Introduction

The National Security & Investment Act (NSI Act) came into force on 4 January 2022 and introduced a standalone national security investment regime in the UK for the first time. It replaced the Secretary of State’s (SoS) previous powers to scrutinise mergers which give rise to national security considerations under the Enterprise Act 2002 (EA 2002).

Under the EA 2002, the government was only able to review a transaction on national security grounds where it met the jurisdictional thresholds under merger control rules. Only 12 transactions were reviewed on this basis since 2003. The NSI Act therefore constitutes a major change in how the UK regulates investment from a national security perspective. 

This note provides an overview of the NSI Act, including notification requirements and the Act’s application to internal corporate reorganisations and common private client scenarios. The note also remarks on a newly published call for evidence.

Mandatory notifications

The NSI Act includes mandatory notification of certain “trigger events” in 17 specified “sectors”. 

Trigger events include a party: (a) increasing their shares or votes in a qualifying entity to more than 25% or 50% or to 75% or more; or (b) acquiring voting rights in the entity enabling them to secure or prevent any class of resolution. A qualifying entity is a body corporate, partnership, trust or unincorporated association that is formed or recognised in the UK. Entities formed or recognised under the law of a non-UK country or territory are in scope only if UK activities are carried on or goods and services are supplied to persons in the UK.

The specified sectors subject to the mandatory regime are: Civil Nuclear; Communications; Data Infrastructure; Defence; Energy; Transport; Artificial Intelligence; Advanced Robotics; Computing Hardware; Cryptographic Authentication; Advanced Materials; Quantum Technologies; Synthetic Biology; Critical Suppliers to Government; Suppliers to the Emergency Services; Military or Dual-Use and Satellite and Space Technologies. Each specified sector is defined comprehensively in a statutory instrument and in some cases the definitions are highly technical in nature.

Failure to notify a transaction within the scope of the mandatory regime has severe consequences, including the transaction being deemed void, fines of £10 million or 5% of worldwide turnover and/or criminal sanctions and potential imprisonment for individuals. Where an entity commits an offence, officers such as directors (or equivalent) will also be guilty of the offence where it was committed with their consent, connivance or due to their neglect.

Voluntary notifications

In circumstances where there is no mandatory requirement to notify a transaction, the NSI Act provides a mechanism enabling parties to voluntarily notify a trigger event to the SoS to obtain a “call-in decision” in relation to the transaction. Both buyers and sellers can make voluntary notifications.

To help decide whether to make a voluntary notification, parties to a transaction can refer to the Statement for the purposes of section 3 (of the NSI Act) - https://deloi.tt/468YL6O, which sets out how the SoS expects to exercise the call-in power. 

In addition to the trigger events above that trigger a mandatory notification, voluntary notification can be made in respect of the acquisition of: (a) a right or interest in a qualifying asset, such as land, intellectual property or tangible property, that results in an ability to use the asset or to direct or control how it is used (or which increases the acquirer’s ability to do these activities); and (b) acquisitions of “material influence” (usually this is 15% or more of shares or votes, but it can be less).

Transitions involving the acquisition of business or individual assets (as opposed to shares or interests in shares) fall outside the scope of the mandatory notification regime and therefore default to the voluntary notification regime. 

Notification process

Both voluntary and mandatory notifications are submitted via a digital platform created by the Investment Security Unit (ISU) (which is part of the Cabinet Office). The SoS has 30 working days from acceptance of the notice to decide whether to issue a call-in notice. If a call-in notice is issued, the review process may be extended to up to 105 working days (following which the SoS will have the ability to impose a variety of remedies – interim remedies may also be imposed during the review process).

Where a transaction is not notified, the SoS has 6 months of becoming aware of a transaction to issue a call-in notice, provided this is done within 5 years of completion. However, the 5-year time limit does not apply where there has been a failure to notify a trigger event that is subject to mandatory notification. In relation to trigger events that took place between the date on which the NSI Act was introduced to Parliament (12 November 2020) and 4 January 2022, the SoS can call-in the relevant transaction within 6 months of becoming aware of it, provided this occurs within 5 years of completion.

Internal reorganisations

Perhaps surprisingly, the NSI Act does not exclude intra-group transactions from its scope, i.e., even where the is no change in the ultimate ownership of the corporate group in question. Therefore, an intra-group transaction involving the transfer of shares or voting rights in a qualifying entity could fall within the mandatory notification regime. Deloitte Legal has advised on a number of mandatory and voluntary notifications in the context of intra-group transactions. 

Potential impact on private client transactions

It is clear from the drafting of the NSI Act that it does not specifically contemplate transfers of shares, or interests in them, in common private client scenarios, such as: the settling of shares (or interests in them) into trust; the subsequent distribution of trust assets (including shares or voting rights) to beneficiaries or the appointment of voting rights to beneficiaries. Share transfers following a death also give rise to considerations under the NSI Act. These points are considered further below. 

Bare trusts/nominee arrangements

The application of the NSI Act to bare trust/nominee arrangements is relatively clear-cut, as paragraph 4 of Schedule 1 to the NSI Act provides that an interest held by a person as nominee for another is to be treated as held by the other (and not by the nominee). In other words, it is the beneficial owner of the assets held as part of the nominee arrangement whose interest must be considered for the purpose of the NSI Act. 

Other types of trust

Under section 5 of the NSI Act, a trigger event takes place when a person gains control (as defined above) of a qualifying entity. “Person” is not specifically defined in the NSI Act. Given the context in which the expression “person” is used throughout the NSI Act and having regard to general principles of interpretation under English law, Deloitte Legal takes the view that “person” in the NSI Act means the legal owner of the asset – i.e. the trustee(s). A trust itself, as the concept is understood in the UK, the Crown Dependencies and the British Overseas Territories, does not have legal personality and so would not be a person under the NSI Act. Some key potential practical implications and areas of uncertainty are as follows: 

• A change of trustees could potentially trigger a notification requirement. 

• A distribution of trust assets to beneficiaries could trigger a notification requirement. The beneficiary(ies) would be the acquirer of the trust assets, so if a mandatory notification requirement arises it would be the trust beneficiary receiving an asset within the scope of the NSI Act who would need to file the notification. 

• Given the absence of a definition of the term “person”, consideration would need to be given to any persons other than the trustees who could potentially be included in the scope of the NSI Act. For example, any trust protector. 

Transfers on death

Shares are automatically transferred on death. Shares often pass to an individual’s personal representatives (e.g. executors), who will deal with the estate and may transfer shares to the beneficiaries named in a will. Such transfers could trigger a notification under the NSI Act, albeit the NSI Act does contain an exemption for acquisitions that it would be “impossible” to notify in advance. Death was specifically considered in this context during the Parliamentary debate on this point, though there are areas of uncertainty in how this notification exemption applies. In addition, in correspondence with us, the ISU have stated that the beneficiary may be required to seek retrospective validation of the acquisition - "depending on the circumstances".

Careful consideration should therefore be given to the notification position on death.   

Joint holdings and connected persons

Schedule 1 of the NSI Act contains deeming provisions concerning interests and rights in shares of a qualifying entity. Many of these provisions are relevant to shareholdings in family companies, including those of family members and family trusts. 

Joint interests

If two or more persons hold an interest or right jointly, each of them is treated as holding that interest or right.

Joint arrangements

If interests or rights held by two or more persons are the subject of a joint arrangement, each person is treated as holding the combined interests or rights of both of them. A “joint arrangement” is an arrangement between the holders of interests or rights that they will exercise all or substantially all the rights conferred by their respective interests, or their respective rights, jointly in a way that is pre-determined by the arrangement.

Connected persons

Two or more persons who are connected with each other (see below) are each treated as holding the combined interests or rights of both or all of them. This means that transfers between connected persons should not trigger event a notification requirement (e.g. if Connected Persons A and B each own 20% of the shares in a company and Connected Person A transfers their shares to Connected Person B, they still have a combined 40% shareholding and so no notification requirement arises). 

Conversely, if A and B both acquire 20% of shares in a company from a third party the total shareholding they have acquired is 40%, and so a notification requirement would arise (if the other relevant conditions are met). 

An individual, A, is “connected with” another individual, B, if:

• A is B’s spouse, civil partner or cohabitee,

• A is a relative of B,

• A is the spouse, civil partner or cohabitee of a relative of B,

• A is a relative of B’s spouse, civil partner or cohabitee, or

• A is the spouse, civil partner or cohabitee of a relative of B’s spouse, civil partner or cohabitee.

For the purposes of the above:

• Two persons who are living together as if they were a married couple or civil partners are cohabitees,

• References to a spouse, civil partner or cohabitee include a former spouse, civil partner or cohabitee, and

• “Relative” means a brother, sister, uncle, aunt, nephew, niece, lineal ancestor or descendant (the stepchild of any person, or anyone adopted by a person, whether legally or otherwise, as their child, being regarded as a relative or taken into account to trace a relationship in the same way as that person’s child).

Common purpose

Two or more persons who share a common purpose in relation to an asset or entity are each treated as holding the combined interests or rights of both or all of them. The cases in which persons share a common purpose in relation to an entity include, but are not limited to, cases in which the persons co-ordinate their influence on the activities, operations, governance or strategy of the entity. The cases in which persons share a common purpose in relation to an asset include, but are not limited to, cases in which the persons co-ordinate their influence on the way in which the asset is used.

Stop press…

On 13 November 2023 the Financial Times reported on the launch of a nine-week consultation, with the objective of paring back some provisions of the NSI Act to make the legislation “more business friendly”. Notably, the government is proposing to exempt from notification internal reorganisations where the ultimate beneficial ownership of the corporate group does not change, to narrow the scope of the Artificial Intelligence specified sector rules and to introduce standalone specified sectors relating to semi-conductors and critical minerals (they are currently subcategories of other specified sectors). The call for evidence was launched on the same day and is available at https://deloi.tt/46pTfgk.