The National Security and Investment Act 2021 (the NS&I Act) will establish a new regime for government approval of transactions that may give rise to a risk to national security when it comes into effect on 4 January. Conrad Purcell, infrastructure and energy projects partner at law firm Haynes Boone, considers the implications for the energy sector.
The NS&I Act seeks to balance the desire to promote the UK’s attractiveness to investors, especially foreign direct investment post Brexit, with the need to protect national security.
The NS&I Act will replace parts of the Enterprise Act 2002 (the Enterprise Act) under which the government was able to intervene in transactions that threatened national security on public interest grounds, if they fell within the UK or EU merger control rules.
Although the NS&I Act will apply to both domestic and foreign investors, the increased scrutiny of investments in the 17 mandatory notification sectors (of which energy is one) comes at a time when other countries around the world are tightening their foreign direct investment screening regimes. The government’s expectation is that up to 1,800 transactions a year may be reviewed by the Investment Security Unit (ISU) (the unit within the Department for Business, Energy and Industrial Strategy responsible for approving transactions under the NS&I Act) a significant increase from the number of interventions under the current Enterprise Act regime.
Impact on energy investments
Energy is one of the 17 sensitive sectors of the economy listed in the Regulations that accompany the NS&I Act (National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 No. 1264). If the target of an investment is a large new or existing oil or gas production, processing, import or export facility or holds an electricity transmission, distribution, interconnector or generation licence, it will fall within the scope of the new regime.
There are size thresholds. For investors in small to medium-sized power projects (which is a very active space for renewables and battery storage in the UK) it is worth noting that the new regime will only apply to owners or operators of individual assets with a total installed capacity of 100MW or more and those with an overall capacity of 1GW or more.
The NS&I Act is primarily targeted at acquisitions of qualifying entities or assets but it could have implications for financing, especially secured lending transactions such as project finance. Funders and borrowers will need to carry out analysis of their security package (including security over shares and key contracts) to manage the risk of enforcement triggering a breach of the NS&I Act provisions relating to notification.
The NS&I Act contains both a mandatory notification regime and a voluntary notification regime. It also grants the secretary of state for Business, Energy and Industrial Strategy (the SoS) the power to call-in a transaction for review if they reasonably suspect that a change of control (which could include the acquisition of ‘material influence’) over a target may give rise to a national security risk. The NS&I Act has some retrospective effect in that the secretary of state may call-in transactions for review that completed on or after 12 November 2020 (being the day on which the bill was introduced to Parliament), subject to time limits of up to 5 years from completion, after 4 January 2022.
Under the mandatory notification regime, a potential investor must notify the ISU before they acquire an interest (which may be as low as a shareholding of 25%) or increase their interest in a qualifying entity or asset (as set out in the Regulations).
An investor may make a voluntary notification to the ISU before it acquires or increases its interest in an entity or asset outside of the 17 sensitive sectors in order to obtain approval for the transaction and avoid the risk of a transaction being called-in by the SoS.
The SoS is able to make an interim order or a final order under the NS&I Act to prevent or prescribe aspects of a proposed transaction if a risk to national security would arise from it or otherwise approve the transaction.
Repercussions for unapproved transactions
Breach of the NS&I Act may result in criminal and civil sanctions. It is a criminal offence for an investor to complete an acquisition that is subject to the mandatory notification regime without approval from the SoS, unless they have a reasonable excuse. Failure to notify the ISU of a transaction that falls within the mandatory notification regime will result in that transaction being deemed void. An investor may apply to the SoS for a validation notice in relation to such a transaction which, if it is granted, will mean the transaction is approved by the SoS and not void. Breaches of the NS&I Act may also result in imprisonment of up to 5 years and fines of the higher of 5% of total worldwide turnover of the investing business or £10 million.