The UK’s National Security and Investment Act 2021, which came fully into force on 4 January 2022, has transformed the UK government’s powers to scrutinise transactions.
The act is broad-reaching, applying to both UK and overseas entities and assets, and will particularly impact overseas investors, although the key factor will be whether the investment is made in a sensitive industry by a party that could be considered a risk to national security.
The government has created a new division – the Investment Security Unit (ISU), which forms part of the Department for Business, Energy & Industrial Strategy – that will be able to ‘call-in’ a transaction. The new regime grants the ISU wide-ranging powers, including relating to information it can request, orders it can make, the outcome of any investigation and the sanctions it can impose in a transactional context.
Although it is thought that the majority of transactions will be approved swiftly, the new regime will, undoubtedly, have implications for investors and their deals, and the potential sanctions for breach are severe (including a deal being unwound).
The importance of due diligence
Additional due diligence at the outset of any deal (whether share or asset) will be crucial. Careful thought will be needed as to whether there is a UK nexus, as well as whether the transaction could result in a trigger event, fall within one of the 17 mandatory notification sectors or require voluntary notification. Where a transaction relates to property, wider consideration of whether the property itself has or may have a national security interest will be needed.
The act is bound to affect deal timetables and, consequently, deal costs. Notification may delay completion and the inclusion of conditions and risk allocation will undoubtedly become the norm in contracts. In borderline cases, particularly during the teething stages of the act, it may be thought advisable to seek informal guidance from the ISU at an early stage of the transaction.
For investors, practical advice would be:
- Think ahead – create a workstream to consider the act early on
- Challenge your lawyers to consider the act as soon as possible
- Work out how to best build specific due diligence on the act into your transaction
- Engage with the other side early regarding whether the act applies and how to deal with it in the context of deal documentation.
Lianne Baker, knowledge development lawyer at Forsters, contributed to this article.