National Security and Investment Act 2021: what do lenders need to know?Print publication
On 20 July 2021, the Government announced that the National Security & Investment Act 2021 (the Act) will come into force on 4 January 2022. The Act introduces significant reforms which increase the ability of the Government to review transactions on national security grounds, and potentially prohibit their completion or require remedies to allow them to proceed. It is important that lenders are aware of the Act’s implications, particularly when they may be looking to enforce security and/or effect a debt-for-equity swap.
Brief overview of the new regime
The Act introduces a mandatory notification regime for share acquisitions in 17 key sectors. Completing a transaction which is subject to the mandatory regime without obtaining prior approval from the Secretary of State for Business, Energy and Industrial Strategy (BEIS) will render the transaction void and may give rise to serious sanctions, including fines of up to £10 million and prison sentences of up to five years. The filing requirement applies regardless of where the target entity is incorporated (provided it carries on activities in a key sector in the UK) and also applies to intra-group transactions.
In addition to the mandatory notification regime, there will also be an extensive call-in power enabling the Government to intervene in qualifying transactions in any sector, whether assets or shares, with no minimum size or value thresholds. This call-in power will apply to transactions which completed on or after 12 November 2020. For further details about the mandatory regime and the call-in power, please read our previous article here.
How does this affect lenders?
The Act represents an important new risk factor in M&A and lending, with a similar risk profile to merger control rules. The Act will be relevant to lenders in the following situations:
- when providing acquisition financing to fund an underlying transaction to which the Act applies; and
- when acquiring control over qualifying entities or assets when enforcing security or converting debt to equity.
Managing the risk in acquisition finance
Whilst responsibility for assessing whether the Act could apply to the acquisition or investment being financed will mainly fall on the parties to the transaction, given the serious consequences of non-compliance with the regime, it will also be important for lenders to carry out their own due diligence and/or seek a legal opinion on the application of the regime. If there is a mandatory notification obligation for the underlying acquisition or investment being financed, lenders may want to include a condition precedent in the finance documents to ensure that the underlying transaction does not become automatically void.
If the underlying transaction falls outside the scope of the mandatory notification obligation, lenders should nonetheless consider the risk of the transaction being called in for review, and whether a voluntary notification should be made by the parties. The call-in power may generally be exercised at any time up to six months after the Secretary of State becomes aware of the transaction, provided this is within five years of the acquisition of control. It may therefore be advisable for a lender to consider including protection in the finance documents, even if the mandatory notification obligation is not engaged.
Impact on deal timing
Compliance with the Act could have significant timing, and potentially cost, implications to transactions. The Government has emphasised that it will carry out any review quickly however the review process could take up to 105 working days (or even longer in certain circumstances). There is an initial period of 30 working days following acceptance of a notification (whether mandatory or voluntary) within which the Secretary of State must decide either to clear the transaction or to issue a call-in notice for a more in-depth investigation. This review timeframe could be extended further if, for example, the clock is stopped when a further information request is issued following a call-in notice, or if the Government is unable to reach a conclusion within the 105 working days and seeks a further extension.
Enforcement of security and debt-for-equity swaps
The new regime is not expected to apply to commercial lending at the point at which lenders take security over shares and/or assets. Where the regime will apply is where lenders subsequently seek to enforce security over shares or assets in order to effect a disposal and/or effect a debt-for-equity swap, and the acquisition of control by the lenders or a third party purchaser of the secured shares or assets amounts to a qualifying transaction which either triggers a mandatory filing or risks being called in by the Secretary of State.
If a lender is making its credit evaluation on the basis that it will be able to sell the assets and business as a going concern at some point in the future if it needs to enforce its security, the impact of the Act may well affect its ability to exit via such a process, because the Act could limit the pool of potential purchasers. Lenders therefore need to be conscious, in lending on a secured basis to any customer who may form part of the supply chain in any of the key sectors, that the Act may place an unexpected fetter on the lender’s ability to recover its exposure through a disposal process. If the possibility of a call-in could have an adverse effect on the price on sale (or may even prevent a sale at all) then the lender is left evaluating an exit strategy on a break-up basis only. That may have an impact on lending appetite.
Key questions to be asked by lenders
- In relation to acquisition finance, does the underlying transaction potentially fall within the scope of the Act, and if so, should a condition precedent and specific contractual terms be included in the finance documents? Should the lender require the borrower to deliver a legal opinion regarding the applicability of the Act?
- Could the enforcement of security by the lender to effect a disposal amount to a “trigger event”?
- For share charges, does the company whose shares are secured carry out specified activities in the UK within one of the 17 key sectors? It is not uncommon for share charges to include rights to direct voting which could trigger the mandatory notification regime.
- Could any acquisition of control during the course of a restructuring be considered to give rise to a risk to national security?
How we can help
It is important for lenders to be aware that enforcing security over shares or other assets to effect a disposal, or for funds and alternative lenders completing a debt-for-equity swap, could fall within the scope of the Act, as could a subsequent sale by the security holder of the shares or assets over which security was taken. Even if a mandatory notification is not required by the Act, a cautious buyer may feel it prudent to make a voluntary notification if the shares or assets in question are particularly sensitive. It will therefore be crucial to take advice early in the transaction because application of the regime could have severe consequences for deals which have to happen quickly. Our team has already had experience of obtaining informal guidance from the newly-formed Investment Security Unit and we can help provide you with practical steps which will help you assess the relevant risks.
 The key sectors are advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to Government, critical suppliers to the emergency services, cryptographic authentication, data infrastructure, defence, energy, military or dual-use technologies, quantum technologies, satellite and space technologies, synthetic biology and transport.
 Different limitation periods will apply in relation to acquisitions of control which took place between 12 November 2020 and 3 January 2021 inclusive.