of control of a qualifying asset where there is a risk to national security (such as land, tangible moveable property, ideas, information or techniques which have industrial, commercial or other economic value).
In deciding whether to call in a transaction for an in-depth review, the government’s guidance suggests that it will consider three factors:
- trigger event risk: this relates to the potential for the acquisition of control to undermine national security;
- acquirer risk: acquirers with allegiances to hostile states or organisations are most likely to be flagged; and
- target risk: for asset sales, the government will consider if the assets relate to a core area of the entity’s activities.
Penalties for non-compliance
There are wide ranging penalties under the Act for non-compliance. These penalties include avoiding a transaction and fines of up to 5% of worldwide turnover or £10 million (whichever is greater) and/or imprisonment of up to five years.
Insolvency professionals will need to consider whether a proposed action (such as a restructuring, reorganisation (including internal reorganisations), distressed M&A processes or the appointment of an officeholder) falls within the scope of the Act given the severity of non-compliance.
Appointment of administrators: The mere appointment of administrators and foreign officeholders will not trigger the provisions of the Act due to an explicit carve-out which applies to such appointments. It is not clear why this protection is not extended to the appointment of other insolvency officeholder, such as liquidators.
Appointment of liquidators / receivers: The position as regards liquidators or receivers is unfortunately not so clear cut. Prior to appointing a liquidator or receiver great, care should be taken to consider whether the company operates in one of the 17 strategic sectors and whether any notification may be either required or would be indeed prudent before any appointment is made.
Share sale: a share sale by an insolvency officeholder (including administrators and foreign officeholders) of a qualifying entity could either trigger the mandatory regime or a voluntary filing. This additional step will need to be factored into any contingency planning. While the obligation to notify rests with the buyer (not the insolvency officeholder as seller), all parties need to be aware of the process of submitting a foreign investment filing to the Investment Security Unit of BEIS, which includes a 30-working day screening period. There may then be a full assessment of up to 30 working days (this could be extended further by 45 days). It is hoped that for urgent sales in the context of a pre-pack or distressed M&A process this timing will in practice be much shorter.
Asset sales: an asset sale will not trigger the mandatory regime, but parties will need to consider whether the voluntary regime applies if the officeholder or receiver divests qualifying assets.
Debt for equity swaps: the regime has clear consequences for debt-for-equity swaps where a qualifying entity is concerned (and depending on the level of shares that are issued). In any contingency planning, care will need to be taken at the outset to clarify whether the mandatory notification regime will apply, and any notice periods will need to be factored into the timing of any such debt-for-equity swaps.
It will often be perfectly obvious from the start whether a company operates in at least one of the 17 sectors and, therefore, if the Act applies. This will not always be the case, however, particularly in sectors such as technology. Great care should therefore be taken at the outset to diligence whether the detailed guidance issued by the UK government shows that a company does operate in a sensitive sector and whether the Act therefore is likely to apply.
It is hoped that the UK government will act quickly to grant the necessary consents in the context of a restructuring or a pre-pack administration where this can save the business and employment contracts: after all there may not be a window of 30 working days available in these circumstances.