FDI step change: UK unveils NSI Act

March 2022  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

March 2022 Issue

It is difficult to overstate the importance to a country of having oversight of all foreign direct investment (FDI) entering its domain – its origin and intent, as well as potential drawbacks for the host economy, both economic and non-economic.

In a move designed to beef up investment screening in the UK, a new regime with standalone powers for the review of investments emanating from foreign shores has been unveiled: the National Security and Investment (NSI) Act 2021, which came into force on 4 January 2022.

The NSI Act replaces the existing public interest merger regime provisions of the Enterprise Act 2002 for transactions with national security considerations. For entities within its scope, the Act requires a review of the timeline into deal planning, alongside other applicable regulatory approval processes, such as merger control, and potentially across multiple jurisdictions.

“The legislation represents a step change in investment screening in the UK,” says Nicole Kar, a partner at Linklaters. “While many UK allies have had FDI screening in place since the 1970s, with its first standalone foreign investment regime the UK joins the major leagues in terms of international M&A reviews, alongside the US, Canada, Australia, Germany, France and Italy.

“The Act has no safe harbours or de minimis thresholds, applies equally to UK and overseas investors, and captures deals even with a limited UK nexus,” she continues. “The 1800-plus estimated number of yearly notifications is truly eye-catching and is in stark contrast with the previous regime, with only 16 having been reviewed on national security grounds in the almost two decades since 2003.”

The overall intention of the NSI Act, suggests Ms Kar, is to turn national security screening of M&A deals from being essentially reactive for largely high-profile defence deals, into an expansive informational regime where the UK government is proactively informed about M&A in sensitive sectors.

“The new regime seeks to tackle concerns around national security that have been present for years,” adds Sofia Platzer, managing associate at Linklaters. “In 2015, the UK government’s ‘National Security Risk Assessment’ concluded that national security threats were increasing in scale, diversity and complexity. Following this, in 2017, a green paper concluded that the UK’s existing enforcement toolkit was inadequate to address evolving national security risks.”

More recently, concerns over issues such as sovereignty and opportunistic acquisitions of undervalued businesses in the midst of the coronavirus (COVID-19) pandemic reinforced the perceived need for increased foreign investment controls in the UK, thus the introduction of the NSI Act.

Solutions and sanctions

Under the UK’s new NSI Act, numerous powers are available to screen FDI that evokes national security concerns, including the ability to apply conditions to UK corporate transactions, which may have a significant impact on deal timelines, or to block deals entirely.

“The NSI Act creates a hybrid regime with a mandatory, pre-closing regime enabling the UK government to scrutinise, and potentially block, transactions in 17 sensitive sectors and a voluntary, call-in system for all others,” explains Ms Kar. “The NSI Act will capture a very broad range of transactions, including minority shareholding acquisitions, where the acquired shares or voting capital is as low as 25 percent, or lower where there is a right to pass or block resolutions of a company.

In terms of penalties for non-compliance with statutory obligations, these include fines of up to 5 percent of worldwide turnover or £10m, whichever is higher, and up to five years’ imprisonment.

“These sanctions will apply to breaches of the mandatory notification obligation and also instances of non-compliance with interim orders and information requests,” says Ms Platzer. “Transactions covered by the mandatory regime which take place without clearance will be legally void – thereby creating risks for buyers and sellers – although the UK secretary of state will have the power to retrospectively validate transactions.”

Make or break

In summary, the NSI Act represents significant regulatory change for transactions with a UK ‘nexus’ – legislation which is expected to go a long way toward reinforcing the UK’s national security posture.

“In the short term, the radical overhaul in the UK’s approach to foreign investment screening may be off-putting to investors reluctant to blaze the trail with a fledgling agency,” suggests Ms Kar. “But the UK government has been clear that its aim is to introduce a proportionate and efficient approach to screening which ensures the UK remains a global champion of free trade and an attractive place to invest.”

That said, the Investment Security Unit (ISU) – which administers the NSI Act – has the capacity to make or break the new FDI regime, given the pressure it will be under to demonstrate its efficiency, as well as fulfil the Act’s aspiration to clear the majority of deals in 30 working days or less, especially non-problematic transactions.

“The NSI Act has retroactive effect, with transactions closing on or after 12 November 2020 technically having a sword of Damocles hanging over their heads,” concludes Ms Platzer. “So far, this does not seem to have acted as a significant deterrent, with public and private UK M&A remaining buoyant.”

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Fraser Tennant