The National Security and Investment Act and its implications for UK M&A
The NSIA will lead to a major change to the approach to M&A activity connected to the UK. From 4 January 2022, the NSIA will require acquirers to submit a compulsory pre-closing notification if they are purchasing either more than 25% in a target business operating in a “sensitive” sector (from a national security perspective) or if the stake they acquire gives them the ability to pass or block resolutions at AGMs.
“The UK is effectively switching from having one of the most light-touch investment approaches in the world to one of the most extensive.”
Laurence Whitehead, MHA Corporate Finance Partner
As a result, all corporate financiers, regardless of country of origin, will need to take NSIA considerations into account when advising on transactions connected to the UK. Private equity acquirers will also need to consider whether to make a voluntary notification even if the target business falls outside of the 17 mandatory sectors. The voluntary notification system will be accompanied by a “call-in” mechanism, which will allow the UK government to review non-notified deals up to five years after they have been completed. The penalties for non-compliance are swingeing, not just voiding the transaction but also criminal penalties for buyers and their directors.
Whilst to date the UK has been somewhat of an exception among Western countries in not having a foreign investment act, the most significant difference, once the act comes into effect, will be the wide-ranging scope of the new rules, including the lack of safe harbours. The NSIA has no turnover, transaction value or other de minimis thresholds. It also applies equally to UK and overseas investors and will apply to many international transactions with only a limited connection to the UK, because it requires only that an entity has activities in the UK or supplies goods or services in the UK. The UK government anticipates that around 1,500 transactions will be notified each year, illustrating the wide-ranging reach of the new rules. Germany aside, the mandatory/voluntary mechanism being put in place is also relatively uncommon when compared to similar regimes in Europe. The substantial call-in powers and extent to which the UK government may apply the rules will mean far greater uncertainty for acquirers than has been the case to date.
So, in summary, the NSIA represents a major change to the way in which the government will deal with M&A activity connected to the UK. The UK is effectively switching from having one of the most liberal approaches to M&A activity to one of the most sweeping. Consequently, there is bound to be some negative impact on investment in the short term, as investors struggle to get their heads around the new procedures, the increased deal scrutiny, and the far-reaching call-in remedies available to the authorities. The UK government has continually reiterated that its aim is to implement a highly efficient and effective process that will not deter companies from investing in the UK. Only time will tell if this means that government intervention is likely to be exceptional rather than frequent. Over the longer term, we anticipate that the new NSIA rules will become one of many factors that transacting parties will have to consider, as has been the case in other countries for sometime.
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