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National Security and Investment Act 2021: what do acquirers, investors and biotechs raising finance need to know?

This article is part of our Biotech Review of the Year - Issue 12 publication.

The National Security and Investment Act 2021 (NSIA) mandates government clearance prior to the completion of certain transactions involving companies operating in designated “sensitive sectors”. These sectors include several that are relevant to biotech companies. 

What specific considerations should companies and their potential acquirers/investors keep in mind?

The NSIA’s very broad remit

The NSIA applies regardless of transaction value, so even seemingly low-profile deals can fall within its remit. It also applies to transactions involving UK-based acquirers and investors (as well as those from overseas), making it broader than many equivalent regimes which are focused on foreign direct investment. In addition, there is no exemption for intragroup transactions, so routine corporate reorganisations can trigger mandatory notification requirements.

A mandatory notification obligation will only arise if the transaction involves a target entity carrying on certain activities within one of the 17 “sensitive sectors” of the UK economy defined under the NSIA. The entity in question does not have to be a UK company, as the NSIA is engaged if the target operates in the UK. For companies and potential acquirers/investors who are active in the biotech space, the most relevant of these sectors are likely to be:

  • Synthetic biology, defined as: the process of applying engineering principles to biology to design, redesign or make biological components or systems that do not exist in the natural world. 
  • Artificial intelligence, defined as: technology enabling the programming or training of devices or software to do any of the following, with a view to achieving a specific objective: (i) perceive environments through the use of data; (ii) interpret data using automated processing designed to approximate cognitive abilities; or (iii) make recommendations, predictions or decisions. 
  • Advanced robotics, defined as: a physical machine that can interact with its environment and can move itself or its ‘limbs’, which has either a meaningful degree of autonomy, and/or the ability to use sensors to carry out sophisticated surveillance and data collection.

If a transaction triggers a notification obligation, the investor or acquirer must submit an online form describing the transaction and the parties to it. The UK Government then has 30 working days to either clear the transaction or call-in the transaction for further investigation. Completing a notifiable transaction without prior clearance can result in severe penalties for the investor or acquirer, including fines up to 5% of global turnover or £10 million (whichever is greater), and voiding of the transaction.

The vast majority of notified transactions are cleared 

The NSIA came into force on 4 January 2022 but information about its application remains limited. The third Annual Report on the NSIA was published in September 2024 covering the period of 1 April 2023 to 31 March 2024. 

Key takeaways from that report are that: 

  • 906 notifications were submitted in the 2023-2024 period, up slightly from 865 in the previous reporting period;
  • only 4% of notified transactions were 
    called-in for investigation (compared to 7% in 2022-23); and
  • just five final orders were issued, all being conditional clearances, a marked decrease from 15 final orders (including five prohibitions) the previous year. 

These figures suggest the UK Government is operating the NSIA regime with a very targeted approach, and while many transactions trigger notification, the vast majority proceed without further investigation.

It can be easy to overlook the application of NSIA

While the NSIA regime may at first appear to be focused on transactions involving a change of control (eg M&A), a mandatory notification could be triggered by a wide range of transactions and events common to early stage biotech companies, making it relevant at various stages throughout a company’s lifecycle. 

If the activities of a company fall within one of the “sensitive sectors”, an investor in that company may need to make a mandatory notification if one of the following situations occur: 

  • a relevant shareholding threshold is crossed (ie 25%, 50% or 75%);
  • the investor gains “material influence” over the company; or
  • voting rights are acquired by an investor allowing it to pass or block any class of resolutions governing the affairs of the company.

Identifying such events might seem straightforward, but the balance of power and ownership in an early stage biotech company can be fluid, and deals often involve commitments to take actions in the future that may trigger a notification. Some examples are set out below. 

  • Convertible instruments: a convertible loan converting into shares on a specified event might push an investor over a relevant shareholding threshold on exercise of the conversion rights. 
  • Multi-tranche investments: drawdown of a later tranche of investment (eg linked to achievement of a milestone) may result in a threshold being crossed.
  • Governance shifts: the ability of an investor to control the board in certain circumstances could result in a notification triggered by the acquisition of “material influence”.
  • Other arrangements: the entry into certain lending arrangements and/or commercial agreements might be sufficient to give an investor “material influence” over the company. 
  • Corporate reorganisations: the insertion of a new holding company, or the movement of subsidiaries around a group, could trigger a notification since there is no exemption for intragroup transactions.

Planning ahead will minimise delays and surprises

Navigating the NSIA review process can disrupt deal timelines or introduce complexity, especially if the application of the NSIA is only identified late in the process. Acquirers/investors and their advisors will need to carry out an analysis and prepare any required notification, and the approval process itself then takes up to 30 working days from the date that a notification is submitted (assuming that the transaction is not ‘called in’). 

The notification obligation falls on the relevant acquirer/investor, but companies can take proactive steps to mitigate delays: 

  1. Understand ‘sensitive sector’ criteria: analyse whether the activities of the company bring it within any of the “sensitive sectors”, and keep this analysis up to date. Acquirers/investors will form their own view, but they rely on the company providing them with up to date and accurate information, particularly if the company’s technology is very complex or spans multiple sectors.
  2. Maintain accurate cap tables: this can be key in ensuring that all parties to a transaction are able to assess whether key thresholds are being crossed (or may be crossed on the occurrence of future events). Remember to model the impact of the exercise of convertible instruments.
  3. Plan for future events: anticipate the impact of future commitments, and build conditionality into agreements if necessary.

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