When considering the potential application of the National Security and Investment Act (NSIA) regime, it is crucial to appreciate that the NSIA is not limited to entities and assets which are based or domiciled in the UK. Indeed, the NSIA can apply to overseas entities whose main operations may be located abroad or, in some cases, who do not have any physical presence in the UK.
The extraterritorial scope of the NSIA applies to transactions which involve:
- entities formed under the laws of jurisdictions outside the UK that carry on activities in the UK or supply goods or services to people in the UK (“Qualifying Entities“); and
- assets (including land, moveable property and intellectual property) situated outside of the UK that are used in connection with activities carried on in the UK or with the supply of goods or services to people in the UK (“Qualifying Assets“).
An acquisition might be covered by the rules if a Qualifying Entity or Qualifying Asset is being or has been acquired, and if that acquisition meets other tests in the NSIA that would make it a trigger event.
If the entity or asset being acquired qualifies, you may need to get approval from the government before you can complete the acquisition, or the government may be able to call in that acquisition to investigate it.
The UK government can also impose certain conditions on an acquisition and in rare cases may unwind or block an acquisition completely.
It is also worth remembering that even intra-group transactions and restructurings may be within the scope of the NSIA if the group in question has a sufficient UK nexus.
For an overview of the NSIA regime, please see our earlier articles which can be found here and here.
What types of acquisitions outside the UK are covered by the rules?
In Guidance on the NSIA’s Application to Overseas Entities, the Department for Business, Energy and Industrial Strategy confirms that the key issue as to whether an entity or asset will be within the scope of the NSIA is whether or not it has a sufficient UK nexus. The guidance includes the examples below:
Qualifying Entities
Qualifying Assets
How might it impact on a transaction?
As shown above, parties need to be mindful of the potential extra-territorial application of the NSIA to acquisitions where the acquired group carries on activities in the UK even if the entity or asset being acquired is not established or located in the UK. The NSIA’s statutory timelines for review (at least 30 working days) mean that the application of the NSIA could significantly impact on a transaction’s timeframe.
In respect of mandatory notifications, unless parties are content to pre-notify ahead of signing (we are regularly seeing parties take this approach), transaction documentation will likely need to be structured in a split exchange and completion fashion rather than a simultaneous closing.
Where notification is voluntary, the parties will need to evaluate the risks of the likelihood of the transaction being called-in. If a voluntary notification is made (and approved) this will provide investors / acquirers with certainty that the transaction will not be open to challenge post-closing.
If the parties decide not to make a voluntary notification, the risk that a transaction may be called in can be mitigated by either seeking guidance informally from the Investment Security Unit (ISU) prior to completion and / or starting the clock on the six-month period by publishing details of the transaction immediately post-completion to make the Secretary of State “aware” (though the NSIA does not yet prescribe what will constitute awareness for this purpose).
What practical steps should parties be taking?
- Specific NSIA related questions should be included in due diligence questionnaires to help assess whether a proposed transaction will be within the scope of the NSIA regime and what approach should be taken.
- Parties can seek to prepare by compiling the required information on their corporate structure and ownership so the notification form can be submitted (via the ISU online portal) in a timely manner.
- Parties should seek to allocate and mitigate risks associated with the NSIA in their deal documentation, for example negotiating warranties and/or indemnities in respect of the NSIA, both in respect of the NSIA applying to the contemplated transaction and in respect of any transactions completed by the target on or after 12 November 2020.
Authors
Follow us online
