Warning for key UK acquisitions and disposals
Anthony Cork
by Anthony Cork
Anthony Cork is a Partner at Cork Gully LLP. With more than 25 years of experience he regularly assists boards, investors, and financiers to find unique and innovative solutions to distressed, often complex, and contentious recovery situations. Anthony works with both SMEs and large corporates spanning a wide range of sectors, providing practical, straightforward and commercial advice. Contact Anthony.
The UK’s National Security and Investment Act 2021 came into force on 04 January 2022 and has a wide-ranging impact on proposed transactions in 17 sectors which the UK government has deemed to be of strategic importance. The Act permits the UK government to scrutinise and, where appropriate, intervene in proposed acquisitions that may harm UK national security.
The impact one year on
The Act provides for two separate regimes, namely mandatory and voluntary notification. A mandatory notification obligation will occur for relevant transactions involving target entities within the 17 sectors, and is triggered when control over a qualifying entity is acquired. Control is generally defined as an acquisition of more than 25 percent of the shares or voting rights of the qualifying entity, referred to as a trigger event. The obligations for mandatory notification fall upon the relevant acquiring party.
Failure to gain clearance from the Investment Security Unit (ISU), an office of the Department for Business, Energy and Industrial Strategy, for these transactions may lead to significant sanctions, including turnover-based fines and criminal liability. Additionally, an acquisition will be automatically void if it is determined to be subject to the mandatory notification regime and approval from the ISU has not been obtained in advance.
Insolvency is one area that is immediately affected by the new legislation: the appointment of an office holder, and/or creditor enforcement actions may give rise to notification requirements if the debtor operates in one of the 17 sectors. Examples of appointments and creditor enforcement actions where notification may be required include:
Liquidator being appointed over the debtor;
Appointment of a receiver over certain assets of the debtor;
Mortgagee enforcing its security by entering into possession of charged property;
Appointment of a trustee in bankruptcy over the estate of a bankrupt individual; and
Appointment of foreign insolvency office-holders in other jurisdictions.
Please note that there is a carve-out for the appointment of an administrator who takes control over a qualifying entity. Such an appointment will not itself automatically trigger a notification under the Act. However, where the administrator is seeking to dispose of the assets of, or shares in, a qualifying entity, such disposals will be caught by the provisions of the Act. Careful contingency planning with respect to pre-packaged administrations in particular will be required.
This is a serious challenge for anyone seeking to enforce their security, for example by pursuing one of the options set out above, or alternatively when an accelerated sale of a business is being considered, and when time can often be of the essence.
Deciding whether a transaction requires a notification may be complex, and professional advice should be sought at an early stage to mitigate risk and avoid delays with concluding transactions.
Practical considerations
Office holders and those who appoint them will need to be mindful of the Act’s impact on transactions, as there is no exemption for sale of the business or assets of an entity in an insolvency process. This is a particular area of concern where a pre-packaged administration is contemplated. In such circumstances, the onus is on the acquirer to make a notification.
When contemplating a pre-packaged administration or the appointment of a receiver over shares, the 30-day review period will need to be considered within the pre-acquisition/appointment timeline where mandatory notification is a requirement. As well as the timing risk, there are other associated risks such as the directors’ risk of trading a business which is insolvent pending the requisite approval, cash flow/working capital considerations of trading the qualifying entity for the review period, and transaction risk if knowledge of the proposed pre-packaged sale seeps into the market, eroding value and potentially leading to the acquisition falling through. All of these represent significant associated risks when considering the implications of the Act in an insolvency scenario, and highlight the need for careful planning.
Cork Gully LLP is a trusted advisory firm focused on bringing clarity to restructuring, recovery, and insolvency scenarios. Based in London and working throughout the world, they are renowned for leading on tough, complex assignments with their experts’ understanding and resolving challenging issues. The team is prepared to take on high-risk engagements – often at short notice, with the skills, tenacity, and vision to deliver results that preserve and enhance value.
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