On 4 January 2022 the National Security and Investment (NSI) Act came into force in the UK. In this article, we look at what this law means and how it affects investors, startups and businesses.
What is the National Security and Investment (NSI) Act?
The NSI Act allows the UK Government to investigate and intervene in investments, acquisitions and mergers of private companies that could threaten UK national security. The new law also allows the Government to impose certain obligations on companies and investors who intend to complete such transactions.
The legislation is part of wider activity to better monitor and prevent foreign individuals and organisations making potentially hostile investments in strategic areas of UK business development.
The new law has two major components:
- For some transactions, it’s mandatory to notify the government
If certain ‘trigger events’ occur, investors / acquirers must notify the UK government of any transactions in 17 sectors, ranging from artificial intelligence to synthetic biology. The government must receive the notification and approve it before the transaction is completed.
- The government can ‘call in’ a transaction
The law gives the government the right to ‘call in’ transactions which it considers to be (or could be) a risk to national security. The government can analyse the transactions and impose restrictions, or unwind or block them. The Secretary of State has the power to retrospectively call in transactions completed anytime on or after 12 November 2020, even though the NSI Act wasn’t in place at the time.
NSI mandatory notifications: which sectors / companies does this apply to?
The NSI requirements cover companies in these ‘areas of the economy’:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
- Military and Dual-Use, Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
Companies affected are called ‘qualifying entities’. To check exactly what activities are covered by each of these categories and to find out if your business is a qualifying entity, read the full details at the government website:
gov.uk: NSI Act: Guidance on notifiable acquisitions
These ‘areas of the economy’ are broad so we expect the mandatory notification obligations will affect a large number of companies, especially those in technology sectors and disruptive industries.
The NSI regulations are intentionally designed not to refer to any value thresholds, for example, annual turnover, net worth of assets or size of transaction. This is so that the law covers investments in startups and SMEs, as well as large companies.
NSI mandatory notifications: what transactions does this apply to?
If a person or an organisation invests in or acquires shares/assets in a company operating in a sensitive area (see the list above), it’s a ‘notifiable transaction’ if one of these situations occurs:
- After the transaction, the investor/acquirer obtains a shareholding stake larger than 25%
For example, if an investor originally owned a 20% shareholding in the company and as a result of investing further, they obtain a further 7% stake, raising their total shareholding to 27%, this is a notifiable transaction.
👉 This situation is likely to occur at fast-growing startups and SMEs which allocate substantial proportions of their company equity to investors.
- After the transaction, the investor/acquirer’s shareholding goes from 50% or less to more than 50%
For example, if an investor held 47% before the transaction, then as a result of their investment they hold 60%, this is a notifiable transaction.
- After the transaction, the investor/acquirer’s shareholding goes from less than 75% to 75% or more
For example, if an investor held 60% before the transaction, then as a result of their investment they hold 68%, this is not a notifiable transaction because it did not cross any threshold (50% or 75%). But if the investor invests to take their shareholding from 68% to 77%, this is notifiable transaction because they’ve crossed the 75% threshold.
- After the transaction, the investor/acquirer is able to materially influence the operations and policy of the company
For example by acquiring the right to appoint a majority of members of the board, or by acquiring the right to appoint a key member of the board which influences the strategic direction of the company.
- As a result of the transaction, the investor/acquirer obtains voting rights in the company that allow them to unilaterally pass or block resolutions of the company
For example, if someone owns 10% of the company’s voting rights but they acquire a preferential share class which provides them with the ability to pass ordinary resolutions by themselves, or acquire a share class with super-voting rights allowing them to pass resolutions on their own.
To check if you need to tell the government about an investment or acquisition, read the guidance on the government’s website.
Based on our experience of more than 2,500 funding rounds completed on SeedLegals, our data shows that at least one of the above scenarios happens in at least 10% of early-stage funding rounds. This means that for some companies, you’ll need to notify the government about even a simple equity investment.
Does the NSI Act only cover acquisitions/investments by foreign investors?
No. The acquirer/investor does not need to be a foreign person or foreign organisation – the law covers any relevant transactions even if they’re carried out by UK citizens, residents or organisations.
Who submits the NSI notification? Is it the target company or the investor/acquirer?
It’s the investor/acquirer – the person or organisation buying shares/assets in the transaction – who must notify the government.
What are the penalties if an investor/acquirer doesn’t properly notify the government?
If you complete a transaction that’s subject to mandatory notification without government approval, the transaction will be legally void. Also, the investor/acquirer could be fined up to 5% of their global turnover or £10million, whichever is greater, and they may face criminal penalties of up to five years imprisonment.
If the investor/acquirer doesn’t submit a notification before the transaction takes place, they can apply for retrospective validation on the government’s notification portal, but until the government approves the transaction, it’s void.
How do I submit an NSI notification?
If you’re an investor or acquirer and your transaction meets the criteria for a mandatory notification, you’ll need to notify the government via the online NSI portal. You’ll need to give details of the:
- structure and share ownership of the investee/acquired entity
- structure and share ownership of the investor/acquirer
- terms of the investment/acquisition
You can also use the portal to submit a ‘voluntary notification’ – that is, notify the government about a transaction even if it doesn’t appear to meet the criteria for a mandatory notification.
To help you prepare your notification, you can view the forms and guidance at the government website.
⚠️ Important: For transactions where it’s mandatory to notify the government, the investor/acquirer must notify the government before the transaction is completed. Then, if the government calls in a transaction, you must delay it until cleared by the government. To avoid delays to your transaction, send the notification as early as possible.
The government expects to receive around 1,800 notifications a year – we believe this is an under-estimate because the law covers such a broad range of sectors.
Can my transaction be called in by the government even if I didn’t have to notify them about it?
Yes. If the government reasonably suspects the transaction might be a risk to national security, they can call in the transaction for assessment.
The government can assess acquisitions for up to six months after they become aware of the transaction, and up to five years after a transaction has taken place.
Can I choose to notify the government about my transaction, even if I don’t legally have to?
Yes. If your transaction doesn’t meet the criteria for a mandatory notification, you’re not legally required to tell the government about it. However, the investor/acquirer can submit a voluntary notification via the online portal if they’re involved in a planned or completed transaction not covered by mandatory notification and they want to find out if the government will call it in.
What happens if you notify the government about a transaction and it’s ‘called in’?
If the government ‘calls in’ a transaction, they aim to complete their assessment within 30 working days. The government can extend this by a further 45 working days in some circumstances. Your transaction must not be completed before the government has given you clearance, otherwise the transaction will be deemed legally void.
When the government has completed their assessment, they’ll either clear the transaction, allowing you to complete it, or impose certain conditions on the acquisition, or unwind or block the acquisition partially or completely.
The government has said they expect 75 to 90 transactions to be called in for assessment every year – this means they don’t expect to call in the overwhelming majority of transactions.
There’s more detail at the government website about what to expect after you’ve submitted your NSI notification form.
TL,DR: Two essential things to know if you’re involved in an investment or acquisition
- Don’t assume your transaction won’t be caught
The NSI Act covers many sectors and types of transactions. Investors/acquirers and target companies must read and understand the NSI requirements to decide if they need to notify the government about their transactions.
- Notify early
If you need to notify the government about your transaction, do it well ahead of time. This will minimise disruption to your transaction timetable in case the government calls in the transaction. And you’ll want to make sure the transaction is valid – it will be void if the government weren’t notified, or were notified incorrectly.
I have another question not covered here…
Take a look at the details published on the government website:
gov.uk: NSI Act: prepare for new rules about acquisitions
If you have more questions about the National Security and Investment Act and how it might apply to your business, hit the chat button or email us: firstname.lastname@example.org