NSI 2021 vs AI: Mandatory or not mandatory? That is the question.

The Act and what it means for AI operations

Unlike most legislation, NSI works retrospectively to a limited degree: where a transaction was completed on or after 12 November 2020, it could still be brought under scrutiny – despite NSI not being in force at the time.

NSI applies where there is both a qualifying entity (companies, LLPs, partnerships etc. but not individuals) and a trigger event, which can be any one of the following:

1. 1. Acquisition of votes/shares exceeding 25% or 50% in one transaction or reaching or exceeding the 75% threshold. This means crossing the thresholds at 25%, 50% or 75% of the shareholding or voting rights, or where the shareholder holds at least 75% already, increasing the holding further.
   2. Acquisition of voting rights enabling or preventing resolutions. As above, this should be acquiring rights of 25%, 50% or 75% dependant on the rules governing the company itself. This will give the investor the ability to reject special or ordinary resolutions respectively without any other shareholders.
   3. Acquisition of material influence over company policy. In practice, this is likely to be similar to the acquisition of voting rights to block resolutions (e.g. consent rights or veto rights), though it may extend to the ability to appoint a chairperson with a casting vote or the ability to add a majority of directors to an odd-numbered board.
   4. Acquisition of right or interest in a qualifying asset allowing use/greater use of the asset/ or control/influence over how the asset is used. This includes rights given in share purchase and investment agreements to utilise company property in a certain way, if that property is a qualifying asset.

Where both a qualifying entity and trigger event are present, the parties to the transaction will then need to decide whether to make a notification to the Secretary of State for Business, Environment and Industrial Strategy.

The notification will either be mandatory or a voluntary, depending on the circumstances of the transaction and the sector in which the company operates. Artificial intelligence (AI) is one of these sensitive sectors, so tech-based companies should be particularly mindful of this legislation.

Sectors of concern and how NSI is applied

The mandatory notification provisions are aimed at companies and sectors that have been identified as posing a greater risk to national security. As such, NSI gives the government greater oversight of these transactions and empowers it to either impose certain conditions, or in some instances, to veto a transaction in its entirety.

17 industries have been earmarked as “high risk” with 3 of these appearing to be particularly relevant to the AI industry, namely: ‘artificial intelligence’, ‘advanced robotics’ and ‘data infrastructure’.

These sector names are clearly broad and wide-reaching. In fact, some commentary suggests the legislation was drafted to make these deliberately unclear – the theory being it creates “catch all” categories to allow the government maximum oversight. A further difficulty is the current lack of practical guidance from legislators or precedent of what falls into each category.

As an example, for NSI, “artificial intelligence” means any technology “enabling the programming or training of a device or software” to “perceive environments through the use of data”, interpret data to mimic human thought or giving “recommendations, predictions or decisions” to achieve an objective.¹

These provisions therefore look to be geared towards capturing entities that wouldn’t necessarily immediately identify themselves as operating in the AI space.  As an example, a company developing autonomous vehicles quite clearly falls under the scope. We’re yet to see, however, where a line may be drawn in these circumstances and how this broad interpretation of AI will ultimately be applied in practice.

The only additional government guidance to combat this uncertainty is posed as two questions:

1. Does the company develop or pursue research into any technology, goods or software that uses AI?
2. If so, how is such AI being utilised? ²

Whilst these do help clarify the legislation to some extent, the potential scope is still undeniably broad. At least for the time being, the presumption should be that it will be applied in the broadest possible sense.

Mandatory notification procedure

Where a mandatory notification is required, as it may be for your AI business, the proposed acquirers of the shares or controlling influence must seek authorisation and approval from the Secretary of State. This must be done before the transaction is completed.

Skipping this step could lead to serious consequences. Penalties that could be imposed on the proposed acquirer can include fines of up to 5% of worldwide turnover or £10 million (whichever is higher), a custodial sentence up to 5 years for any director of the acquiring entity, and director disqualification. The transaction itself could also be declared void – something clearly not in the interests of either party.

Importantly, whilst the obligation to make the mandatory notification rests with the acquirer, it’s in both parties’ interests to seek clearance as early as possible. Being proactive here is key. The government can impose certain conditions on an acquisition and may also block or unwind an acquisition completely. Gaining approval is the only way to be certain, so may be advisable even where the transaction is voluntary for NSI purposes.

Where a notification is not mandatory, a voluntary notification may be advisable in any case.

Checklist: does NSI affect your tech-rich business?

For more information on the NSI visit: Are you affected by the UK National Security and Investment Act?.

This page will also direct you to our online checker (developed in partnership with Mishcon de Reya) and offers a series of questions to help you understand if a notification is necessary.

If your AI business needs any support with NSI application or any other legal challenges, please contact Charlie Lyons-Rothbart (charlie.lyons-rothbart@taylorvinters.com).

[1] The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (legislation.gov.uk)

[2] National Security and Investment Act: guidance on notifiable acquisitions - GOV.UK (www.gov.uk)