In January 2022, when the UK’s National Security and Investment Act (NSIA) came into force, angel investment deals stalled as my clients and co-investors sought to understand how this act applied and affected their ability to close deals. Given the nature of Business Secretary Kwasi Kwarteng’s first intervention under the NSIA involving the University of Manchester, arguably angel investing (and the age and stage of the investee companies involved) is not the main focus of the act. However, the legislation is drafted widely enough that mid-market equity investment can be caught under the framework.
The major concern was that the NSIA states that “acquirers” (which includes investors) must report to the Department for Business, Energy and Industrial Strategy (BEIS) where certain criteria apply. These include the nature of the investee company’s business and the extent of any change in control or voting rights obtained following the deal.
Investment documents regularly contain reserved matters on which investors have an effective veto over decisions made by the investee company’s board. The rationale here is simple – the investors request an element of control over company decision-making to ensure that the company uses the funds invested in accordance with its agreed business plan.
What would constitute a trigger event under the NSIA?
The question then arose: would such reserved matters constitute a “trigger event” under the NSIA and, if so, would several deals now require to be reported to the BEIS before they could proceed?
The UK government’s latest guidance provides some explanation, in that “voting rights” will generally be construed as those applying to shares specifically, as established in the company’s articles of association, and not the exercise of any “veto” rights over reserved matters.
Certain arrangements may still amount to giving an acquirer “material influence” over the investee company, and investors may still decide to submit a voluntary application to the BEIS. Kwarteng’s call-in power will apply regardless, with the power to quash foul transactions retrospectively. A risk is that investors lose out with no ability to recoup their money from an offending company.
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Any reporting obligation falls on the acquirer, although the company will need to be actively involved in any application. Only the board will be able to provide the necessary detail on its business, which the investors need to understand to know if they need to make an application in the first place.
It followed that the NSIA quickly became a key consideration for investors’ due diligence. Investor groups began seeking warranties, for instance, confirming that the business did not fall into an applicable high-risk sector. This ensured that the company would at least consider the act’s implications in its disclosure process, and be contractually bound for any repercussions arising.
While recent developments hint at the “national security” risks that the NSIA seeks to address, it remains to be seen whether its reach will deter participants from investing in sectors such as innovation and technology. Recent government guidance provides some clarity for angel investors, but the NSIA should be an important consideration for advisers and stakeholders in this sector.