United Kingdom: National Security and Investment Act

What is the National Security and Investment Act?

The National Security and Investment Act (“NSI”) came into effect on 4 January 2022, alongside a series of guidance notes. The NSI Act allows the UK government to scrutinise and intervene in certain acquisitions made by anyone, including businesses and investors, that could harm the UK’s national security. Acquisitions of 25% or more in a target active in the 17 sensitive sectors are subject to the mandatory notification requirement, and clearance is required before completing the acquisition. The UK government is also able to “call in” transactions for in-depth review where it reasonably suspects they give rise to a risk to national security. At the end of an assessment period, the UK government will either clear, impose conditions on, or unwind or block an acquisition.

The NSI Act applies broadly in its scope and jurisdiction. It applies to acquisitions of control over qualifying entities (covering different legal structures, including companies, limited liability partnerships and trusts) and qualifying assets (covering both tangible assets and intangible assets). It also has a very broad UK nexus definition. Non-UK based target entities or assets are subject to the NSI Act if they carry out activities in the UK, or supply goods or services to persons in the UK.

The UK government is encouraging parties to seek informal guidance from the Investment Security unit (“ISU”) as to the application of the NSI Act to particular transactions, both prior to and after the NSI Act‘s formal commencement. The Secretary of State will be able to call in any acquisitions of control of legal entities and assets that took place on or after 12 November 2020.

Notifiable acquisition

Subject to certain criteria, it is legally required to notify the UK government about acquisitions of certain entities in 17 sensitive areas of the economy (called “notifiable acquisitions”). The 17 areas of the economy are:

• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• Civil Nuclear
• Communications
• Computing Hardware
• Critical Suppliers to Government
• Cryptographic Authentication
• Data Infrastructure
• Defence
• Energy
• Military and Dual-Use
• Quantum Technologies
• Satellite and Space Technologies
• Suppliers to the Emergency Services
• Synthetic Biology
• Transport
   

The NSI Act and Export Controls

Export controls and the NSI Act have the shared objective of safeguarding national security, but with different remits and factors considered. With military and dual-use being one of the 17 sensitive areas of the economy, it is legally required to submit a notification if a business is seeking to acquire a qualifying entity that researches, develops, or produces restricted goods or technology that are controlled by the aspects of the export control legislation that concern national security controls. Export controls operate with specific regard to the exporting of items specified on a “control list”. These export control lists form the basis of determining whether any products, software, or technology that are intended for export are “controlled”. The relevant lists are:

• UK Military List
• UK Dual-Use List
• UK Radioactive Sources List
• Dual-Use List (taken from Annex I to Council Regulation (EC) No. 428/2009)
   

A mandatory notification is not required if the activities of the qualifying entity concern goods or technology that appear on the Human Rights Strategic Export Control Lists and the Non-Military Firearms List - unless they also appear on the Military and Dual-Use Lists.

It is not always easy to tell if the entity you are seeking to acquire is researching, developing, or producing export controlled items. It is not uncommon that a business is unaware that its product is export controlled. Therefore, due diligence would be key when evaluating whether the target has any export controlled items.

Asset acquisitions are not subject to the mandatory notification requirements under the NSI Act. However, the UK government may call in an asset acquisition if there is reasonable suspicion that it has given or may give rise to a risk to national security.

In the case where the two systems both consider the same asset, the UK government, when using the powers under the NSI Act, will take account of any controls and licences issued by the Export Control Joint Unit.

Key takeaways

Businesses engaged in acquisition should:

• check if the NSI Act applies to your acquisition. This will depend on what is being acquired and how much control you have over it.
• check if the mandatory notification requirement applies to your acquisition.
• pay special attention to entities that research, develop, or produce export controlled items (including technology) as it is one of the 17 sensitive areas of the economy that you should notify the UK government about.
   

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