"Fine-tuning" the National Security and Investment Act
24 May 2024
On 21 May 2024, the UK Government published an updated statement on how it expects to use its call-in power under the UK National Security and Investment Act (NSIA) and updated market guidance.
The National Security and Investment Act came into force on 4 January 2022. It significantly strengthened the Government's powers to investigate and potentially prohibit transactions on national security grounds by requiring mandatory notification for transactions in 17 sectors thought most likely to raise national security concerns. In addition, the Act introduced a voluntary notification process (underpinned by a "call-in" power) for other transactions. For further background, see our Quickguide.
On 13 November 2023, the UK Government published a Call for Evidence to consider changes to the National Security and Investment Act 2021 (see our November 2023 update). The Call for Evidence closed on 15 January 2024 and invited interested parties to provide feedback on:
On 18 May 2024, the Government published its response to the Call for Evidence setting out its intentions and on 21 May 2024 the Government published:
In its response to the Call for Evidence, the Government noted that some respondents had suggested a fast-track process for certain types of acquirer (for example, those who have already had a transaction cleared under the Act). The Government is not considering introducing a fast track process as it considers some targets to be so sensitive that screening will always be required and transactions therefore need to be considered on a case by case basis.
The new section 3 statement expands on the previous version, providing additional information in relation to:
The revised section 3 statement sets out that the Government may call in acquisitions involving the incorporation of a new entity, if the incorporation involves a change of control of an existing asset or entity: for example, the transfer of intellectual property in certain joint ventures or control of certain assets in new build energy infrastructure.
While acquisitions of assets fall outside the mandatory regime, they may be called in for review. The section 3 statement sets out that the call-in power is more likely to be used in relation to assets that are, or could be, used in connection with the activities falling within the mandatory regime. For example, the Government will consider whether the acquisition would allow the transfer of technology, intellectual property or expertise to an acquirer (or parties linked to an acquirer) which could undermine national security.
The updated guidance includes three examples of deals which may be called-in for detailed review in the section on target risk:
The section 3 statement reiterates that the regime applies to acquisitions by both UK and foreign acquirers. A case by case assessment is always required. The section 3 statement also highlights concerns that "actors with hostile intentions" may seek to "obfuscate their identity by funnelling investment through other companies or corporate structures". Accordingly, the Government may request information on the source of funds, including members of investment consortia and ultimate beneficial owners.
Relevant factors for assessing acquirer risk include:
In this section, there is the example of a target business with underlying source code in its computer programmes which are used by UK air traffic control operators. The acquirer's motivation for the acquisition is to gain access to, and use of, the underlying source code. The acquirer is also known to have existing ties to a country which has shown hostile intentions to the UK and has laws which allow their security service to covertly monitor communications and to compel businesses to share information and data with the security service. Such a transaction is likely to be called-in for detailed review.
Control risk refers to the level of control which the acquirer gains over an entity's activities, policy or strategy. Some characteristics (such as a history of passive or long-term investments, or voting rights being held by passive investors) may indicate lower control risk. The Government may also consider the amount of control that an acquirer could gain through exercising financial instruments, such as loans, conditional acquisitions, futures and options that affect the control of an entity: for example, debt-to-equity swaps.
Two additional examples have been added:
A new paragraph in the section 3 statement highlights that in certain situations outward direct investment (ODI) may constitute an acquisition under the NSIA: for example, where it involves the transfer of technology, intellectual property and expertise as part of the investment or when forming joint ventures overseas. Additional guidance on ODI and the NSIA is available in the guidance on how the NSIA could affect people or acquisitions outside the UK which was also updated on 21 May 2024.
The updated market guidance contains a new section on how long the notification process takes:
On 18 April 2024, the Government announced that it intends to launch a formal consultation on updating the mandatory area definitions by the summer. The consultation will include proposals for a standalone semiconductor area and a critical minerals area. The Government has also indicated that it is exploring the possibility of adding water to the list of areas subject to mandatory notification under the Act.
Subject to parliamentary time allowing, the Government indicated that it intends to consider technical exemptions to the mandatory notification regime. In April 2024, the Government indicated that it intends to bring forward secondary legislation exempting the appointment of liquidators, official receivers and special administrators from the mandatory regime. It also intends to consider whether to make targeted exemptions for certain internal reorganisations, Scots law share pledges and public bodies, but that further work is required to consider the feasibility and potential impact on national security.
The timetable for this work may change as a result of the upcoming general election.
In April 2024, it was also announced that the Department of Business and Trade will launch a review team to better understand the risks from Outward Direct Investment. In January 2024, the European Commission has also published a White Paper on Outbound Investment and consulted on its proposal for targeted fact-finding and analysis of selected outbound investments from the EU. Following a consultation with Member States, the European Commission is expected to provide an update in Autumn 2025.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.