The UK government has published the first of its Market Guidance Notes (MGNs), answering questions and providing advice based on the first six months of the National Security and Investment Act 2021 (NSIA). The MGNs come shortly after the first prohibition under the NSIA was published (see our earlier post).
As noted in our review of the first five months with the NSIA, the past several months of practical experience have highlighted some issues, such as the broad scope of the NSIA – resulting in a high number of precautionary notifications, concerns about the lack of transparency in the review process, and a lack of clarity on the application of the NSIA to financing transactions, contractual rights and indirect acquisitions.
Some key issues resolved – but questions remain
The NSIA was intended to be an efficient and proportionate screening regime, allowing for fast clearances and minimising the burden for businesses. However (as discussed in our earlier post), while certain aspects of the NSIA have worked well, the past several months have equally highlighted a number of hurdles to achieving this goal. The MGNs help smooth some of these road-bumps and better align the operation of the NSIA with the UK government’s goals – but some issues and uncertainties still remain.
Internal reorganisations still in-scope
One practical issue with the NSIA is that its broad jurisdictional scope has driven a significant number of precautionary notifications, and mandatory notification requirements for internal reorganisations have accounted for a material proportion of the filings that we have made to date.
This is not set to change with the MGNs, which confirm that internal reorganisations are notifiable, even where the ultimate beneficial owner remains the same. While the government acknowledges that this will capture a number of acquisitions that are ‘simply a product of internal corporate restructuring and efficiency’, the aim is to ensure that the NSIA still captures those ‘rare cases’ where the acquisition of control by a person in the same business group raises national security risks, and this risk may be present even where the ultimate beneficial owner is unchanged. While the reaffirmation of the Government’s thinking here is welcome, the MGNs do not alleviate the burden on business (or the Investment Security Unit, ISU) from such precautionary filings for internal reorganisations – an issue which seems an anomaly relative to comparable regimes.
Transparency and accountability – the ISU still remains something of a ‘black box’
Concerns have been raised about the lack of transparency and accountability in the ISU review process, with experience showing that the ISU is relatively anonymous (without a clear case officer allocated to a file) and can be reticent to provide parties with information on timeframes as well as any insight into the substantive appraisal of the case (even following the issuance of a “call-in” notice). The MGNs do not attempt to address these concerns and provide no substantive insight into the manner in which the ISU will engage with parties during the review process.
The MGNs clarify that there are no statutory requirements for the government to publish information about individual acquisitions prior to a final order being made; although the MGNs equally note that that there is nothing to prevent the ISU from making such announcements. Ultimately, it will be up to the discretion of the ISU whether to give information to stakeholders (and what level of information to give) prior to a final order being made. While the MGNs do give examples of situations where the ISU might provide information prior to a final order (such as where the parties disclose this information or where the acquisition is in the public domain and the SoS considers it in the public interest to do so), further clarification on the situations in which the ISU could provide less substantive information (such as expected timeframes) would be useful.
Financing transactions – granting security over shares unlikely to be notifiable, but enforcing security might be
Financing arrangements (such as loan and security agreements, the issuing of debt instruments or financing of underlying transactions) can in principle fall within the scope of the NSIA. This has led to uncertainty about the application of the NSIA, so the MGNs’ public clarification on how the NSIA will apply to the granting and enforcement of security over shares is welcome.
The MGNs confirm that the granting of security over shares will not require mandatory notification, as long as title to the shares is not transferred to the lender (or its nominee), or as long as the granting of security doesn’t otherwise confer control.
However, the enforcement of security over shares involving the appointment of receivers may in some specific scenarios require mandatory notification. So too, in an insolvency situation, might the appointment of a liquidator over the shareholder entity. The MGNs explain that, where a liquidator or receiver has voting rights over the shares in a solvent entity, mandatory notification may be required. It is unclear whether this example provided by the guidance is illustrative or exhaustive and its application in practice will require careful consideration.
Contractual rights will not usually trigger mandatory notification
One of the trigger events under the NSIA – including for the purposes of the mandatory notification regime – relates to the ability to block or pass a class of resolutions regarding the affairs of an entity. Given that shareholders’ agreements will typically contain veto rights, there was uncertainty over the extent to which such contractual rights could constitute a trigger event for the mandatory regime under the NSIA.
Surprisingly, the MGNs clarify that such contractual rights do not – as a general rule – confer the ability to block or pass a class of resolution for the purposes of the mandatory regime, although (either alone or in conjunction with other rights) they may give an acquirer material influence over the policy of an entity and therefore allow the government to call in a transaction for review. As such, the MGNs provide welcome clarity that this threshold is only likely to be engaged where a company has set alternative thresholds to those that usually apply for ordinary and special resolutions under UK company law.
Indirect acquisitions of control
The MGNs confirm that indirect acquisitions of control may trigger a mandatory filing where there is an unbroken chain of majority stakes down to an entity of interest. Additionally, the MGNs illustrate this principle by giving examples of situations in which the acquisition of indirect control might also be a qualifying acquisition that can be voluntarily notified and called in for scrutiny, even where they are not subject to mandatory notification requirements.
Other welcome clarifications
Single notifications possible in certain situations
The MGNs have provided welcome clarification on the situations where a single notification may be possible, including by indicating that a single notification can be used where multiple qualifying entities are being acquired by one acquirer from one seller, and in some internal restructuring scenarios.
Additional guidance for new build gas and electricity
In addition to the MGNs, the UK Government has published guidance on how the NSIA will apply to new build downstream gas and electricity assets. This guidance explains when you can voluntarily notify the government about qualifying acquisitions relating to new build downstream gas and electricity infrastructure.
Further guidance welcome
The MGNs are only the first set of market guidance publications on the operation of the NSIA, and further MGNs are foreshadowed for early 2023. We look forward to this guidance, and particularly to additional guidance on: (i) the level of engagement that stakeholders can expect from the ISU prior to issuing a final order (especially with respect to review timeframes); and (ii) the application of the NSIA to indirect acquisitions of minority control.
For further information, please contact:
Nicole Kar, Linklaters