UK National Security and Investment Act Update: what’s new on the horizon for restructuring & insolvency

The UK National Security and Investment Act came into force on 4 January 2022, significantly extending the UK Government’s power to investigate and intervene in transactions which pose, or could pose, threats to the UK’s national security. 

As covered in a previous blog post, the regime has important consequences for restructuring and insolvency professionals when dealing with companies carrying out specified activities in the UK that fall within at least one of the 17 sensitive sectors. The regime introduced mandatory notification (and suspension) obligations to certain acquisitions of shares or voting rights (‘trigger events’) in companies carrying out those activities. Significant sanctions can be imposed for completing a notifiable acquisition without clearance and (until retrospectively validated) the transaction is legally void. 

On 18 April 2024, the Government published its response to a Call for Evidence launched in November 2023. The response sets out the Government’s planned next steps in respect of those points.

From a restructuring and insolvency perspective, the key takeaways are:

1. the Government has proposed to expand the current carveout for administrators from the mandatory notification regime to also include liquidators, official receivers and special administrators through secondary legislation (but there is no mention of receivers and administrative receivers);
2. no amendment is proposed to provide exemptions from the notification regime where a transfer of voting rights to a secured lender occurs automatically under secured financing agreements following an event of default; and
3. the Government will launch a formal public consultation later this year in order to further refine and amend the scope of the Act, including a review of the sensitive sectors currently identified.

Exemption for liquidators and special administrators

Under the Act, the appointment of administrators or foreign officeholders were exempted from the mandatory notification requirements that apply:

• upon the occurrence of a ‘trigger event’: acquisitions of shares or voting rights that cross one of the statutory thresholds (from 25% or less to more than 25%; from 50% or less to more than 50%; or from less than 75% to 75% of more) or enable the acquirer to secure or block resolutions governing the company’s affairs; and
• if the relevant entity is carrying out specified activities in the UK. 

This carveout was not extended however to the appointment of other English officeholders, including liquidators and receivers (and the position of administrators in special administration regimes was unclear). This left open the question of whether a notification under the Act was required ahead of the appointment of a liquidator or receiver over a company operating in any of the sensitive sectors covered by the Act. 

The Government has now stated its intention to extend the carveout currently applicable to administrators and foreign officeholders to also capture liquidators, the Official Receiver and special administrators. While this amendment is a helpful and sensible clarification, the response is silent in relation to receivers or administrative receivers. This indicates that it is unlikely that the carve-out will extend to them. This means potential receivers or administrative receivers need to continue to consider whether it is necessary or prudent for any notifications to be made before their appointment over companies operating in the relevant sectors. 

Subject to available parliamentary time, the secondary legislation to enact the extension of the carveout is expected to be put before parliament in Autumn 2024. 

No exemption for automatic acceleration on Event of default

The Government also confirmed that it does not intend to exempt transfers of control under automatic enforcement provisions in lending agreements from notification requirements. Concerns had been raised regarding the practicalities of secured lenders complying with notification requirements when acceleration occurs automatically upon the occurrence of an event of default under certain loan documents. 

While loan agreements entered into since the coming into force of the legislation  are unlikely to include automatic acceleration provisions and many existing agreements will have been amended already for this reason, some legacy loan documentation is likely to remain in force unamended. The rationale provided by the Government for not providing an exemption is that (i) only a limited proportion of respondents noted that the mandatory reporting notification requirements had in fact affected their approach to secured lending or created uncertainty in the market, while a higher proportion of respondents had updated the terms within lending agreements to reflect the requirements, and (ii) the Government had only received a very small number of notifications in respect of automatic enforcement transactions. It remains to be seen whether this low number of notifications is a product of amendments to existing agreements to remove automatic acceleration, or whether the relatively short period since the legislation came into force has simply involved a limited number of declared events of default (either due to economic conditions, or a lack of triggers in documentation).

Further reforms

As covered in further detail in our more general update on the response to the Call for Evidence, the Government flags that further changes to the legislation are in the pipeline. Restructuring professionals should be particularly aware that the mandatory notification sectors are to be clarified and expanded following a public consultation to be launched by Summer 2024 which will cover:

• clearer definitions for “Advanced Materials” and “Artificial Intelligence”;
• standalone definitions for semiconductors and critical minerals, aligning with the UK’s latest strategies for those sectors;
• the potential addition of water as a new sector.  This would be a departure from the Government’s previous position that the existing regulatory regime provides adequate controls, despite the fact that other regulated utilities and critical infrastructure (eg electricity and gas transmission and distribution) fall within scope, but is perhaps a response to the challenges currently facing the sector; and
• additional/clarified guidance for “Defence and Critical Suppliers to Government areas”.

The main aims of the review of the mandatory notification sectors are to:

• ensure the sector definitions are up-to-date and targeted at those activities which pose a risk to national security, given the rapidly evolving geopolitical risk environment; and
• provide more certainty to businesses by resolving current areas of ambiguity in the definitions. 

Overall, the Government hopes the reforms will hone the regime so it safeguards the UK against the small number of investments that could be harmful to national security, while leaving the vast majority of deals unaffected. 

The Government will also give further consideration before potentially providing further exemptions for certain transactions, including internal company reorganisations. This will disappoint many companies and investors who have argued that internal reorganisations should fall out of scope given the very limited risk of national security concerns arising where there is no external party or new investors involved and often no ultimate change in control.

For further insights on the response to the Call for Evidence, please see our more general update here.