Partner London
"The response notes that, based on the feedback and the small number of notifications received in relation to this issue, the government does not intend to exempt transfers of control in respect of automatic enforcement provisions."
The NSIA takes a multi-faceted approach to the task of identifying those transactions that could raise concerns for Britain’s national security and comprises:
(a) a mandatory regime that applies to the acquisition of entities and requires notification in respect of notifiable acquisitions of qualifying entities in 17 designated sensitive areas of the economy, including energy and transport. Failure to notify results in the acquisition being void, as well as providing grounds for civil and criminal penalties;
(b) a call-in power to “call-in” a transaction for review. This relates to the acquisition of assets as well as entities and the definition of control is wider than that used in the mandatory regime. A trigger event is required which must have given, or give rise to, a risk to national security. There are various remedies available to the Secretary of State in the Cabinet Office, including unwinding a transaction and restricting access to sensitive information or sites; and
(c) a voluntary regime which applies to the acquisition of entities and assets and allows a notification to be made to reduce the risk of call-in.
The NSIA is broad and far-reaching. However, the government has made clear that its intention is not to interfere arbitrarily with investment. In November 2023, it launched a Call for Evidence to allow stakeholders to share views on the operation of the NSIA system to date, with a view to considering how best to “fine-tune the essential protections” required for national security. The government response was published on 18 April 2024. Engagement levels were encouraging and, overall, the feedback was reported as positive and regarded by the government as a useful insight due to the direct involvement in the screening system by over 75% of the respondents.
110 full responses to the NSIA Call for Evidence were received:
- 41% were from legal firms;
- 15% were from trade bodies or other bodies representing business;
- 15% were from banks or investors;
- 11% were from business operating in the 17 sensitive sectors of the economy relevant to the mandatory regime; and
- 7% were from academic and research institutions.
The response sets out next steps and identifies five areas upon which the government will focus between now and Autumn 2024:
"Scots law share security and 'certain' internal reorganisations are now under active consideration for 'targeted exemptions' from the mandatory notification regime, but first further work is said to be required to assess feasibility and potential national security impact."
- publishing an updated statement on how the Secretary of State expects to exercise the call-in power;
- publishing updated market guidance;
- consulting on changes to the 17 mandatory notification areas;
- considering certain technical exemptions to the mandatory notification requirement; and
- making further improvements to the operation of the NSI system, including the NSI Notification Service.
Of particular interest to finance parties and borrowers will be the commentary relating to the secured lending market and the concern that the creation and/or enforcement of security over shares may trigger the provisions of the NSIA.
English law share security
It has generally been the accepted view that the mere creation of English law equitable share security would not appear to trigger mandatory notification requirements because it does not involve title transfer in the shares secured. This view was confirmed in guidance issued by BEIS in July 2022.¹ Another potential issue with share security is the transfer of rights to vote the charged shares from the chargor to a security agent. Most English law share security does not transfer voting rights until the occurrence of an event of default or an enforcement event. BEIS further confirmed in July 2022 that the grant of security on those terms would not of itself trigger notification. NSIA clearance may be required at enforcement stage, however, if the other elements of the NSIA are engaged. As standard procedure, we would recommend that this is checked on a transaction.
Certain share charges provide for automatic transfer of voting rights in relation to the charged shares if there is an event of default under the facilities agreement. Although Paragraph 7 of Schedule 1 to the NSIA provides a carve-out meaning no clearance would be required because a security agent is not treated as holding the voting rights, to date finance parties have been reticent to rely on these provisions because it is not always clear that the exercise of voting rights by a security agent will remain within the parameters of the carve-out. Drafting solutions include: (1) not granting security agents voting rights automatically following an event of default and instead only upon service of notice stating that the security agent wishes to vote the shares, providing time for the finance parties to notify and seek clearance where it is considered necessary; and (2) suspending the voting rights of the security agent until any necessary NSIA clearance is obtained – this is the approach the LMA has taken in its REF documentation suite.
Responses received in relation to the automatic transfer of voting rights and the impact on finance documents and the enforcement of share security are set out below.
- “20% of all respondents have reflected NSI mandatory notification requirements in the terms within lending agreements, either as part of new agreements or through updating existing agreements;
- 12% of all respondents said it had affected their approach to secured lending or had created uncertainty in the markets; and
- 14% specifically noted that the inclusion of Automatic Enforcement Provisions under mandatory notification had not affected their ability to access loans, or to enforce such provisions”.
The response notes that, based on the feedback and the small number of notifications received in relation to this issue, the government does not intend to exempt transfers of control in respect of automatic enforcement provisions i.e., where voting rights are automatically transferred. Instead, the government will consider where it can provide further guidance in this area.
"The government proposes to bring forward secondary legislation to exempt the appointment of liquidators, official receivers and special administrators."
Scots law share security and internal reorganisations
The position in relation to Scottish law share security differs from that of English law equitable charges over shares because, unlike an English equitable charge, Scots law share security involves transfer of title in the shares from the chargor to the security agent. Existing government guidance states:
“The creation of a share pledge over shares in a qualifying entity of a specified description under Scots law, where title to the shares is transferred to the secured lender or its nominee, would require prior notification and clearance from the government.”²
Similarly, the applicability of the NSIA to internal re-organisations, including those where ultimate beneficial ownership remains the same, has added an additional layer of complexity to those types of transaction.³
As noted above, the government is considering certain technical exemptions to the mandatory notification requirement. Scots law share security and “certain” internal reorganisations are now under active consideration for “targeted exemptions” from the mandatory notification regime, but first further work is said to be required to assess feasibility and potential national security impact.
Liquidators, receivers, etc
The NSIA allows administrators or creditors of a company in certain insolvency proceedings to exercise rights without triggering the requirement to obtain clearance. However, liquidators and receivers do not currently benefit from the same carve-out. This means that, depending on the facts, the appointment of a liquidator or receiver could trigger a mandatory notification if the other elements of the NSIA are engaged. Indeed, government guidance sets out two specific scenarios by way of example as to how this may arise.⁴
The response notes that 25% of all respondents supported an exemption for the appointment of liquidators, official receivers and special administrators from the NSIA mandatory notification regime, and that respondents noted that “the inclusion of the appointment of liquidators as an activity that requires mandatory notification could detrimentally impact entities in financial distress, and is considered an anomaly to the existing carveout for administrators who have the same type of control over distressed assets and entities”.
As a result, the government proposes to bring forward secondary legislation to exempt the appointment of liquidators, official receivers and special administrators.
The detail remains to be seen, but the development will be welcome for secured finance parties for whom time is of the essence when enforcing security. Not least because administration is simply not always possible or realistic.
The Call for Evidence certainly seems to have produced some interesting responses from stakeholders and an encouraging response from the government in relation to key issues affecting the loan markets.
Footnotes
[1] https://www.gov.uk/guidance/national-security-and-investment-act-guidance-on-acquisition
[3] https://www.gov.uk/guidance/national-security-and-investment-act-guidance-on-acquisitions
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