Why that group restructuring might not be as straightforward as you think: reorganisations remain in scope of the National Security & Investment regime, for now

The National Security and Investment Act 2021 introduced a right for the government to scrutinise and intervene in acquisitions which might pose a risk to national security. Transactions taking place within any of the 17 listed “sensitive” sectors need to be notified to the government in advance of completion and could be subject to call in and potential blocking by the government. Whilst most of the transactions that hit the headlines are high-profile deals involving Russian or Chinese investments, or in sectors currently getting a lot of press attention such as semi-conductors and AI, the Act needs to be considered with every UK transaction, whether a sale to a third party or a “simple” group reorganisation. (It even potentially applies to R&D licences and acquisitions of real estate, but that’s for another day).

The broad scope of the regime has, understandably, been criticised, as heavy handed and causing unnecessary delays – most recently in industry responses to the government’s latest consultation, with many repeating earlier calls for reorganisations to be taken out of scope of the regime. The government has previously signalled its intention to amend the rules in this area, but in its response to the latest consultation (Response to the Consultation) has made changes to some of the sectors, but has not addressed the issue or group reorganisations.

So, advisers still need to be alert. Particularly given that the NS&I rules apply even:

• to UK only transactions (with no foreign entities or ownership);
• to internal reorganisations regardless of whether the ultimate holding company/owner remains the same (so potentially hive-downs, share-for-share exchanges and debt-for-equity swaps); and
• even if there are no real conceivable national security concerns – a transaction will be in scope purely on the basis that it falls within one of the 17 sensitive sectors listed in the legislation.

Some of the categories in the affected sectors are very wide (even with the proposed changes) and can catch clients and advisers out. For example, if the target has subcontracts with the MOD to supply services even where they has no military use (like catering or cleaning) the business as a whole could still fall in scope of the defence sector because the target has access to defence facilities. Clients are often, understandably, unaware of this, and will simply answer “no” to the question of whether they operate in any of the 17 sectors, or otherwise think the transaction poses a risk to national security. Advisers need therefore to know to ask those very specific questions of the client, as early as possible in the process.

Some practical advice:

• understand the risks: sanctions for completing an acquisition without approval can be harsh. Its potential criminal liability, and ultimately the transaction can be unwound. If the organisation precedes a third-party sale, then consideration of the Act becomes even more critical; and
• build in sufficient time to deal with the issue, in terms of assessing the risk and the notification process if required. Although we’ve seen relatively quick responses from the government on submissions, gathering all the required information for the notification can be time-consuming. You are still looking at a delay of a few weeks even in straightforward cases.

Going forward, it is the government’s stated intention to remove certain internal reorgs from scope of the regime, but we await clarification as to precisely what this will mean. The consultation focussed on narrowing certain sectors, and introducing a new water sector (a sector close to the heart of all residents of Tunbridge Wells and surrounding areas….). So, we are expecting (hoping for!) the government to take most internal reorganisations out of scope, but we don’t yet have a timeframe for this, nor do we know exactly where they will draw the line. It doesn’t look like there would be a blanket exemption. In which case, we may still need to analyse the risk for all internal reorganisations. The government has previously been keen to give itself a lot of freedom to decide on what constitutes a risk to national security, for so it will be interesting to see what comes of this.