National Security 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 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 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 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.

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 seeks to gather evidence on the effects of this regime from stakeholders. The consultation process ended mid-January 2024, and we look forward to a more fine-tuned application of the legislation and the introduction of new exemptions.

• https://parissmith.co.uk/

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