Holders of an insolvency office may require authorization when appointing an entity in a relevant sector.
The National Security and Investment Act (NSI Act) came into effect in early January, and market participants could reasonably have expected that a common approach to the practice of mandatory and voluntary notifications would now be established. . However, due to the breadth of the provisions, the lack of clarity in their application to secured financing transactions in the normal course of business, and the consequences of a transaction failing to notify, there is still market concern that timelines operations and execution strategies are only affected in situations where there may be little obvious threat to national security.
The NSI Act applies to changes in ownership or control of assets that may pose UK national security concerns. If the entity concerned carries out certain activities in the United Kingdom in one or more of the 17 sensitive areas of the economy (such as energy, defense or communications), any transfer of ownership of the entity beyond a certain level, or if the entity itself disposes of an asset, may give rise to either a mandatory notification or a voluntary notification to the Secretary of State. If notification was required and the entity fails to obtain authorization, the consequences are serious: any transaction will automatically be considered void and the party who acquires control will be subject to criminal penalties.
Anxiety on the agenda
It is clear under the NSI Act that any actual acquisition by a third party in a relevant sector as a result of enforcement action will trigger mandatory or voluntary notification (the latter form of authorization eliminating the risk of a post-acquisition “call” by the government). However, it is unclear whether the mere appointment of an insolvency officer would itself result in a change of control requiring authorization and a potential delay in appointment, which most difficult situations can ill afford. Mirroring the PSC (persons with significant control) regime upon which much of the NSI Act legislation is based, the NSI Act includes a notification exemption for directors exercising control rights while the entity is under administration. Yet there is no such exemption for receivers, liquidators or mortgagees in possession, even though there will have been no change of control in the legal sense at the time of their respective appointments. This lack of exemption is of particular concern for named receivers on shares and is likely to add valuable time to any enforcement strategy involving such appointment in any relevant industry.
A potential solution in lender-directed sale transactions requiring regulatory approval under the Committee on Foreign Investment in the United States (CFIUS) regulations that deal with similar foreign investments has been to appoint a receiver during the sometimes lengthy approval process to give lenders a level of control, less ownership. However, this solution does not appear to be available under the UK scheme.
Timely clarity welcome
Market players are hoping the government will clarify the position that such appointments of officials do not require authorisation. During parliamentary passage of the NSI Act, the government committed to produce market guidance notes within six months of the law coming into force. The guidance notes provide a platform for clarification, as well as the removal of any lingering doubt that taking security over shares of an eligible entity or its assets will not require authorisation, at least until to the act of execution by the office holder.