UK: UK's National Security And Investment Act 2021 (Video)

On 4 January 2022, the UK's National Security and Investment Act 2021 (NSIA) entered into full force, heralding a sea-change in deal planning and related risk assessment.

With the NSIA celebrating its second year in force, Samuel Beighton and James Stunt explore key learnings and current trends, including considering:

• approaches to assessing NSIA-related risks when planning transactions;
• the impact that the NSIA can have upon transaction timetables; and
• how NSIA-related risks can be addressed within deal documents.

Transcript

Sam Beighton: Good morning. Firstly, welcome to this Thinkhouse Webinar where we will be covering the National Security and Investment Act which obviously celebrates its second full year in force, so Happy Birthday to the National Security and Investment Act.

I am Sam Beighton. I am a partner in Gowling WLG's EU, Trade and Competition team and I am joined today by my colleague, James Stunt, who is a senior associate in the EU, Trade and Competition team.

We will be presenting today on this Webinar. We are going to leaving time for questions at the end. We will try and cover as many questions as possible. Obviously if we do not get to your question we can of course come back to you by email if that is helpful. Any questions you have as we are going through, please do put those in the Q&A and we will turn our attention to those.

Without further ado, I would like to kick off with is just an outline in terms of what we are going to be covering today. Firstly to give you some background to where we are, how we have got to this second anniversary of the entry into full force of the NSIA. Then thinking about some of the risks that we have seen from our time advising upon this regime so far and we are going to focus in particular upon the mandatory notification requirement. We are going to think about some of the buyer risks that can arise under the regime and how they may be managed and we are going to touch on conditionality because we are seeing that as being an area in which parties are spending a bit of time thinking through how they can use conditions to seek to manage a number of these risk profiles, and then turning to our crystal ball gazing, where next for the regime, what is going to be coming down the tracks, what do people need to be aware of at this point in time?

So by way of background, as I said at the beginning, it is the second birthday. As of 4 January 2022 the NSIA entered into full force and as you are all aware what this regime does, it enables the UK government to screen transactions on national security grounds. So before we had the Act, national security grounds were addressed under the UK merger control regime and once the Act entered into force what effectively happened were those national security grounds were taken out from UK merger control regime, they were expanded and they were packaged in the NSIA, so that regime exists in addition to UK merger control. It is not a one stop shop so you still have to think about merger control issues and the National Security and Investment Act is focused upon those national security grounds in the context of the UK and its economy.

The regime is managed by the Investment Security Unit or the ISU and the ISU sits within the Cabinet Office within the UK government. We have a Secretary of State in the Cabinet Office who acts as decision maker in the context of the regime. I think the really interesting dynamic that we saw evolving and we have obviously been advising on over the last couple of years is the fact that there is no de minimis threshold so the regime as we will touch upon has various controls thresholds that are relevant but there is not a de minimis threshold. So you could be acquiring a very small entity and that still gives rise to certain requirements under the regime and as a result of that what we have seen is this very broad application of the regime really covering a wide range of transactions and that can include transactions that just involve UK entities or assets so people often talk about foreign direct investment, foreign direct investment regimes, but the NSIA, it applies to transactions that are domestic only, so UK entities and UK assets. The regime also applies to indirect investments so if you are perhaps acquiring a non-UK parent company as a UK subsidiary, that could still be caught by the Act and one thing that a surprising number of clients... has been the fact that corporate restructuring within the same group can be within the scope of the National Security and Investment Act.

Really importantly, what the regime did was it introduced a mandatory notification requirement and currently this applies to certain transactions that affect 17 high risk areas of the UK economy. Now this requirement only applies to acquisitions of the control of qualifying entities so if you have got an asset transaction that is not going to be falling within this mandatory notification requirement. The way a transaction that does fall within that requirement, that it must be notified to, and really importantly, must be approved by the Secretary of State before it can complete.

That requirement does throw up a number of unexpected outcomes and we have had clients who have been I think very surprised that things like internal restructuring have been caught by this requirement, somewhat dismayed at the delay this is then going to cause. So I have just got an example here on the slide to walk through where we have an internal restructure that the client is planning, it is going to enable the sale of a group business, so company X. The internal restructure triggers a mandatory notification requirement and, because of that, that restructure needs to be notified to and approved by the Secretary of State before it can be completed. So that whole process of notification, building in the standstill period when you can do nothing until the Secretary of State has approved, all of that needs to be factored into the timetable for the sale of X and following on from that the planned sale of X itself may also trigger a mandatory notification requirement, so again that process, that standstill period also needs to be factored in to all of that deal planning. So things that pre-NSIA may be much more straightforward in terms of getting up and running, doing the internal work required to get that sale at a place where it is ready to go, that now needs much more thought in certain sectors to make sure you are actually able to do what you want to do from day 1.

And the requirement is supported by some quite severe sanctions so risks arising from breaching the standstill period, so completing that approval, would mean that the transaction is legally void and that is automatic. There is no need for application to court, that transaction in law is void. It is possible to apply for retrospective validation but that is not really a very happy place to be in truth be told. Officers of the buyer who consented to or neglected to prevent the breach, they could face personal prosecution, so criminal prosecution, or they could face civil penalties and the buyer, so the business itself, could face a civil penalty of up to the higher of £10 million or 5% of worldwide turnover and this is setting a void. We are seeing this becoming increasingly important in the context of due diligence so if a seller has completed an internal restructure to enable the current transaction to proceed, did the seller do so in compliance with NSIA or is that restructure, is it legally void? In which case are we all going to have to wait for there to be an application for retrospective validation to enable the current transaction to proceed, so that is something that we have had issues with as we advised upon and those have been points that we are noting more and more in the context of DD.

From the data that has been published, we have two annual reports addressing the regime so far. The most recent came out in July of last year, so we are lagging a little bit in terms of the data that is available but in terms of public data, what we know is from conception, we have now more than 1,000 notifications reviewed. Of those we had 820 mandatory notifications that were accepted. We had 13 applications for retrospective validation, so people who have realised 'whoops, I should have had that on a mandatory basis, didn't notify it, Secretary of State, please could you now validate and make legally viable the transaction that's completed?' Interestingly we have yet to have any penalties imposed for breaches and no criminal prosecutions, but if you ask me to think about where we would see likely developments I think that voidness is a space where it would be really helpful to have some further guidance, potentially from the government, to explain how they see that work in the context of the regime and I think penalties and prosecutions, from my perspective, I think those will follow in due course because on this regime and a mandatory notification requirement, I think it only works as long as participants understand that if you get this wrong there are sanctions, so I think there is the ability to apply penalties, to apply prosecutions. I think it's a matter of time before we see those in real terms.

So outside of the mandatory education requirement there are different routes that parties can take with transactions. So parties can voluntarily notify and seek approval from the Secretary of State, so if they have got a transaction that falls outside the mandatory requirement they can still the view of, you know, we want the comfort of a formal clearance. So you can notify your transaction, you can notify entity acquisitions, asset acquisitions, and you can make completion conditional upon receipt of Secretary of State approval. Another option is to do nothing, there is a risk then the Secretary of State will call in the transaction because a Secretary of State can call in of its own volition certain unnotified acquisitions where these are reasonably suspected to give rise o national security risks.

So however the Secretary of State comes to understand about the transaction, whether it is notification or it has been called in, in addition to the risks I have touched on for mandatory notification we have this overarching general risk that under the regime the transaction may be found to give rise to national security concerns and if that is the case, if the Secretary of State does believe there are concerns arising from the transaction then the transaction could be subject to conditions or in the very worst case scenario could be prohibited. And to date we have had five transactions prohibited under the regime. I will not run through these in any detail save to note that we have three transactions involving semiconductors, we have one transaction where a party was required to divest shares that had already been acquired and we had one transaction which related to IP licensing, so the licensing of a specific technology to a party was blocked by the Secretary of State. So not all company transactions, there was also the blocking of an asset transaction as well.

And outside of prohibition we have seen conditions being imposed in 12 transactions. I have listed some of those on the slide here, I will not run through all of them but I think perhaps some interesting ones to note are what you would perhaps expect. So requirements for entities to retain strategic capabilities in the UK and ensure they have a continuity of supply, so for example if a target is supplying the MoD with certain products and services, for that to continue. Information and security safeguards, so preventing flows going from the target business perhaps back into the buyer or perhaps back into aspects of the buyer's group and government-appointed board observers. So the government insisting that they have an observer at board meetings to understand the dynamics of the business that is being acquired going forwards.

So we have seen a significant number of transactions assessed under the NSIA to date but a comparatively small number have been affected by conditions of prohibitions but when we do see those being imposed the commercial impact may be material which then gives rise to the focus of our session: how can parties manage these NSIA-related risks when they are planning transactions?

James Stunt: So as Sam has already mentioned the key aspect of the NSIA is that it introduces this mandatory notification requirement, so this means that when you are planning a transaction and managing your NSIA-related risks, the first question you should be asking is whether the transaction will trigger this mandatory notification requirement. As a starting point you should check that the transaction involves the acquisition of a qualifying entity, not an asset. As Sam has mentioned while asset transactions can be reviewed under the NSIA the mandatory notification requirements will only apply to transactions that involve investments in entities. You should also confirm that there is a UK nexus such that the NSIA will apply. So pulling all this together the mandatory notification requirements will only be triggered where the transaction involves an investment in either a UK entity, so a company, a partnership or a trust, or an entity that is formed outside of the UK but which carries on certain activities in the UK such as R&D activities or which supplies goods or services into the UK.

Once you have established that the transaction involves the acquisition of a qualifying entity which has UK nexus the next question is will the buyer actually acquire control of that entity? So what do we mean by control? Well the NSIA establishes a few tests for determining whether a buyer has acquired control and these tests are set out on the slide. The most obvious test is that the buyer's shareholding or voting rights in the qualifying entity will increase above a certain threshold as a result of the transaction. So as you can see from the slide the shareholding or voting rights should increase from 25% or less to more than 25%, from 15% or less to more than 50%, or from less than 75% to 75% or more. If the buyer's shareholding or voting rights in the qualifying entity do not increase in line with these thresholds it may still acquire control where it gains the ability to pass or block resolutions that govern all or substantially all of the affairs of the qualifying entity. I should just note at this point that transactions that do not involve or do not need these thresholds may still be reviewed under the NSIA but these transactions do not need to be notified under the mandatory notification requirements.

The key point to mention and to keep in mind is one that Sam mentioned earlier which is that that mandatory notification requirements will also apply to the acquisition of indirect control of qualifying entities. So just to give you an example, you may have an transaction where a buyer is looking to acquire a US-based company. That US-based company has no activities within the UK but it does have a subsidiary, a wholly-owned subsidiary within the UK. What this means is that although the target company is incorporated outside the UK and does not carry out any activities within the UK, the buyer, the transaction may still be subject to the mandatory notification requirements because the buyer has acquired indirect control of the qualifying entity through an unbroken chain of majority stakes that flow down to that entity.

So let us assume that you have established that we are dealing with a qualifying entity and that it has a UK nexus and that the buyer will acquire control of that qualifying entity for the purposes of the NSIA, the next question that you should be asking is what exactly are the activities that are carried out in the UK by that qualifying entity? The reason we need to ask this question is that the mandatory notification requirements will only apply where a qualifying entity carries out specific activities that affect one or more of 17 high-risk areas of the UK economy. I have set out these sectors on the side and I do not propose to go into these in any particular detail. A few of these are fairly obvious when we are thinking about the concept of national security, so for example defence, military and dual use. But there are some of these which are slightly more unexpected such as computer hardware or potentially within energy and this just goes to show that the NSIA is intended to capture a really very broad range of potential transactions.

So how do you check whether the activities that are carried on by the qualifying entity within the UK actually fall within these sectors? The starting point is that... for this is contained within accompanying secondary legislation which is the Notifiable Acquisition Regulations and these regulations contain a description of each of the activities that will trigger a mandatory notification requirement. The UK government has also published guidance which is intended to assist in interpreting these regulations. So your assessment will require you to understand the full scope of the qualifying entity's activities within the UK and to map these to the descriptions of the 17 sectors that are set out within the regulations.

Something that Sam and I have learned in advising in this area is that it is very important to obtain as much detail as you can in relation to the qualifying entity's activities as this will be really crucial to analysis and often this information will fall outside the scope of a general counsel's activities which means that you will need to obtain the input of commercial teams or technical teams within the business and so you should be thinking about lining up these personnel, the relevant personnel, at an early stage of the transaction just to ensure that you have as much information as possible to carry out a full assessment.

Another point just to flag here is that for the purposes of completing the mandatory notification form itself you will need to provide details of all the activities of the qualifying entity that will trigger the mandatory notification requirement, so you will need to make sure that your assessment is sufficiently broad in scope so that it covers all potential activities of the qualifying entity.

In certain situations you may have an example where parties do not agree as to whether the qualifying entity's activities actually trigger these mandatory notification requirements and in some transactions the application of the mandatory notification requirement will be quite obvious, for example if the qualifying entity manufactures military or dual use items or provides these to defence bodies within the UK, then these will quite clearly be caught by the mandatory notification requirements. But in certain scenarios this will not be quite so clear cut and so you will need to carry out a more detailed investigation and this is compounded by the fact that the regulations themselves can be somewhat imprecise. So you may reach a situation where the seller will argue that the qualifying entity's activities do not trigger the mandatory notification requirement, on the flip side you will have a buyer who is in general more risk averse and cognisant of the risk of voidness, of criminal prosecution, financial penalties that we have touched upon earlier, and so the buyer will take the view that the activities of the qualifying entity do fall within the scope of the regulation and so the transaction should be notified.

It is possible for parties where you have this difference of view or where there is significant uncertainty to seek a view from the ISU as to whether mandatory notification requirements apply to the transaction. There are some drawback to this approach. Firstly the ISU's view will be non-binding and secondly the ISU is not required to engage in the process, it is entirely discretionary. Equally where the ISU does decide to give a view there is no timescale in which the ISU must respond to this engagement and as we will explore shortly this can have a knock-on impact on the wider timescales involved in the mandatory notification assessment process.

So we will just take you through an example of a transaction that Sam and I recently worked on where you do have this difference of view and the impacts this can have on the timescales. So this transaction which we are terming Project Alpha involved a US client that was planning to purchase a US target entity. This US target had a US subsidiary which is the qualifying entity for these purposes. The qualifying entity was a sub-contractor to a prime contractor and supplied products and services under this arrangement to the prime contractor within the UK. The prime contractor used the qualifying entity's products to service Royal Navy vessels. As part of this arrangement the qualifying entity also provided services to the prime contractor which enabled its products to be used to service these Royal Navy vessel. A key part of this contractual arrangement was that the qualifying entity was also authorised to receive classified material and documentation in relation to the supply of these products and services.

Seller's counsel in this deal initially argued that the mandatory notification requirement was not trigged and in particular they drew upon an aspect of the notifiable acquisition regulations which is repeated on the slide. Effectively they argued that the qualifying entity's activities did not include research development or production or creation of any goods or services within the UK as these were all carried out elsewhere. They also argued that the qualifying entity's activities did not involve the application of goods or services due to the nature of how these goods and services were supplied. We, on the basis of the information we received, were unable to align with this position and advised our client that the transaction did meet the mandatory notification requirements and should be notified. Our client followed our advice and renegotiated the structure of the transaction incorporating mechanisms within the deal to allow for a split exchange and completion that was conditional upon receiving approval from the Secretary of State. We submitted the mandatory notification and this was submitted... and this was accepted by the ISU and the Secretary of State subsequently approved the transaction.

Ultimately this was a positive outcome for all the parties. We achieved the necessary clearance that allowed the transaction to proceed but it did mean that the parties had to proceed with a split exchange and completion whereas if the parties had agreed earlier that the mandatory notification requirements were met and the relevant notification had been prepared at an earlier stage in the deal planning, the approval could have been received in time to enable simultaneous exchange and completion.

The key point to take away from this is that it is really critical to assess as early as possible whether or not a mandatory notification applies to the transaction. In doing so it allows the parties to take the view once they have established that the mandatory notification requirements apply whether or not the transaction will still be commercially viable having regard to this standstill period required to obtain the approval of the Secretary of State. Even if the parties do agree that the transaction is still commercially viable they will need to factor in time to prepare the notification using the prescribed form and for the ISU to assess the notification and for the Secretary of State to issue its decision. The good news is that a mandatory notification can be submitted once the parties have a good faith intention to proceed with the transaction so you do not have to wait until all the deal documentations have been completed. You can also start to think about whether the notification and assessment process can be run in parallel with other activities that typically form the early stages of deal planning such as due diligence. It also allows you to ask the question as to whether you can obtain approval in time to allow for a simultaneous exchange and completion rather than a split exchange and completion.

So I have made reference in this section to the timescales involved in obtaining clearance for a transaction to be notified and the requirement when deal planning to ensure that these are accounted for. Unfortunately there is not a one size fits all approach and the amount of time for receiving clearance will ultimately depend upon a number of factors which are unique to each transaction but the key point to take away is that these timescales can be really quite long and become much more open ended if the transaction is called in for further assessment by the Secretary of State. As I will explain shortly the actual duration of the assessment period is capable of being extended once the transaction has been called in for further review. Additionally if the Secretary of State makes a request for information once that transaction has been called in, this will stop the clock for the assessment period until the request has been dealt with. All of this means is that it is vital to have these potentially quite long timescales in mind when you are planning a transaction and to account for them insofar as possible within the transaction documents using for example longstop dates.

The approach that Sam and I take to this aspect is to hope for the best but to make sure that you are prepared for the worst. Just to illustrate this we have set out on this slide an overview of the timescales that may apply to a transaction. The best case scenario is on the left hand side where you have the notification accepted by the ISU which is confirmed as complete which typically takes around five working days to receive in our experience. The ISU will then have a period of up to 30 working days from the date of acceptance to review this notification. In our experience the ISU typically takes the majority of that time period and the following this period the best case scenario is that the Secretary of State will decide to take no further action in respect of the transaction, so that is good news.

On the right hand side this demonstrates that you may be in for a much longer assessment period if the transaction is called in. So as you can see on this slide there is an initial period of up to 30 working days from the point at which the transaction is called in. This period can be extended by a further period of 45 working days and, if the Secretary of State and the buyer agree, that period can also be further extended.

Another consideration to keep in mind when managing your NSIA-related risks is whether or not the buyer poses a risk to national security, the concern here being that if you have a higher risk buyer it may be more likely that the transaction will be called in by the Secretary of State or even subject to conditions later down the line. Unfortunately there is no checklist which parties can use to determine whether a buyer is or is not more likely to present any national security risks but the Secretary of State has given some guidance as to the range of factors that may feed into this assessment. This will include the characteristics of the buyer, who ultimately controls the buyer and whether the buyer has any ties or allegiances to states or organisations that are hostile to the UK.

In our view there are also some other characteristics that may give an indication that the buyer presents a lower risk profile, so for example does the buyer have a history of making passive or long-term investments which might indicate that it is a secure and established entity. Equally is the buyer well known to the UK government, does it have a longstanding, established and positive commercial relationship with the UK government?

A question that Sam and I are asked fairly frequently is whether the buyer's nationality or country of incorporation has any bearing as to its risk profile. There may for example be an assumption that if you are dealing with a US, an EU or even a UK buyer that these entities are not going to present any risks from a national security perspective. I think the answer to this point is that we cannot draw any definitive conclusions on the basis of the buyer's nationality alone and that there is certainly no form of safe harbour for the buyer from certain nationalities even if that buyer is a UK entity and this is corroborated from the data that we have from last summer and we have referred to earlier in this webinar which showed that of the 17 transactions that were subject to conditions or prohibitions, eight of these involved buyers associated with China but seven of these involved buyers associated with the UK or the US.

If you are a seller the buyer is ultimately going to sit on a spectrum of risk and it will be a question for you as to what you as the seller are comfortable with. To make this assessment you will need to obtain certain information from the buyer which will include confirmation as to who the ultimate controller of the buyer is and whether there are any parties that have interests in the buyer. It is also useful to confirm the extent of any government relationships or government links. For example if the buyer has any strong links with the UK, this can be a positive factor in your assessment, but if the buyer has links to any hostile actors that again will be a negative implication. It is also useful to understand the extent and outcomes of any of the buyer's previous notifications that it submitted under any foreign direct investment regime be that the NSIA or the foreign direct investment regime of another non-UK regime. In particular it is useful to understand whether or not these transactions have been called in for any further assessment or whether any remedies have been imposed in the context of previous transactions under these regimes as this may allow you to draw some degree of conclusion as to what may happen in your own transaction.

Ultimately having obtained this information you may reach the view that certain buyers present too great a risk for the transaction to be commercially viable and obviously this will be particularly important in competitive bid situations. However this is not solely a question of concern for the seller. As the buyer you may also need to be cognisant of your own level of risk and potentially factor this into your commercial negotiations with the seller. In some cases you may need to offer a premium price in the context of the sale to make yourself more attractive notwithstanding your higher risk. You may also wish to accept a greater degree of risk in transaction documentation with regard to any conditions that the Secretary of State will impose if it clears the transaction.

Sam: That takes us nicely, James, onto conditionality. So thinking about conditionality in relation to transactions involving the regime I have outlined on this slide here some of the key areas that we have advised upon, both in the scope of mandatory and voluntary notification situations. I think the first key question is what is the acceptable clearance phase? So going back to the flowchart that James helpfully walked us through, is it acceptable that we have phase 1 as a cut-off? So we will have completion conditional only upon a phase 1 clearance, so within 30 working days of the notification being accepted as complete, or are we okay with having a phase 2 possibility which we know is more open ended. We have the 30 working days from notification accepted as complete plus however many working days depending upon the call-in period, whether any questions are asked when the clock is stopped. So that is more open ended, are we happy with that open ended phase 2 clearance approach? What are the conditions going to be, what is acceptable in terms if the Secretary of State does impose conditions to enable completion, what is the materiality threshold, what is it that the buyer is going to accept going forwards as that is okay for me to still carry on with this transaction, how is that going to be negotiated?

A key provision that perhaps is a little overlooked sometimes is how the parties are going to co-operate to satisfy the condition. As James mentioned speaking about the mandatory notification requirements there is a good deal of information that the buyer would need in a mandatory situation which is going to sit with the seller or the qualifying entity and there needs to be that understanding this is going to flow to enable the condition to be satisfied and be clearly articulated and there are questions as well about timing, so how quickly once a document has been signed is the submission of a notification going to made. It may be the notification has already gone in, it may be that people have been very organised, they have run things in parallel and they have put this in already, it may be you want to have some wording in there to get in a couple of business days after signing. And then thinking about longstop dates, so if we have got this phase 2 period where we have got an elongation that is potential, we know that could be happening, are we going to have a longstop date that could serve to cut off an ongoing phase 2 investigation if that is just dragging on too long and what does that start to look like in terms of what is acceptable to the parties?

So within that context I just want to pick up on Secretary of State and the power that they have to impose conditions. From our experience of advising upon this it is apparent that the power gifted by the regime is broad, so the Secretary of State may where it reasonably considers the conditions are necessary and proportionate for the purposes of preventing remedying or mitigating the risk to national security, it may impose those conditions. There is a process of judicial review under the regime, we have yet to see a judgment on any review of conditions that have been imposed. I think we can expect to see perhaps more around that if we have more conditions being imposed that are particularly onerous but on the black letter law the Secretary of State has a broad power to impose effectively whatever conditions it believes are necessary and proportionate.

Now there are some conditions that we have already seen that I think are very unlikely to cause significant concerns from a buyer perspective, so things like information security safeguards, it may be a little bit of a pain but you can live them, they are not a showstopper when it comes to the transaction. There are other – and they may be potentially theoretical but they are still things that you may wish to be thinking about as a buyer – other conditions that if we are thinking the Secretary of State has this broad general power they may give rise to more material commercial issues for a buyer. So if a buyer has concerns that it has various interests in the UK and, you know, what if the Secretary of State was to put in place some kind of order which requires them to divest down existing shareholdings and existing interests they have, you know, that could be much more of a material commercial issue even if that is seen as a potentially theoretical outcome.

So where we find ourselves as with all transactions is we have the very seller-friendly approach whereby the buyer is going to comply with any Secretary of State imposed conditions to enable completion and at the opposite end of the spectrum we have the buyer-friendly approach whereby the buyer reserves the absolute discretion to reject Secretary of State imposed conditions.

So a think for a lot of transactions although it is going to depend upon the parties' bargaining positions, most transactions I think you would be looking to land on a mutually acceptable approach to this risk whereby materiality is somehow captured and where we have seen this done quite effectively is where there has been an upfront assessment assuming 'okay, let us all assume a worst case scenario'. So the transaction gives rise to national security concerns, okay, so that is our base case. What then are the likely conditions based upon what we have seen in other deals potentially that the Secretary of State could seek to impose to address these conditions? And then we have seen the parties effectively negotiate a list of specific conditions that would be acceptable to the buyer and would not be acceptable to the buyer and had transactions signed on that basis so there is a clear understanding with the parties that there are certain lines whereby if we were in this quarter, therefore the buyer, they will still move to complete the transactions, for others if it crosses over into this line which is about divesting of perhaps existing interests then the buyer is not prepared to accept that condition and will walk away from a transaction in that context.

So we have done a couple of transactions where that aspect, this point around conditionality/materiality, what is acceptable in terms and conditions, has required quite a bit of thought to get the parties to a position that everyone is happy with to move forward with the transaction.

I mean just to pick up on the point that I alluded to earlier, the point around co-operation to satisfy the condition, I think this does need to be spelt out really, really clearly and there be the understanding that this will be done appropriately because this is one of the potential blockers in terms of getting these conditions satisfied is that potential information gap. I think having the obligations and requirements really clearly articulated in deal documentation does mean that if for any reason there is a suggestion that perhaps one party is not doing what they should be doing you can then refer to that arrangement and draw attention to what is required. I think that is particularly important not just when the submission has been made to the ISU which you are in that call-in period where you are more likely to be getting perhaps quite detailed requests for information, it is at that point in particular, you know, you are well advanced down the line in terms of the assessment, you need what is now quite critical information from the ISU's perspective to help flesh out their theory of harm or to eliminate their theory of harm and that is where you really need the parties to pull in together really promptly to get those responses in and to get that condition satisfied and the deal over the line.

I think one point as well, just to flag in conditionality, is obviously we are focussing in the time available today on the National Security and Investment Act regime but obviously do not forget other conditions and timings and these also need to be woven together and factored in, so as I said NSIA is in addition to UK merger controls, so there could be merger control conditionality and there maybe other applicable investment screening and merger control regimes in other jurisdictions and as will be I think on everyone's radars we are seeing an increasing number of investment screening regimes entering into force worldwide. So we recently worked on a transaction where clearances are required in five different jurisdictions under investment screening regimes, that transaction has now been slightly recrafted and will be I think will be completing, due to complete in the next few months. In that time period, so a period of about six months, we have had two additional investment screening regimes enter into force whereby notifications are now likely in those additional jurisdictions. So if you are revisiting deals, if you are looking at transactions afresh, do not assume it is going to be the same jurisdictions in play as was before, you do need to take a second look at that just to make sure that nothing has been enacted in other jurisdictions that may catch the transaction you have planned.

I think that then takes us on to where do we go to where we go to next and what next for the National Security and Investment Act. As I mentioned at the very beginning of this webinar, I think the issue of voidness is one that is ripe for development and I think further guidance from the government will be very helpful in relation to that. I expect it is an area where we could also see the potential for perhaps litigation if parties have entered into arrangements which suddenly turn out to be void due to the application of the regime. Penalties and prosecutions, as I touched on before, I think are areas where we can watch this space and expect further developments.

In relation to the regime generally the government recently issued a call for evidence which pro's earlier this week and in this context the government is really looking to take stock. I think there has been some criticism of the regime that it casts the net very, very wide so if you think about more than a thousand transactions were assessed and actually only 17 gave rise to conditions or prohibitions, so quite a low rate of deals that you would perhaps say gave rise to, you know, material issues and yet a lot of transactions looked at to get to that point. I think the government is mindful of that, what they are looking to do is to ensure that the regime protects national security within the UK while minimising burdens upon businesses and in that context the government is contemplating making a number of amendments to the current regime and that would include – and James and I were on a call with a client when this came down the newswires via email and I mentioned it to him, it was apt to what we were discussing – an exemption of seven types of internal restructuring from the mandatory notification requirement and when we said this to the client they were... I think they even danced! They were so happy at this news because for them this idea that internal restructuring when really, you know, just move the deckchairs around, they could not see why that gave rise to any material national security risks.

So I think that is, that is a good news piece in terms of that feedback has been received by government, they are looking to think about how they can exempt not all restructuring but certain types of restructuring from that mandatory notification requirement and there is also potential then with regards to revising existing definitions of the notifiable activities. So if we are thinking about the activities as currently defined it is a case of refreshing, expanding, in some cases narrowing those activities to make sure they are capturing what they, from the government's perspective, should be capturing from national security viewpoint.

Just picking up on the current definition of AI, so Artificial Intelligence currently does not include generative AI. I do not think I have been able to scroll through LinkedIn in the last few months without seeing at least ten posts about generative AI. Generative AI is a very, very hot topic so it is perhaps unsurprising that the government is thinking about expanding the current definition of AI to make sure this captures generative AI.

Another couple of points to flag are the government is also considering adding new notifiable activities in additional areas, so we talked before about there being 17 areas of the UK economy that triggered the mandatory notification requirement, this would be adding a couple more onto that so we would have potentially 19 areas of the UK economy that gave rise to that requirement. And if we cast our minds back to the earlier slide, thinking about prohibitions, three of those five related to transactions involving semiconductors, so again it is perhaps no surprise to see the government is considering introducing semiconductors as a standalone additional area that would trigger a mandatory notification requirement and the government has outlined in its quarter evidence the activities it could be looking at in that scope will potentially reflect the national semiconductor strategy, so focussing for example upon design and intellectual property.

Another the government has flagged is critical minerals and in this context the government has indicated that this would potentially address activities by aligning with the British Geological Survey's awaited report on critical minerals. Critical minerals is an area which if you think more broadly around these sorts of investment screening regimes there are a number of regimes, for example France and Germany, that already have aspects that address transactions involving critical minerals, so again unsurprising to see the UK government looking to carve out a specific defined area which is going to trigger a mandatory notification requirement with regard to those aspects.

So in terms of where we are now then, I think what we have is this continuing evolution of national security investment, that regime, so it is certainly growing up. It has celebrated its second birthday and it is now heading off into, well, childhood, toddlerdom, whatever you want to call it! But it is continuing to evolve and I think that is only right because the whole purpose of the regime is to address national security risks so it is intended to respond to real world developments and we are seeing just that. We are seeing a review process which the government is required to undertake at periodic intervals and we are seeing this expected targeted expansion of the mandatory notification requirement. Generative AI, semiconductors, critical materials, they are all hot topics, they are all things that have been in the news, they are all things that are giving rise to concerns in different arenas in the last year or so, so it is not surprising to see the NSIA regime expanding to address those particular facets from a national security perspective. I think to go back to the point that James was making earlier, given we have this expanding regime, this evolving regime, I think it is really important that parties are aware that it exists and that it potentially applies to their deals when they are planning transactions and I think because it is evolving and expanding parties just need to bear in mind that this may not have been an issue a while ago but actually this now could be more of an issue for them.

So for example if you are thinking about a transaction let us say involving critical minerals, we now have a government indication that this is potentially a cause for concern. It is not mandatory but if you were thinking about doing a transaction now involving critical minerals you may want to on a voluntary basis notify that transaction and have completion conditional upon clearance before you proceed with that, just so you have that safeguard of having factored in NSIA and seeking de-risk it as far as possible.

So with that background in mind, and I think at this point cannot be emphasised enough, I think it is really prudent to undertake a National Security Act Investment analysis as early as possible and I think doing that just means that you can identify and flush out the issues. For most of the transactions that are looked at under the regime, as we have seen, the vast majority do not give rise to significant concerns and they are cleared at an early stage. I think from the statistics in the report it is something like 93% of transactions would be cleared at phase 1. So in that context the National Security Investment Act, it is about identifying the risks, identifying the issues and then I think insofar as possible looking to engage with how those can be slotted into the deal timetable to maximise the likelihood of promptly obtaining approvals that may be required in the context of the regime itself for the parties' arrangements.

I am conscious we have covered a lot of ground in that session and we have done so quite quickly but we have managed to leave some time for questions, so what I will do very quickly is just open up the question box here. We have a few questions, I think I will pick the more difficult ones and I am going to give this to James, so... oh James, we have one here. Someone is asking for a friend – if you think that you might need a retrospective validation, how would you go about getting one of those?

James: Yeah, so I think as you made clear earlier, Sam, it is possible to retrospectively validate your transaction although it is by no means a position that anyone wants to be in. So in terms of how you would go about obtaining approval retrospectively in respect of a transaction, there is a specific form that you need to fill in and submit to the ISU. It is very similar, very, very similar to the actual mandatory notification form so you are going to need to get all of the same information, the same considerations apply to ensure that you have a detailed understanding of, you know, what the qualifying entity does to that same level. One slight difference to the usual mandatory notification form though is that you are... you need to provide a reason or an explanation as to why the transaction was not notified originally, so... but otherwise the same considerations apply in terms of submitting the relevant... obtaining the information and submitting that information to the ISU.

Sam: Thank you. Okay, so next question is going back to that very helpful flowchart that you shared, in terms of the phase 1 period, up to 30 working days, can you expedite that, can that be done faster, is the question.

James: Yeah, so unfortunately, and to be the bearer of bad news, there is no way of expediting that period. There is, as I said, there is this, a timescale, there is actually a timescale in place whereby the ISU will review that notification and that is a period of 30 working days. In our experience, and as I alluded to, we have tended to find the ISU uses the majority of that period. It is not always the full 30 working days, sometimes it can be a few days before, but unfortunately the parties are somewhat in the hands of the ISU on this aspect, so I think the best approach to when you are planning a transaction is to ensure that you present as complete a notification as possible so that the notification is confirmed to be accepted as complete as soon as possible by the ISU so you can get that clock ticking as soon as possible.

Sam: Thank you. Okay, I will field this one. So we have a question here about are we aware of any asset deal notifications where there is an acquisition of land in sensitive areas with sensitive tenants, so any asset deal notifications. We are... I'm not... in terms of asset deals. One of the issues with the regime is it is not like UK merger control regime where you have an announcement by the CMA for example where they are investigating a particular transaction and that is very transparent and you have full decisions that are published with theories of harm etc. The ISA regime... sorry, the NSIA regime, the ISU does not publish routinely when it is opening up investigations. We do have information about final orders that have been issued and in the context of asset deals I have not seen any that are related to acquisitions of land. So where we have seen asset deals they have been licensing of intellectual property, so there have been concerns about certain technologies being acquired by a third party where those technologies could be used for perhaps military purposes, but in terms of land we have not seen anything covering that as yet.

And then I think to pick up on a related question to this is if you acquire an asset with a sensitive tenant in situ, will consideration be had to the landlord's access to the property and information is limited. I think given that because it is an asset acquisition any notification will be on a voluntary basis, I think you would have to, if you wanted to look to de-risk that by having a voluntary notification and clearance, I think you would have to do that on a sort of best foot forward basis with the ISU and set out the reasons why certain information was not available and if the ISU had further questions on the back of that I think you would have to engage with that at the time. But I would anticipate that depending on how you structure the transaction you should be able to cover a good deal of the information about landlords' rights etc which would be presumably acquired in the context of the transaction and relevant to the assessment so it may be less of an issue in that context.

Okay, I'm conscious we have got a few more minutes in terms of time for questions. Question about... okay, James, if you are up for this one – informal guidance. So can parties approach the ISU and seek informal guidance about whether their deal is likely to give rise to concerns?

James: Yeah, so as I mentioned in my section, you can approach the ISU where there is uncertainty as to whether a transaction triggers the mandatory notification requirement, so you can find out from the ISU 'do I need to notify my transaction?' What you cannot do is seek guidance, informal or otherwise, as to whether or not the transaction has... gives rise to any national security concerns. There is, as Sam alluded to earlier, you have information on final reports but there is not any information as to what... the security concerns that the Secretary of State identified in these transactions. So unfortunately you can get understanding as to whether you fall within the regime but you will not get any guidance as to, you know, whether the transaction gives any national security concerns.

Sam: Thank you. We have got a couple more questions that are coming in on this list. There is one... so in terms of negotiation... I have a question about how much negotiation with the ISU is available on the nature and extent of the conditions that might be imposed. So I am, I am happy to respond to that one. So in terms of nature and extent of conditions, I think the reality is when we think about call-in period, if you are going past that initial 30 working day of call-in and you are moving into that 45 working day extension time period then I think you are getting to a place where once you are into that 45-day extension you are thinking about conditions. And in our experience where we have spoke to ISU about these sorts of issues there is certainly the indication that there will be a discussion around the nature and extent of conditions.

I think one of the issues around conditions is understanding precisely what the theory of harm is and I think that is something that needs to be understood by the parties so that they can understand, 'okay, this is the concern, this is what we need to be doing to address that.' But I do think it is possible to have those conversations and to offer different potential solutions to the issue and I think when you are offering different potential solutions you do not have that question about, you know, what is going to be necessary, where it is going to be proportionate in that context. So I think there is room to have discussions and to have conversations about what the potential outcome could be from this process but ultimately this is going to be the decision of the Secretary of State so it will be for the Secretary of State to decide based upon the information available what condition they believe to be appropriate in the circumstances. So the parties can certainly feed into that discussion and outline and advocate for a range of different solutions but it is not in their gift to tell what that is going to be, that is going to be the Secretary of State that will be making that decision.

Just having a quick look through, I had a quick question, James, if I may, on notification and the form. So if the form, go to the ISU and they say it is not complete, what happens then?

James: So unfortunately with the... if the notification is not complete, as I set out on my earlier timeline, the ISU will typically have that period of five working days in which it will confirm the notification, when the notification is accepted as complete. The ISU may in certain circumstances raise further requests for further information or clarification before confirming that it is complete but otherwise if you get to the position where the notification is rejected – I should stress that there have only been very few notifications which have been rejected on the basis that it was incomplete – you may need to submit the notification which includes, you know, contains the correct information. So that has an impact on the overall deal timetable, so it goes to the point that, you know, I was making earlier that when you are thinking about, you know, ensuring that you have got the timetables as locked down as possible, ensuring that you have sufficiently... gathered sufficient information to submit as complete a form as possible, de-risks that process. You are able to get confirmation from the ISU as soon as possible that the notification is complete and avoid any unnecessary delays.

Sam: Thank you. And one final question on – I am assuming this is someone who is looking to avoid having to notify an internal reorganisation on a mandatory basis – when do the government's planned changes come into force? That is a really, really good question, so the call for evidence closed this week. I think we can now expect the government to sift through the various responses it has had to that. For my money there will be this shift around the inclusion of internal restructuring in the mandatory notification space. I think they are going to have to streamline that because there are clearly transactions that are being caught there that do not need to be looked at. What we end up with I think will be a tighter, more clearly drafted scope. When that comes into play though I think that is something that we are going to have to wait and see. It will be I believe in primary legislation so it is not going to be a change to the Act, so that should mean it can be done quite quickly. Obviously they have got a number of things happening in the political landscape this year, potentially including a general election, so there may be a question about where firepower is focussed and energies are focussed but I would hope that we would have something emerging during the course of this year that gives some more clarity around the government's intended positions and developments.

I think that then that we have, I think we have exhausted our question bank there, so if there is anything else sort of crops up, comes to mind following this webinar, James and I would be delighted to answer any questions that you may have regarding the regime and any assistance we can provide, you know, please do let us know. But in the meantime, thank you very much for joining, we hope that has been of interest and we look forward to speaking and meeting you soon at a future ThinkHouse event.

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