About the NSIA Act
The National Security and Investment Act 2021 (“NSIA”) became law on 29 April 2021, and applies to any transaction completed on or after 12 November 2020. It establishes a new regime for the UK Government to “call in” acquisitions of control of entities or certain assets which could cause a national security risk in the UK, within six months of the Government becoming aware of the deal (and subject to a longstop of five years from completion).
Following a ‘call in’, the Government can impose a range of remedies, such as limiting the acquiror’s control or access to information. The regime is expected to become operational in late 2021. Parties will be able to notify the Government voluntarily, in order to seek pre-deal confirmation that the Government will not call in the deal.
The NSIA also establishes a mandatory notification regime: anyone acquiring control of entities operating in 17 specified sectors in the UK must notify the Government, regardless of deal value. If the acquiror fails to do so, it is prohibited to close the transaction and any attempt to do so is void, and the Government can impose significant sanctions.
The NSIA is neutral as to the nationality of the acquiror, and also to the nationality/location of the target entity or assets. The acquisition of an overseas entity could engage the NSIA if the target operates in the UK and the transaction could give rise to a national security risk.
Given the very significant implications of getting it wrong, parties should think about the practical implications of the NSIA at the outset of any transaction which could be relevant.
Planning a transaction: what types of deal could be subject to the NSIA regime? Can we avoid the NSIA by designing the deal terms carefully?
The NSIA will apply to various types of transactions, and not only 100 percent sales. This is because of the way in which “control” is defined broadly in the NSIA, to mean:
- in the case of the general call-in power, “control” means (i) a holding of shares or voting rights increasing through 25 percent, 50 percent, or 75 percent, (ii) being able to pass or block shareholder resolutions, (iii) being able to influence materially the policy of the target, and (iv) to use or control how the assets are used, or to do so to a greater extent; and
- in the case of the mandatory notification regime, all of the above except for (iii) and (iv).
There is no minimum jurisdictional threshold referable to value or UK turnover. This definition of “control” means that the NSIA could apply to a partial disposal, a fundraising round in which an entity issues new shares, a share buyback, if the buyback increases the proportionate shareholding or voting rights of another shareholder; and the formation of a joint venture.
It may be possible to mitigate the risk that the NSIA will apply, by designing the deal terms carefully. For example, parties could cap the acquisition of shares/voting rights at one of the specified levels by means of provisions in the target’s articles. In a joint venture context, parties could avoid agreeing to reserved matters which establish negative control. However, it will be more difficult to eliminate the risk of “material influence over policy”.
Connect with us
- Find office locations kpmg.findOfficeLocations
- kpmg.emailUs
- Social media @ KPMG kpmg.socialMedia
Save, Curate and Share
Save what resonates, curate a library of information, and share content with your network of contacts.
Planning a transaction – how do we know whether the transaction could give rise to a national security risk?
At the early stages of a transaction, the seller or the target will be best-placed to assess whether the NSIA could apply. They should consider questions such as the following.
- Does the target supply any customers who are relevant to the UK’s national security, even indirectly?
- Do the target’s operations give it access to any sensitive information?
- Does the target operate at sites which may raise national security sensitivities, or at sites which are near to Government locations?
- Does the target operate in any of the 17 mandatory notification sectors?
The Government is continuing to consult on the precise definitions of these sectors, and will publish the final definitions in “Notifiable Acquisition Regulations” in due course. The Government will also publish a final “policy statement” on the call-in regime, in which the Government will describe the circumstances in which it expects national security concerns to arise. It is also open to parties to seek informal guidance from the Government.
If the NSIA could apply, what should a seller/target do at the outset?
If the seller/target concludes that the NSIA could apply to the transaction, there are a number of steps that they should take at the outset.
First, the NSIA should be factored into timetabling discussions with all key stakeholders, including lenders, customers, suppliers, and employees. The seller will not want to create over-optimistic expectations. If the parties notify, the Government has 30 working days to call-in the deal (counting from the date that the Government accepts that notification is complete). There is then a 30 working day decision period, which the Government can extent by 45 working days. The Government can also “stop the clock”, with further information requests. So, the NSIA could potentially add several months to a deal timetable.
Secondly, the seller/target should remember that the Government’s call-in power applies not only to signed or completed transactions, but also “arrangements … in process or contemplation”. This could apply to the first steps in a transaction process, such as the publication of an Information Memorandum, the establishment of an auction process, submission of a non-binding offer, or negotiation of Heads of Terms. So, if the seller/target concludes that the NSIA is engaged, it should consider seeking guidance at the outset. It is possible to notify the transaction at this early stage – although the benefit of doing so will need to be weighed against the risk that the resulting review process derails the timetable before there is a committed bidder.
Thirdly, the seller/target should consider its universe of likely buyers/investors. The Government has said that it will look at three factors when deciding whether to call in a transaction: (i) the target’s operations, (ii) the level of control which the buyer/investor will acquire, and (iii) the identity of the buyer/investor. The last of these means that the Government is more likely to approve a transaction if it is comfortable with the identity of the buyer/investor. So, the seller/target can increase its chances of success by limiting its negotiations to parties that the Government will consider desirable.
Finally, the seller/target could re-consider the transaction perimeter: if the entity or assets which give rise to the national security risk are not key to the transaction value, is it possible to effect a pre-deal reorganisation or hive-out, such that the buyer/investor does not acquire control of the relevant entity or assets?
How will the NSIA affect due diligence processes, and what can sellers do to prepare?
Seller and targets should expect buyers to conduct enhanced due diligence to assess whether the NSIA could apply.
Buyers and investors will look more closely at the target’s technology, R&D, customers, and suppliers to assess whether the target (or any of its assets) are relevant to national security, and whether the target is engaged in any of the 17 mandatory notification sectors. Because there is no financial materiality threshold, a target could be captured even if the relevant part of the business is immaterial to overall revenues or value.
Sellers should be mindful of this when populating the dataroom, and be ready to answer questions on these topics as part of the Q&A – while being careful of other factors relevant to due diligence information exchange, including the competitive sensitivity of the information.
How might the NSIA affect pricing, and deal terms?
The NSIA could affect competitive tension in auction scenarios. The Government has said that UK buyers are less likely to cause concern in relation to the NSIA, so this could have implications where there is a global buyer pool. Could certain overseas buyers be at a disadvantage in auctions, on the basis that their bid is more likely to engage a clearance procedure? Will some overseas buyers be incentivised to overpay as a result – or alternatively will they avoid UK auctions, and thereby reduce competitive tension?
As regards deal terms and processes, sellers may seek reverse break fees with certain buyers to compensate for the higher execution risks. Sellers may also seek to make notifications earlier in the auction process for multiple buyers to seek clearance before awarding exclusivity. The deal tactics will develop over time, as parties and their advisors become more familiar with how the Government is operating the NSIA regime in practice.
The NSIA regime will also affect conditionality and co-operation provisions. Given the scope for severe remedies and sanctions, buyers may well err on the side of caution in deciding whether to notify. We expect to see a significant number of sales and purchase agreements with conditions precedent for NSIA clearance, and the level of commitment required to progress the application will be a closely negotiated point.
In the context of a joint venture, the parties may need to impose controls in their Shareholders’ Agreement or Articles, so that the investor cannot increase its control (for example, by exercising pre-emption rights, or a call option) without approval under the NSIA. There may also need to be controls on access to information (for example, where an investor has rights to appoint members of the board or senior management).
Parties should remember that the NSIA contains “look through” and “connected person” provisions, so investors cannot avoid the application of the NSIA by splitting their shareholdings between related entities. The NSIA also contains “common purpose” provisions which apply to persons who co-ordinate their influence on the activities or strategy of an entity.
What if my deal has already signed or closed?
Although the Act’s notification regime will not be fully operational until late 2021, the Act (unusually) applies retroactively to any transaction completed on or after 12 November 2020.
This means that parties will need to consider not only “live” transactions, which have not yet signed but also any transaction that has signed or completed in the last six months. For transactions which have already signed, the parties can approach the new Investment Security Unit (part of BEIS) for informal guidance on whether a national security issue is likely to arise.
How we can help
KPMG’s multi-disciplinary M&A team can help you deliver real value through your transactions. Our capabilities include corporate finance, tax, law, valuation and pricing, and operational integration, and we work together seamlessly to secure the best outcome for you. We can support you in everything from developing an acquisition strategy and raising funds, through to making the deal and integrating your acquisition.
If you are a seller or a target planning for a deal, KPMG’s proprietary InSite Deal Readiness tool can help you to plan for your transaction at an early stage, by identifying value items and potential impediments. We update the tool regularly, and will do so when the Government publishes the final Notifiable Acquisition Regulations and policy statement. Please contact your KPMG team if you would like a demonstration of InSite.
