The UK and national security in M&A – finally catching up
Glafkos Tombolis
by Glafkos Tombolis
The United Kingdom has, historically, been very open to foreign investment, but this changed in 2022 when the UK’s first standalone national security law, the National Security and Investment Act 2021 (NSIA) came into force.
Very broadly, a potential buyer of a corporate entity conducting activities in the UK which fall within at least one of 17 “specified sectors” of the UK economy must obtain UK government approval before it can close the transaction. The consequences of not complying are particularly severe. Not only could the transaction be treated as void, but fines of up to 5% of worldwide turnover or GBP 10 million (whichever is the greater) could be imposed, and/or imprisonment of up to five years for individuals. Specified sectors include artificial intelligence, defence, military and dual use, communications, transport, and advanced materials.
Even if the target operates outside the 17 specified sectors, the UK government still has discretion to call in a transaction for review if it considers the transaction may pose UK national security risks.
In the event that the UK government calls in a transaction for a national security review and concludes that it does pose a national security risk, the UK government has multiple remedies at its disposal, ranging from blocking the deal entirely to allowing it to proceed with stringent conditions attached (such as forced divestment of particular subsidiaries or business units, appointing additional directors to the board of the affected entities, and restricting the dissemination of sensitive information within the wider corporate group).
NSIA is very broadly framed. Unlike, for example, the Committee on Foreign Investment in the United States (CFIUS), NSIA is nationality blind – i.e. it could apply to a UK buyer acquiring a target based outside of the UK if there is a minimum level of activity in the UK. It also applies to an acquisition by the buyer of an interest in the target of as little as 25% of the target’s shares or voting rights. Very importantly, NSIA, by design, does not attempt to define the concept of national security, thereby affording much discretion to the UK government in vetting deals.
It's imperative that deal principals and their advisors pay attention to NSIA at the outset of any transaction and take appropriate advice. If NSIA does apply, the parties will need to negotiate appropriate walk-away rights and other risk allocation measures in their definitive transaction documents.
On one level, it’s reassuring that the UK has caught up with many other jurisdictions in implementing a national security law to protect its interests. However, this is yet another regulatory burden that throws sand in the wheels of dealmaking.
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Glafkos Tombolis advises corporate and private clients on M&A, joint ventures, private equity, and company law. He has expertise in healthcare data M&A and works with clients in cybersecurity, software, retail, and digital marketing. He also advises on corporate compliance, anti-bribery, and national security matters.Contact Glafkos.
