The National Security and Investment Act 2021 came into force on 4 January 2022, although it can apply to transactions completed since 12 November 2020. The act paves the way for a new regulatory landscape for overseas and domestic investors and increases the UK government's ability to scrutinise investments on national security grounds.
It includes mandatory and voluntary notification regimes that depend on the facts of a transaction and has been drafted with a broad scope to catch a wide variety of deals.
With more than six months under its belt, where are we now?
Mechanics of the regime
The UK government can call in acquisitions of control over entities or assets (trigger events) where it reasonably suspects there is or could be a risk to national security as a result of a transaction. It must then assess the risk and, if necessary, impose remedies or prohibit the transaction.
Whether an acquisition will be caught depends on the level of control being acquired over an asset or corporate entity.
Mandatory regime
For entities, acquiring shares and voting rights above certain thresholds may result in a mandatory filing requirement, even if there are no national security concerns. For example, the acquisition of voting rights or shares so that the percentage of rights or shares increases is set as follows: from 25% or less to more than 25%; from 50% or less to more than 50%; or from 75% or less to more than 75%.
The entity over which control is being acquired must be active within one of 17 key sectors, including transport and defence. The target entity must also be a UK entity or a foreign entity that performs activities in the UK, with only a limited set of activities being caught by a foreign entity supplying goods or services to persons in the UK. Acquisitions of assets, including land, are not subject to mandatory notification.
There are significant penalties for non-compliance. As well as remaining exposed to call-in by the government, transactions that are not duly notified will be automatically void and the acquirer will be exposed to significant fines and/or a prison sentence. The fines for those transactions that complete without mandatory clearance will be the maximum of the higher of 5% of turnover and £10m.
Voluntary notification
There is a voluntary notification process for trigger-event transactions (for qualifying assets and entities) that are not in one of the 17 key sectors but where there may be a national security issue. As to what constitutes qualifying entities or assets, the new regime includes land and tangible property and also ideas, information or techniques such as databases, algorithms, formulae and software.
As this is a voluntary regime, transacting parties can choose not to make a notification but they risk a subsequent call-in for review where the government reasonably suspects that there is or could be a risk to national security as a result of the transaction. This power lasts for five years post-closing, which can be shortened to six months after the secretary of state becomes aware of the trigger event.
Impact on the real estate industry
Although pure land deals do not fall within the mandatory regime, there are still possible implications for real estate. The most important flag for real estate deals is whether the property is 'in proximity to a sensitive site', such as critical national infrastructure sites or government buildings. If so, a transaction can fall within the voluntary regime but there is little guidance as to what comprises a sensitive site. Despite this, government guidance suggests that it rarely expects to intervene in asset transactions.
The 17 key sectors that have been identified by the new regime as potentially raising national security issues include telecoms, data infrastructure and energy. Although not clear from the act itself, it seems unlikely that a real estate deal involving a purchase or lease of a property with telecommunications equipment, or an electricity substation on site, would potentially be caught by the regime. The government's intention is not to put unnecessary barriers in the way of routine unproblematic transactions.
Where are we now?
On 16 June 2022, the Department for Business, Energy and Industrial Strategy published its first annual report under the act.
The report covers the period from the commencement of the act until 31 March 2022. It therefore provides a helpful, if somewhat limited, glimpse into how the regime has been working in its early months.
Key takeaways from the report are as follows:
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There have been more than 200 notifications, the majority of which have been mandatory.
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There have been 17 call-in notices given, 13 of which followed a mandatory notification.
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The five most common areas for mandatory notifications have been: defence, military and dual use, critical suppliers to government, artificial intelligence and data infrastructure.
For the most part, the report reflects practical experience of the regime. Before being fully enacted on 4 January 2022, and while going through parliamentary approval, the government performed an impact assessment to estimate the volume of notifications it expected to receive (1,000–1,830 per year) and the call-in notices it expected to issue (70–95 per year).
While the report notes that it is still too early to draw conclusions based on three months of data, the above figures may suggest that the new regime (at least initially) is proving to be less burdensome than anticipated.
For the real estate industry, call-ins for asset deals are still rare and the only two publicly announced call-ins have been for 'entity' deals. It is not possible to know if any asset-only deals have been called in from the information that has been made public so far. However, investors still need to bear in mind the notification obligation for deals in the key sectors and the risks of a call-in more generally, particularly where the property is in proximity to a sensitive site.
Jane Dockeray is a senior associate at Hogan Lovells
Contact Jane: Email
Ingrid Stables is a senior knowledge lawyer at Hogan Lovells
Contact Ingrid: Email
Related competencies include: Acquisition of assets, International/domestic investment, Real estate industry