NSIA 3 Years on: Some Practical Guidance for Scottish and Cross-Border Finance Transactions

The National Security and Investments Act 2021 (NSIA, or the Act) came into force on 4 January 2022, and continues to have a material impact on many different transactions across a number of asset classes.

In relation to banking and finance deals, we have most commonly had to consider the Act where security is, or has been, taken over shares in a Scottish company. Because that type of security requires a transfer of the shares to the security holder, the creation, and release, of the security may be a “trigger event” for the purposes of the Act. 

For Scottish or cross-border finance deals involving Scottish companies, it’s therefore crucial that the work that might be needed to deal with these consequences is built into your deal timetable. Being aware of the issues, and understanding the options available to deal with them, will avoid any last-minute surprises.

Background: The scope of the NSIA, the notification process, and calling-in powers

The NSIA came into force on 4 January 2022, and introduced a new national security screening regime with mandatory notification requirements for transactions in certain sectors which also meet prescribed additional conditions (all as specified in The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (the Regulations).

The NSIA also gives the UK Government, acting through its Investment Security Unit (ISU) in the Cabinet Office, broad powers to “call-in” for review a range of transactions involving corporate bodies or assets:

• if those transactions are “trigger events” for the purposes of the Act; and
• where “the event has given rise to or may give rise to a risk to national security” (section 1, NSIA).  

The calling-in power exists even where the underlying transaction is outside of the scope of the mandatory notification requirements. A trigger event for the purposes of the NISA occurs in relation to a company if a person gains control (within the meaning of section 8 of the Act) of that company, and if it carries on activities in the United Kingdom or supplies goods or services to persons in the United Kingdom. The potential scope of the Act is therefore extremely broad, and essentially requires that there is a UK element to the trading of the company being acquired.

In general, a transaction can be called-in by the government within five years of the acquisition, or within six months of the government becoming aware of it. However, where the relevant acquisition is subject to mandatory notification, but has not been notified, the five-year time limit does not apply, and there is no time limit on the call-in power in those circumstances.

Failure to comply with the mandatory notification regime, or if a transaction is called-in, may result in the government taking enforcement action. This may include both criminal and civil penalties, as well as the blocking of any potential transaction or unwinding of transactions that have already occurred.

Shares pledges and the NSIA

“Control” for the purposes of section 8 of the Act includes where the percentage of the shares that the person holds in an entity increases to certain levels. Typically, a security holder under a Scottish shares pledge will acquire a holding of (and legal title to) 100% of the shares of the relevant Scottish companies. Therefore, in almost all cases, the so-called perfection of a Scottish shares pledge (which really just means that the pledge has been properly effected by transfer of title to the shares), as well as its release (by retransfer of the shares back to the previous owner within the borrowing group), will be a trigger event under the NSIA. For the avoidance of doubt, this also applies to releases of share pledges put in place before the NSIA came into force.

This means that the grant or release of a perfected shares pledge may be “called-in” and, additionally, if the operations of the relevant Scottish entity and/or its subsidiaries fall within the scope of Regulations, the relevant share acquisition (referred to in the Act as a “notifiable acquisition”) must be the subject of a mandatory application for approval from the ISU under section 14 of the Act.

Even if the entity’s activities do not fall within the scope of the mandatory notification regime, they may be sufficiently similar in nature to render it prudent to make the transfer subject to approval following a voluntary notification being made under section 18 of the Act.

In April this year, the government published a response to its call for evidence on the operation of the Act. It noted that while “15% of all respondents provided feedback on exempting transactions involving Scots law” (which included all of the major Scottish law firms), its view was that “further work is first required to consider the feasibility and potential national security impact” of any such exemption. Accordingly, subject to the operation of the Moveable Transactions (Scotland) Act 2023 (the MTA) (find more information here on our dedicated MTA page) which, when it comes into force, may allow for statutory pledges over Scottish shares without the need to transfer title (although it would not resolve the issues around the release of existing perfected share pledges), the NSIA will remain a relevant consideration in finance transactions involving Scottish companies.

Impact on deal timetable

The biggest practical issue for transactions is the management of the impact of the NSIA regime on deal timescales. Our experience is that an application for mandatory or voluntary approval can take around eight weeks from submission of the application to the ISU. The drafting (and agreeing with relevant counterparties’ counsel) of the terms of the application will involve additional time. Therefore, if notification is to be made, it can add a substantial amount to the overall deal timetable.

This can be particularly important in refinance transactions where, even if the new lending group does not require a perfected shares pledge, the release of any existing perfected pledge in favour of the outgoing agent or lender may give rise to a notification requirement. This is a very common scenario, as many refinance transactions were originally entered into prior to the Act coming into force and will therefore feature perfected pledges.

If no application is made and the matter is “called in”, there is then a 30-working day period where any conditions to the transaction will be determined. This 30-working day period can be extended by a further 45-working days, if further investigation is needed (and again further, if agreed).

Our single key take-away, therefore, is that the issues have to be identified and addressed as early as possible in the transaction process.

Addressing the issues in practice

If the activities of the company whose shares have been pledged, or are to be pledged, come within the scope of the Act, or may come within that scope, a number of scenarios may arise.

• So-called unperfected shares pledges are becoming the norm where there is any risk. Since a pledge that does not require transfer of title to the shares does not create any security right in Scots law, these are often partnered with a floating charge over the shares from the relevant parent company. A further feature of these arrangements is the inclusion of a specific “further assurance” clause providing that when the MTA comes into force and allows for a new statutory pledge to be taken over financial collateral, that form of pledge will be entered into. 
•  A full application for approval – mandatory or voluntary – may be made. Clearly if the Regulations apply, a mandatory application has to be made; but we have also seen voluntary applications made, for example where the activities of the company in question are clearly covered by the Regulations but an additional condition – such as a production or output threshold – is not met.
• In relation to the release of a shares pledge, if an application is mandatory or is otherwise thought desirable, and the deal timetable does not allow for the application to be (hopefully) approved prior to closing, it may be necessary to have the outgoing security agent or its nominee retain title to the shares, albeit on the basis that the underlying security interest is released and discharged in a global deed of release. 
• If no mandatary application is required, and there is no desire to carry out a voluntary application, the options are:
  • to do nothing at all, and either take or release security as normal: 
  • “informally” notify the ISU after the event: the aim and benefit of doing this is to reduce the period allowed for calling-in from five years to six months.

By Burness Paull LLP, Scotland, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact ukscotland@transatlanticlaw.com

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