The weakest links? When golf and other non-obvious things are a national security concern

What can the Government actually look at with the national security powers?

Because of the nebulous and intangible threat to national security, the UK Government has wide powers under the National Security Investment Act 2021 (NSIA) to intervene where the Secretary of State considers there could be a national security concern.  While a subset of corporate transactions need to be notified on a mandatory basis (which delays closing and for which there are severe sanctions for missing a filing), a much broader range of issues can be ‘called in’ for in-depth scrutiny.

The types of actions which are reviewable under the NSIA include the acquisition of land, tangible moveable property and intangible assets (including IP, data, know-how or ideas) as well as applying for certain licences.  For example, the application for an electricity generation licence is a trigger which can be reviewed by the Secretary of State.  It is also possible that minority investments in entities (as low as 5%) could and indeed have previously been scrutinised.

While none of these actions need to be notified on a mandatory basis to the Government, a misstep can have significant consequences at a later date.  The Secretary of State has up to five years to decide whether to issue a ‘call in notice’ and has broad discretion to impose remedies or conditions which are deemed necessary to mitigate or remove a national security concern.

For example, if land were acquired and the transaction closes, a later determination by the Secretary of State that the acquisition could give rise to a national security concern might lead to a forced sale (potentially at well below market rate).  Similarly, if applying for a licence sits alongside significant development investment, realising too late that national security concerns are in play (such that the licence will not be granted) can scupper business plans and significantly destroy value.

One of the key difficulties in undertaking this assessment for parties outside of Government is that national security is not defined. Furthermore, the Investment Security Unit (ISU), which runs the NSIA regime, has continued to maintain a ‘black box’ approach, arguing that this allows the Government to assess each matter on a case-by-case basis. Matters which may appear identical to external audiences may have material differences from the Government’s perspective. The absence of a list of things which will be unproblematic is deliberate, intended to avoid would-be adversaries being able to work around the likely scope of concerns. So spotting when issues could arise, and being prepared for unexpected Government interest, is no straightforward task.

It is worth noting that the proportion of actions ‘called in’, where no mandatory filing has been made, is around twice that of call ins for acquisitions notified on a mandatory basis.  This clearly indicates that just because something does not have to be notified does not mean there will be no concerns.

A call in by itself does not mean a transaction will ultimately be viewed as contrary to UK national security, but around 5-10 transactions a year are withdrawn after a call in has occurred.  Further,  the most recently published statistics indicate that just under half of Final Orders (i.e. imposing remedies or blocking/unwinding a deal) have resulted from an action that was not notified on a mandatory basis.

What are the non-obvious mandatory filing obligations which could be missed?

Even when it is necessary to tell the Government about a transaction, it is not always immediately obvious or intuitive to spot what can be caught.  The consequences for getting this assessment wrong can be stark, with the deal being void and possible exposure to civil and criminal sanctions.

A helpful starting point is that the target business has to be active in one of 17 sensitive sectors, soon to be expanded to 19, notably to now include ‘water’ as a new sector.  However, common examples of things which can inadvertently be missed include:

• Internal reorganisations.  The Government has signalled that certain restructurings may be exempted from mandatory notification in the near future, but as of now even an innocuous-seeming insertion of a holding company into ownership structure (with no third-party involvement) is caught.
• Context-dependent activities. Some activities seem so harmless it is inconceivable that a national security concern could be plausible.  A grounds maintenance business which cuts grass and trims hedges might be one such example.  However, if this business has contracts with the Ministry of Defence, or access to significant national infrastructure as a result of its work, these activities are likely to be viewed in a different light and could mandate the need to notify and obtain clearance ahead of closing.
• Data. Unlike similar regimes in Europe, having access to certain types of data, such as sensitive or personal data, is not sufficient to trigger a mandatory filing on its own.  It is however important to carefully understand the nature of the contracts which a target business has, in particular with public sector authorities (directly or indirectly), to avoid missing any relationship which could trigger a mandatory filing.  Access to specific types of sensitive data could still be enough to pique government interest.

Practical tips

Some of the key difficulties in undertaking an assessment of whether national security considerations could impact a deal, or mandate the need for a mandatory filing, are that national security is not defined anywhere and the black box approach described above.  Some issues will be more obvious – such as the target business being a prime defence contractor for the Ministry of Defence – but others may be more subtle or in no way obvious.

Here are some key tips for thinking about this issue and helping to stay out of the bunker:

• Buyer due diligence.  It is important for buyers to do their due diligence on a target business to avoid missing a mandatory filing requirement, or having the risk of onerous remedies being imposed (or, at worst, a fire sale) after closing has occurred.  It is also important for buyers to understand their own risk profile and whether this is likely to be of interest or concern to the UK government.
• Seller due diligence.  Not only is it important for sellers to understand the risk profile of the underlying target business (which can impact how quickly a deal can be executed) but also to understand who the buyer is.  While post-closing, any national security considerations may primarily be an issue for the buyer, the Government can intervene at any time and potentially kill a deal at the 11th hour.
• Mandatory and voluntary filing assessment.  Always consider whether a filing may be required as the consequences for getting this wrong can be severe.  In cases where no mandatory filing can be required (such as the acquisition of land, IP rights or licences) or in borderline cases, consider whether making a filing is nevertheless prudent to avoid any unintended consequences down the line.
• Seek advice early.  Whether that be to anticipate possible concerns, or to deal with them should they arise and it becomes necessary to engage with Government.

Conclusion

It is not always obvious that national security concerns might be in play and getting that wrong, or failing to think about possible issues and being ready to mitigate, can lead to unfortunate outcomes.  Hogan Lovells has deep insight into the operation of the NSIA regime in the UK from both a legal and political perspective and is able to adeptly advise clients on all aspects of risk and interacting with the NSIA regime. Please talk to us if you are uncertain whether national security considerations could be relevant to your activities or planned transactions in the UK, or if you would like help on how best to engage with Government.

Authored by Christopher Peacock and Olivia Williamson.