Earlier this month an important new piece of legislation came into effect that businesses in Wales need to be aware of.
The National Security and Investment Act 2021, changes the landscape for Welsh businesses involved in corporate transactions.
The act creates two separate regimes.
The first requires a mandatory notification of any “notifiable” corporate transactions (such as corporate acquisitions or investments) which fall within 17 “sensitive” areas of the UK economy, for example artificial intelligence, communications or energy.
Where a notification is required under this first regime, completing a transaction without clearance will render it void. The potential acquirer could also face substantial fines and a criminal conviction.
The second allows parties to make a voluntary notification of a transaction which they feel should be notified to the UK Government under the act. This includes the acquisition of certain assets, as well as the acquisition of shares or material influence over a target company.
This second regime is backed up by a “call-in” power which the UK Government has to question any transactions which, while not requiring mandatory notification, it feels may be a threat to national security.
This “call-in” power can be applied by the UK Government to any transaction which completed after 12 November 2020, despite the act only coming into force this month. Once it is notified or becomes aware of a transaction, the UK Government can impose conditions on the transaction, or even unwind a completed transaction.
We have already seen an example of the kind of deal the UK Government might be interested in here in Wales with the sale of semiconductor producer Newport Wafer Fab to Chinese-owned Nexperia for a reported £65m in July 2021.
It has been suggested the act may be used by the UK Government to examine this transaction in more detail. This follows criticism by MPs that the transaction was not looked at in more detail by the UK Government when it originally completed.
Wales has vibrant and growing technology and manufacturing sectors with many businesses that are actively looking for investment and M&A opportunities. As the new legislation is fairly wide-ranging, it could potentially affect many of these deals. This is the case even where there is no obvious risk to national security.
As a result, all interested parties should consider what impact the act will have on the transaction process.
One of the major impacts may be on the transaction timeline.
Once the parties have established that a notification should be made, which itself may take some time, this will need to be submitted to the UK Government, which then has up to 30 working days to review the notification. If the government decides to “call in” the transaction for further examination, it is permitted an additional 30 working days to carry out a full assessment. This assessment period could also be extended by an additional 45 working days if certain criteria is met.
Even though the UK Government has stated the majority of deals will require no intervention and be cleared within the first review period, we have no examples yet as to how the process will work in practice. As a result, where a notification needs to be made there will be a clear impact on the transaction timetable. This should be factored into early-stage discussions.
Acquirers or investors will need to update their initial target due diligence work. This will ensure that they catch any notifiable transactions at an early stage, minimising the risk of any unnecessary delays in the notification process.
We’re yet to see many examples of how buyers or investors may choose to then negotiate transaction documents where there is a notifiable transaction under the act. Additional protections may be sought, and sellers/investee companies will need to be sure that they understand the implications of this.
Welsh businesses and investors might hear the name of the act and think that they are not a risk to national security, so it won’t affect them.
However, the broad scope of the act means that transactions where there is no obvious threat to the UK’s national security, including those which only involve parties based in the UK, may still need to be notified to the UK government. The potential consequences of failing to do so are severe. As are the impacts on transaction timetables where a notification needs to be considered.
That’s why it makes sense for Welsh businesses and their investors to err on the side of caution and to take legal advice at an early stage if they think a transaction may fall under the scope of the act.
- Alex Butler is a partner, corporate, at Geldards LLP, a leading UK law firm headquartered in Cardiff.
