National Security and Investments Act

The National Security and Investment Act (NSI Act) is designed to protect national security. It sets out a mandatory notification regime for buyers of shares with a national security element and a voluntary notification regime for buyers of all other shares and assets, including real property, chattels and IP. Corporate, commercial and property colleagues need to be aware of this.

The NSI Act has heinous penalties that include voiding the transaction, imposing large fines and criminal sanctions for the client (and care of the Proceeds of Crime Act, potentially for you as advisers as well in certain circumstances). It has very wide application and it therefore has to be considered in every deal. In many cases it won't be applicable, but you must form that view advisedly. You should not simply assume that the Act does not apply, nor should you only undertake some very brief enquiries. Where it does or may apply, we expect the timing and structuring of deals may be materially affected. For example, asset deals, split exchange and completion (to allow for NSI Act clearance) pre-sale restructuring (to deal with any element with a national security angle separately) may become common. Clients will want to ensure the NSI Act can do as little damage as possible to the deal at hand.

You may wish to review this excellent article by our colleague, Alexandra von Westernhagen.

Types of notification

If you fail to report a notifiable acquisition of shares that provides control of a relevant entity and where there is a connection to the UK, then the transaction is void and you may commit a criminal offence and be liable to fines. As a result, you must go through the clearance process and you must know what to look out for.

A transaction must be notified if the shares to be sold confer a defined level of control on the buyer and the entity trades within any of the 17 sensitive sectors. Alexandra's article sets out more detail as to both tests. If these tests are met, the deal must be notified.

If these tests are not met, then the buyer may still choose to notify, as the Secretary of State has five years in which to investigate and possibly void the transaction. The Secretary of State will use that power where, in any sense, National Security is at stake. See "Assessing asset deals" below.

Assessing share deals

You must assess every share deal with a UK nexus you work on. While the obligations fall on the buyer, the seller and the target will be impacted if the deal is later voided, so you cannot ignore the Act in any share sale retainer.

You have the following options:

1. You alone deal with the matter

1. You review the NSI Act notification provisions.
2. You explain them to the client.
3. The client confirms that the target does not in any way operate in the 17 sensitive sectors.
4. You agree with the client that the target does not in any way operate in the 17 sensitive sectors.
5. Or, where applicable, you check that the transfer is not of control, as per the NSI Act.

This is for simple matters, where you are sure you know enough about the client's business and the NSI Act.

1. The client appoints an external counsel to advise on the NSI Act

1. You ensure you receive a copy of their advice that no report under the NSI Regime is needed.
2. You explain to the client that Keystone is not advising on the NSI Act and that we'll rely entirely on the advice the client is taking elsewhere.
3. You do not advise on the NSI Act.

This is for any matter, but usually only relevant where there is a concern that the NSI Act may apply.

1. You ask Alexandra to advise whether the matter is reportable under the NSI Regime.

This is for any matter, and the preferred route. For simple matters, for a fixed fee of £450, she will probably be able to advise that the target does not fall into one of the 17 sensitive sectors. If so, that will be the end of the matter. Where there is a risk that the NSI Act may apply, she will let you know asap and work with you to resolve the matter. As the fixed fee won't apply, she will agree a suitable way of charging with you.

The 17 sensitive sectors are:

• Advanced materials
• Cryptographic authentication
• Suppliers to emergency services
• Advanced robotics
• Data infrastructure
• Artificial intelligence
• Defence
• Civil nuclear
• Energy
• Synthetic biology (formerly known as engineering biology)
• Communications
• Military and dual use
• Computing hardware
• Quantum technologies
• Transport
• Critical suppliers to the government
• Satellite and space technology

Assessing asset deals

Assets deals are not subject to mandatory notification, however where the Secretary of State wishes to investigate the matter, the deal can be unwound within five years of completion. The only way to avoid this is to notify and get clearance.

You will need to assess the risk of there being a national security element to your asset deal. A link to the 17 sensitive sectors is the most likely indicator, but you can't ignore other national security factors. As above, Alexandra can offer a fixed-fee service to advise that the asset deal is unlikely to be "called in" by the Secretary of State, but in reality, you are probably best just phoning her to discuss the asset deal. It will be rare for a €˜normal' asset deal to be caught. (A normal asset deal, would not include a deal that (but for a clever pre-sale restructure to avoid the NSI Act) would have been a share deal and would have been caught as such.)

Retrospective effect

Unusually, the NSI Act applies to deals done from 12.11.2020, even though they could not then have been notified.