Considerations for shareholders under the NSIA regime
When thinking about estates and trust planning, individuals who own shareholdings in companies should consider whether the National Security and Investment Act (“NSIA”) regime applies to the businesses. This is because the transfer of the share ownership on death to a trust vehicle and any subsequent disposal of the interests afterwards may be subject to a mandatory government approval under the NSIA regime. Failure to obtain approval under the regime can result in fines, or even criminal liability and the share transfer may be void and could be unwound.
What is the NSIA regime?
Under the UK’s NSIA regime, the UK government is able to screen investment into any target company (referred to as a ‘Qualifying Entity’), when the investment meets certain thresholds, and the Qualifying Entity is active in one of 17 key sectors.
The investment thresholds are triggered when a person gains control of a Qualifying Entity, by their shareholding or voting rights increasing:
-
- from 25% or less to more than 25%;
- from 50% or less to more than 50%; or
- from less than 75% to 75% or more.
Another trigger is where voting rights are acquired that give effective control of the Qualifying Entity through being allowed to pass or block resolutions governing the affairs of the company.
The 17 key sectors are wide ranging and include AI, data infrastructure, critical suppliers to government, defence, military and dual-use, communications, energy, nuclear, advanced materials, synthetic biology and other technology sectors.
Companies that have been subject to scrutiny under the regime include: FireAngel Technology, Transdigm, GE Oil & Gas UK, Vodafone and Newport Wafer Fab Semiconductor Company. However, the regime applies to companies of any size, as long as they conduct a qualifying activity in one of the 17 sectors (which may soon be expanded to 20).
How does this apply to estates planning?
If you own a shareholding of more than 25% in a business which is conducting activities caught under the NSIA regime, and you have created a trust vehicle to transfer your interest in that company to the trust on your death, the beneficiaries of your trust would need to file a notification to the government’s Investment Security Unit (“ISU”) to gain approval of their acquisition. Any buyer of the business would need to file a second notification even if both share transfers occur together.
- You own a 30% shareholding in Alpha, a fictional company that specialises in defence software for the UK military. Alpha has a number of government clients and access to sensitive government data. They are therefore active in the ‘Defence’ sector and conduct a qualifying activity under the NSIA regime. Your shareholding also exceeds the 25% trigger.
- In the event of your death, you arrange for a trust to be created for your spouse. The 30% interest in Alpha will transfer to that trust on your death.
- Under the NSIA regime, on your death and the transfer of your interest to the trust, your spouse is ‘acquiring’ an interest of over 25% in a company that is active in one of the 17 sectors. This means that a mandatory notification to the government will be required to gain approval of the acquisition by the trust.
Where a notification is required and a filing is not made, the government can issue fines and there can be criminal penalties for the acquirer. The transaction is also void and may be ‘called in’ and unwound unless a ‘retrospective validation application’ is made.
How can I prepare for this?
While an assessment will need to be made at the time of the transfer, Freeths’ Competition team can conduct an earlier analysis to identify shareholdings in businesses which could potentially be in scope of the NSIA regime. This means that your trustees and executors can be prepared to make a mandatory NSIA notification and will be in a better position to deal with the administration of the estate.
Notifications can take several weeks to prepare and submit (and the ISU often requires another 7 to 8 weeks to reach a clearance decision), so conducting preliminary analysis at an early stage will alleviate administrative burden later down the line.
Please get in touch with us if you would like to discuss this further.
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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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