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Security matters… and new Act puts deals at risk

Matt Mayes is an associate solicitor in the corporate department at Howes Percival in Northampton.

You may think your business is innocent enough. But the National Security & Investment Act 2021 might have a different view.

The Act comes into force on January 4 2022 and applies to acquisitions of businesses in 17 key sectors which potentially give rise to national security concerns.

The Act places an obligation on parties to transactions in these sectors to notify the government of the transaction. The government also benefits from a wide-ranging power to call in and potentially block a transaction which is a deemed a threat to national security.

There is a strong possibility that your business will be caught by the Act. The sectors subject to the Act are:

  • Computing hardware
  • Communications
  • Suppliers to the emergency service
  • Data infrastructure
  • Transport
  • Critical suppliers to the government
  • Advanced materials
  • Defence
  • Cryptographic authentication
  • Synthetic biology
  • Civil nuclear
  • Satellite and space technologies
  • Advanced robotics
  • Quantum Tech
  • Artificial Intelligence
  • Military and dual-use
  • Energy

The Act was brought into force on the backdrop of a tightening to foreign investment into UK businesses. Despite this, the Act catches both foreign and domestic stakeholders to a transaction in the 17 key sectors.

The criteria that a transaction has to meet to be deemed a national security threat is purposely light on detail. The government wants sufficiently flexible powers to call in a transaction or require parties to make a notification.

If you are buying a business in one of the 17 key sectors, you must notify the government before doing anything else. For the average Northamptonshire business, the list of 17 key sectors may look to be fairly limited and perhaps obscure. However, it is far-reaching and includes sub-contractors supplying components into these sectors.

For example, you could be looking to buy one of your key suppliers, whose owner wants to retire. You do not supply into the 17 sectors. But your target may also supply to another customer, who in turn sells his products into a deference equipment manufacturer. In that case, you would need to do a careful analysis of whether a notification was needed. There is no ‘small impact’ exemption.

If you buy or sell a business where you are required to make a notification to the government, sanctions will be severe. The government has five years from the ‘trigger event’ (the acquisition of the business) to call in the transaction. If it is deemed to be a threat to national security, the government can go as far as making the transaction void.

This would have massive consequences for all parties involved and could require returning the purchase price to the buyer and giving the business back to the seller. This would be legally complicated and expensive to execute.

In addition, non-compliance may result in fines of up to five per cent of worldwide turnover or £10 million. The government has the authority to bring criminal proceedings against the relevant stakeholders and seek imprisonment for up to five years. Directors of the purchaser are liable to disqualification for up to 15 years.

To clarify your organisation’s position in relation to the Act, take legal advice as early as possible. Your advisors can tell you whether your transaction requires a notification.

Once you have made a notification, the government will have an initial 30 working days to decide whether to approve the transaction or trigger a more in-depth review. The government then has up to 45 days to carry out its in-depth review. The earlier you make the notification, the less impact it will have to your transaction’s timetable.

Discuss the issue with the other parties involved. Devise a strategy for dealing with the issue. Do you put the deal on hold while you wait for government clearance? Or do you continue with your timetable and make completion conditional on receiving government approval?

It is important to decide who bears the risk. Which party incurs the costs of making the application. The potential consequences of not following the Act are significant and currently without precedent.

 

For further guidance on the Act, contact Matt Mayes on 07929 876618 or email

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