The introduction of the National Security and Investment Act 2021 (NSI Act) has given the Government the power to investigate and intervene in specific commercial transactions for the protection of national security, and to provide UK companies with transparency and certainty in relation to transactions which may ignite government interest.
Certain transactions involving a lender or borrower and security over certain assets may fall within the scope of the NSI Act. Where this is the case, special care must be taken to ensure the validity of the transaction.
How can a transaction be affected?
Only transactions completed after 12 November 2020 that involve the acquisition of a “qualifying entity” or “qualifying asset” fall within the scope of the NSI Act. The entity or asset must be from, in or have a connection to the UK and the transaction result in the acquirer gaining a (or increasing their) level of control over the entity or asset.
Where a transaction meets the criteria, notification to the UK Government may still only be voluntary. Mandatory notification will be required where the transaction relates to one of 17 economic areas that have been identified as sensitive to national security. If the transaction falls within the mandatory notification regime, the acquirer must obtain consent from the Secretary of State before completing the transaction.
The voluntary notification system is in place for trigger events that are not subject to mandatory notification requirements. This is in place for parties of a transaction to raise any national security concerns. The Secretary of State also has power to ‘call in’ transactions for assessment where there is a suspicion of risk.
How secured lenders might be affected?
The main consequence of the NSI Act for lenders relates to the enforcement of security over shares. Either this will be by the exercise of voting rights by the lender or upon the disposal of the shares by the lender. If the enforcement falls within the mandatory notification requirements provided by the NSI Act, then the transaction will need to be notified to the Secretary of State.
The impact of this is delay in enforcing the security. The worst outcome is that the Secretary of State may not allow the disposal of the shares or may choose to impose conditions on the disposal of those shares. These conditions may be strict enough to decrease the share value deterring potential buyers.
A lender could make a voluntary notification of a proposed disposal of security to pre-clear a proposed disposal, but this cannot be done until the disposal is “in progress or contemplation”. The taking of security does not constitute progress or contemplation and clearance from the Secretary of State can’t be obtained at the time the lender takes the security, only prior to enforcement.
It may be that enforcing security over land, tangible assets or certain types of intellectual property could also be captured. Currently, there are no mandatory notification requirements for this, but the Government still retains the right to ‘call in’ the transaction.
What steps can lenders take?
Undertake detailed due diligence to understand whether entities and assets you are financing have the potential now, or in the future, to be operating in areas of national security concern.
Restrict future acquisitions without lender consent, but similar restrictions should be considered for any borrower group where acquisitions of entities or assets, might fall within the ambit of the NSI Act.
Take care in taking and exercising voting rights in the context of holding share security in order to stay within parameters of carve out under NSI Act.
Explore other enforcement methods. The NSI Act allows administrators or creditors of a company in insolvency proceedings to exercise rights without triggering a change of control review, whereas the appointment of a liquidator or receiver does not receive the same carveout.
To discuss the issues raised in this article in more detail, please get in touch with our team of expert Banking & Finance lawyers.
