• Approval from UK regulators – The notification form requires parties to state whether the transaction is being notified to any UK regulator. This includes the CMA with respect to merger control. This is normally a yes or no question. However, the fact that the transaction is being notified to the ISU may change the strategic approach to merger control. This is due to possible concerns that the ISU may share information with the CMA under their information sharing obligations, as outlined in the MoU, resulting in the CMA enquiring about the transaction. Accordingly, some parties have provided an optional explanation through a ‘Briefing Note’ to the CMA’s mergers intelligence committee detailing why the transaction is not also being notified under the competition regime to alleviate any concerns the CMA may have.
• Structure charts – In our experience, fully understanding the structure of the transaction and the acquirer is one of the ISU’s key concerns. Three structure charts are required as part of the notification ‒ the structure chart of the acquirer and the pre-acquisition and expected post-acquisition positions of the target company. These are important for the ISU to fully understand the ownership structure of entities and assets before and after the acquisition has been completed.
  
  Structure charts need to be in a chart/diagram format, highlighting the ultimate beneficial owner or controller. The post-acquisition chart should also provide information about the entity that is actually acquiring the target company and where it sits within the chain or group. Where possible, information about subsidiaries should also be included. Each structure chart must include details of all shareholders who have share ownership or voting rights of 5 per cent or greater, containing their full name, percentage of ownership, details of voting rights and nationality (or country of incorporation if it is an entity).
  
  Without this information, a notification may be rejected as there might not be enough information for the government to decide whether to call in or clear the acquisition.
• Information about the acquirer’s board of directors – The notification form requires full information to be provided about each member of the acquirer’s board of directors or equivalent. This includes the person’s full name, complete date of birth and position held within the acquirer as well as whether the person is classified as a politically exposed person (PEP).²
• Other relevant information on the acquisition – This is optional. We generally advise parties to take a transparent approach and to provide information about the purpose of and reasoning for the acquisition, as well as the post-acquisition plans of the acquirer relating to the qualifying entity. Sometimes, it is appropriate to explain why the transaction would benefit the UK economy and not pose a risk to national security. It is beneficial to provide any supporting information that can give the ISU an accurate picture of the effects of the transaction.
• Key dates – Specific dates of completion and other dates relevant to the transactions need to be provided in full format (DD/MM/YYYY), even if approximate.
• Government notification response – Generally, the government will inform the parties within three to five working days whether it has accepted or rejected the notification. If the notification is rejected, the Secretary of State must, as soon as practicable, provide reasons for the decision to the parties in writing. When the notification is clear, complete and unlikely to raise national security concerns, the ISU will generally issue its clearance decision within the 30-working-day assessment period. In our experience, a clearance decision is generally given, on average, within 20 working days of the notification being accepted. However, the ISU does not give an update on the progress of its assessment during this time. Clearance decisions are short-form and do not contain any analysis of the considerations undertaken by the ISU.

Other important aspects

• Potential notification (or re-notification) due to internal reorganisation or restructuring – If a new entity is created for the transaction that results in the ownership going through a different corporate chain, it may become mandatory to notify or re-notify the transaction, even where the ultimate beneficial owner remains the same or the qualifying entity is within the same corporate group. This would particularly be the case where it results in a change in the level of shareholding. A separate notification may also be required, for what is essentially the same transaction, where a restructuring or reorganisation may be undertaken in anticipation of a divestment. This is because such developments could be considered a ‘change of control’ under the NSIA.
  
  The fact that the NSIA captures reorganisations or restructurings means that there is a need for more careful drafting of deal documentation. Companies should consider NSIA implications at an early stage when planning any reorganisation or restructuring that involves the integration of the qualifying entity. For example, if, post-acquisition, the intention is to move the qualifying entity to another subsidiary within the corporate chain of the organisation, a new notification may become necessary. Hence, it is paramount to have (and provide to ISU) clarity and certainty regarding post-acquisition structure and where the qualifying entity fits within the organisation.
• Importance of voluntary notifications – Asset acquisitions are not subject to the mandatory notification regime. Nevertheless, acquisitions of control over qualifying assets are in the scope of the government’s call-in power if the acquisition of the interest in the asset raises national security concerns. The Secretary of State has indicated that the government expects to call in acquisitions of assets rarely compared to acquisitions of entities. However, the first deal that the government prohibited using its NSIA powers related to a voluntarily notified acquisition of IP rights. The government has subsequently cleared with remedies another asset acquisition in the UK energy sector relating to the 100 per cent purchase of asset development rights. Therefore, it is advisable for parties to consider voluntarily notifying transactions to the ISU to obtain certainty regarding the possibility of their transaction being called in.
• Condition precedent in the Sale and Purchase Agreement (SPA) – Obtaining NSIA clearance for a transaction is often a condition precedent in an SPA, as well as a closing condition. This would typically also include an “information” provision requiring the seller to provide the information necessary for the notification. It is in the interest of the seller to help ensure the notification is accurate and complete so that it is not rejected or prohibited by the ISU, resulting in the transaction being void.
• Seller warranty in the SPA – The SPA should contain a warranty in relation to the seller’s compliance with the NSIA. Given the retrospective nature of the legislation, it is important to ensure that any prior transactions involving the qualifying entity have complied with NSIA obligations, where necessary.

Concluding remarks

The NSIA regime represents a major shift in the way the government tackles transactions that may raise national security concerns. Recent cases and regulatory developments demonstrate that when balancing security risks with openness towards investment in relation to strategic entities or assets, the government will not hesitate to use its powers to examine, prohibit or clear with conditions any transactions that may be in contemplation or may have already closed.

The regime imposes new obligations on parties to make additional regulatory notifications in certain circumstances. The government has intentionally cast an extremely wide net to cover a range of deals and transactions. This means that the notification process has the potential to add delay and cost to the deal, as the time taken to prepare a notification depends on the cooperation of the parties and the comprehensiveness of the information received regarding the transaction. Hence, organisations are taking a more cautious approach when entering into transactions or collaborations involving sensitive sectors that may fall within scope.

It is important that the government work together with businesses to ensure that good and much needed investment, especially for start-ups, is not deterred. It should also streamline rules and regulations to provide clarity on or make amendments to resolve points of contention, such as potential notification regarding a restructuring or reorganisation, where it results in a change in the level of shareholding.

The Reed Smith team has developed in-depth knowledge and understanding when it comes to managing national security reviews. The team has assisted a number of clients in understanding the legal obligations under the NSIA for their transactions, while also engaging with the ISU. In our experience, if the notification provides a clear and complete analysis of the NSIA implications for the transaction, the process for clearance is likely to be straightforward with little need for follow-up questions.

In-depth 2022-363

1. Acquisition of Sepura Ltd by Epiris LLP (a UK private equity firm), the first transaction to be cleared with remedies (14 July 2022);
   Acquisition of certain IP by Beijing Infinite Vision Technology Company from the University of Manchester, the first transaction to be prohibited (20 July 2022);
   Acquisition by Hong Kong’s Super Orange HK of UK-based Pulsic, the second transaction to be prohibited (17 August 2022);
   Acquisition of shares in UK aerospace firm Reaction Engines by the UAE-based Tawazun Strategic Development Fund, the second transaction to be cleared with remedies (2 September 2022);
   Acquisition of development rights for the ‘Stonehill Project’ (a project aimed at improving the UK Power Grid’s ability to use renewable energy) by Stonehill Energy, the third transaction to be cleared with remedies (14 September 2022);
   Acquisition of UK-based Inmarsat, a provider of global mobile satellite communications services, by U.S.-based Viasat, the fourth transaction cleared with remedies (15 September 2022);
   Acquisition by Nexperia (a Netherlands-based subsidiary of Chinese phone manufacturer Wingtech Technology) of Newport Wafer Fab (the UK's largest manufacturer of semiconductors), the first transaction to be called in using retrospective call-in powers (25 May 2022), blocked by UK government over national security concerns on 16 Nov. 2022, Nexperia to appeal;
   Review of the increased investment in BT by Altice (French telecommunications company) from 12.1 per cent to 18 per cent, the second transaction to be called in using retrospective call-in powers (26 May 2022), although ultimately no action was taken.
2. See section 35, paragraphs 12(1)(a) and 14 of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017