Editor's note: Authored by Christine Graham, Caroline Hobson and Anna Caro, this article was originally published on Law360.
On June 16, the U.K. government published its first annual report on the operation of the U.K. national security and investment regime.
Since then, on July 19, the U.K. government issued its long-awaited market guidance notes on the National Security and Investment Act, which is based on an analysis of notifications received to date and feedback from stakeholders on their experiences of the regime.
The notes focus on whether commonly raised scenarios require mandatory notification, which has understandably tended to be the area of most interest.
Following on from the publication of the annual report, the notes add a greater level of transparency regarding the regime, providing welcome guidance to businesses and their legal advisers on submitting notifications, the types of acquisitions of control subject to mandatory notification and the disclosure and publication of information relating to the NSI Act.
As the notes were developed in part from feedback from stakeholders, they provide a valuable insight into the types of notifications and queries received by the U.K. government to date regarding the operation of the regime.
Summary of Main Points Addressed in the Notes
For voluntary and mandatory notifications, the government has clarified that notifiers should provide as much detail as possible about the activities of the entity or asset in scope, make specific reference to the relevant sector definitions in the notifiable acquisition regulations and avoid the use of technical language.
Structure charts are an important part of the notification form, and are needed for the government to fully understand the ownership structure of the entities and assets before and after the acquisition has been completed. In particular, the notes clarify that it is important to include the ultimate controller of the acquirer to assist the government in deciding whether to make use of its call-in power.
Temporary Acquisitions of Control
The notes helpfully illustrate two scenarios in which the appointment of liquidators and receivers may require mandatory notification:
- If a liquidated entity has shares in a solvent entity, and the liquidator or receiver gains voting rights over those shares during the insolvency process and prior to the shares being sold, this constitutes an acquisition of control that may be notifiable if the other relevant tests are met.
- If a director is declared bankrupt, and its shares in a solvent entity are transferred over to a trustee in bankruptcy during the insolvency process, this also is regarded as an acquisition of control that may be notifiable if the other relevant tests are met.
Granting Security Over Shares
The notes clarify that the granting of share security is not a notifiable acquisition requiring mandatory notification, even if it involves an entity carrying on activities covered under the mandatory notification sectors.
This is because there is no acquisition of control being acquired. This clarification is consistent with the response previously provided by the government in responding to a query raised by the City of London Law Society.
However, and notwithstanding this clarification, the notes point out that, where legal title is transferred or control passes in some other way and the shares fall within the mandatory sectors, then a notifiable acquisition has taken place and must be notified.
Indirect Acquisitions of Control
As set out under the NSI Act, it is possible for investors and other parties to acquire control indirectly over entities carrying on activities in one of the 17 specified sectors, and to fall in scope of the mandatory regime, where there is an unbroken chain of majority stakes all the way through to that entity of interest. The notes provide some helpful examples of how this may happen in practice.
The notes confirm that internal reorganizations also are in scope where they result in an acquisition of control over an entity, even if the ultimate beneficial owner remains the same.
Although that is a rare scenario, the notes explain that such reorganizations may raise national security risks, for example, by enabling a hostile actor to pursue malign actions over the entity. Parties contemplating a restructure should be aware of the potential timing impact if a mandatory notification is required.
Voting Rights and Mandatory Notification
The NSI Act captures the acquisition of voting rights that enable a person to secure or prevent the passage of any class of resolution governing the affairs of the target entity.
The notes confirm that contractual rights — e.g., rights in a shareholders' agreement — are not voting rights and will not trigger a mandatory notification, provided such contractual rights do not amount to control of such voting rights and do not enable the acquirer to secure or prevent the passage of all resolutions of a particular class.
It may be the case that contractual rights — either alone or together with other interests or rights — enable an acquirer to materially influence the policy of a company. Such rights would still fall outside the mandatory regime, but may be subject to call-in by the U.K. government.
Publication of Information
The notes explain that the government will not publish information regarding the receipt and acceptance or rejection of individual notifications, but it may choose to publish information regarding call-in notices or final notifications.
Where the government makes a proactive announcement, it will aim to provide advance notice to the parties. Where a final order has been made, the government is required to publish notice of the order.
A recent example of this is the government's publication of its first final order prohibiting the licensing of vision-sensing technology by the University of Manchester to Beijing Infinite Vision Technology Co. Ltd.
Whitelist of Investors
The notes clarify that the government is monitoring closely whether it would be appropriate to make exemptions from mandatory notification requirements based on the characteristics of the acquirer — i.e., a whitelist of investors — but there are currently no plans to exempt certain businesses and investors from the mandatory notification regime.
Other Guidance Updates
On July 20, the government published new guidance on the applicability of the NSI Act to new-build downstream gas and electricity assets.
The guidance is intended to assist developers of new-build downstream gas and electricity infrastructure to understand what types of assets and acquisitions in the sector are within the scope of the NSI Act, and when to submit a voluntary notification.
The guidance also provides specific examples of acquisitions in the sector that would be in scope of the NSI Act.
In addition, the government has updated its guidance on the notifiable acquisitions regulations to clarify when an acquisition in the downstream oil sector will be subject to a mandatory notification under the NSI Act.
This is the first set of notes to be published by the government since the NSI regime came into force on Jan. 4.
The notes and the additional guidance outlined above are welcome updates that provide more clarity, insight and certainty for businesses and their legal advisers on the U.K. government's approach to NSI notifications — and the overall operation of the NSI regime.
The government has welcomed suggestions for topics to include in future publications, with a further set of market guidance notes expected in early 2023.