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From the Queen’s Speech to the next election: what now for the government’s agenda?
From the Queen’s Speech to the next election: what now for the Government’s agenda?

Navigating the NSIA: which way for M&A?

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Account Executive
March 2, 2022
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The National Security and Investment Act has established a new investment screening policy on national security grounds that has the potential to significantly impact mergers and acquisitions in the UK. The new regime came into effect from 4th January 2022 and is intended to give the UK government an effective and wide-ranging tool to scrutinise and intervene in transactions involving a change of control that could potentially undermine national security.

Following the Department for Business, Energy & Industrial Strategy’s review of the Hinkley Point C nuclear power station project in 2016, the government announced that it would “impose a new legal framework for future foreign investment in Britain’s critical infrastructure.” The Covid-19 pandemic cemented a global shift in the perception of economic security concerns becoming national security ones. Consequently, in the response to the “ever more ingenious threats to our national security,” the NSIA represents the UK government’s solution – with business minister Lord Callanan describing it as “the biggest shake up of the UK’s national security investment screening powers for 20 years.”

Under the Act the Secretary of State for BEIS must now be notified of all transactions that involve one or more of 17 “key” sectors of the economy, before they are completed. For transactions not involving any of the 17 listed sectors, transactions not voluntarily notified to the government are still subject to Secretary of State’s call-in powers which enables them to conduct a review at any time within 5 years of the transaction taking place – or within six months of them becoming aware of the transaction, whichever comes first, along with powers to retrospectively call-in any transactions that have closed since November 2020.

Chris Blairs, Deputy Director of National Security Policy, has confirmed that the government is expecting the screening process to scrutinise around 1,800 transactions per year, with the number of interventions made under the Act every year likely to be around 10.

Any deal requiring mandatory notification which is not approved by the government will be void. The Secretary of State also has powers to impose divestment, or remedial conditions that can restrict access to sensitive locations, information, or intellectual property for potential investors, as well as setting out civil and criminal penalties.

A categoric shift in the policy environment for M&A in the UK following criticism of recent deals

Prior to the introduction of the NSIA, the government’s power to screen transactions derived from the Enterprise Act 2002. This enabled government to issue public interest intervention notices to entities “in certain public interest cases” on national security grounds. This approach had been criticised in recent months due to the large number of sensitive deals which were allowed to go ahead. For example, Chinese semiconductor manufacturer Nexperia’s acquisition of Newport Wafer Fab – the UK’s largest chip plant – attracted significant political attention due to China’s presence in security-sensitive sectors of the British Economy.

The deal went through in July 2021, with the Business Secretary saying that it had been “considered thoroughly”. In a critical open letter to the media, however, the former Head of the National Cyber Security Centre, Ciaran Martin, suggested that the acquisition of the site was evidence of China’s bid to achieve “clear technological superiority” over the West, and that the government would need to “set out a very, very clear, convincing and easy to understand public argument as to why the sale of a leading microchip manufacturer to Chinese ownership is not a strategically unwise decision.” This prompted the government to review its position, with the Prime Minister asking National Security Adviser Sir Stephen Lovegrove to reassess the deal, and marked a watershed moment regarding the government’s reprioritisation of national security concerns within economic policy, with the ultimate outcome being the NSIA.

The NSIA in practice

The Newport deal and other recent high-profile cases have catalysed the government’s reform programme. The Covid-19 pandemic has seen a rise of protectionism globally, particularly surrounding the screening of foreign investment, as it drew attention to the critical link between national security and supply chains. Business Minister Lord Callanan said in December 2021 that “it is an unavoidable truth that a handful of investors want to do us harm. In the UK we see ever more ingenious threats to our national security.”

However, he also qualified that the NSIA is “focused on potential national security risks that may arise from…a small minority of acquisitions,” highlighting that the government’s goal is to restrict “certain aspects of the economy that we want to make sure are not available to our enemies – those who want to do us harm.”

The critical balance the government will need to maintain is between ensuring foreign direct investment into the UK as a driver of overall economic growth, while protecting national interests and sectors of strategic importance. The NSIA is intended to provide just that, a screening system with teeth and a precisely targeted scope. However, without a fixed definition of national security, the government has the leeway to interpret and designate a national security threat at its own discretion – which investors will need to bear in mind when considering potentially sensitive sectors.

Given the substantial penalties which the government intends for non-compliance, and the estimated six-week timescale the government has provided for approval of transactions not requiring full investigation, investors and advisors should be careful to build in additional contingency time to deal timelines to allow for the new NSIA processes to be completed.

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