Insolvency officeholders may need clearance upon appointment to entity in an affected sector.
The National Security & Investment Act (NSI Act) came into force in early January, and market participants might reasonably have expected a common approach to the practice of mandatory and voluntary notifications to have bedded down by now. However, due to the breadth of the provisions, the lack of clarity in their application to ordinary course secured financing transactions, and the ramifications for a transaction of failing to notify, significant concerns remain in the market that transaction timetables and enforcement strategies will be adversely affected in situations in which there may be little obvious threat to national security.
Risk of unwind
The NSI Act applies to changes in ownership or control of assets that may give rise to issues of UK national security. If the relevant entity carries out certain activities in the UK within one or more of 17 sensitive areas of the economy (such as energy, defence, or communications), any transfer in the entity’s ownership above a certain level, or if the entity itself disposes of an asset, may give rise either to a mandatory or voluntary notification to the Secretary of State. If the notification was mandatory and the entity fails to obtain clearance, then the consequences are severe: any transaction will automatically be deemed void and the party acquiring control will be liable to criminal sanction.
Concern on appointment
It is clear under the NSI Act that any actual acquisition by a third party in an affected sector following enforcement action will trigger either mandatory or voluntary notification (the latter form of clearance removing the risk of a post-acquisition “call-in” by the government). However, it is unclear whether the mere appointment of an insolvency officeholder would itself result in a change of control requiring clearance and potential delay to their appointment, which most distressed situations can ill-afford. Mirroring the PSC (persons with significant control) regime on which much of the NSI Act legislation is based, the NSI Act includes an exemption from notification for administrators exercising control rights while the entity is in administration. Yet there is no such exemption for receivers, liquidators, or mortgagees in possession, notwithstanding that there will not have been a change of control in any legal sense upon their respective appointments. This lack of exemption is of particular concern to receivers appointed over shares and is likely to add valuable time to any enforcement strategy involving such an appointment in any affected sector.
One potential solution in lender-led sale transactions requiring regulatory approval under the Committee on Foreign Investment in the United States (CFIUS) regulations that address similar foreign investments has been to appoint a share receiver during the sometimes long approval process in order to give lenders a level of control, short of ownership. However, this solution would appear to be unavailable under the UK regime.
Timely clarity welcome
Market participants hope the government will clarify the position that such officeholder appointments do not require clearance. During the parliamentary passage of the NSI Act, the government committed to producing market guidance notes within six months of the Act’s commencement. The guidance notes provide the platform for clarification, together with the removal of any lingering doubt that taking security over shares in a qualifying entity or its assets will, at least up until the act of enforcement by the chargeholder, not require clearance.