"Fine-tuning" the National Security and Investment Act

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. 

Key takeaways

• The Act remains highly relevant for transactions involving companies with UK activities or UK assets.
• The updated section 3 statement includes additional guidance on the three risk areas (target risk, acquirer risk and control risk), as well as additional examples of how these may be considered in practice.
• The updated market guidance includes guidance on when the NSIA may apply to outward direct investment and amended guidance for the higher education and research-intensive sectors.
• The Government intends to introduce a targeted exemption for the appointment of administrators, official receivers and liquidators in the autumn but this may be affected by the general election.

Background

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: 

• the scope of the mandatory notification requirements;
• the notification and assessment process; and
• the Government's public guidance on how the Act works.

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:

• an updated section 3 statement setting out how the Deputy Prime Minister expects to exercise the call-in power under the Act; and
• updated market guidance on the operation of the Act, including guidance on how the Act can apply to outward direct investment and for the higher education and research-intensive sectors.

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. 

Updated section 3 statement

The new section 3 statement expands on the previous version, providing additional information in relation to:

• trigger events, including when certain acquisitions can be considered under the NSIA (such as the incorporation of new entities and formation of joint ventures);
• targets of acquisitions, including how the Government may consider technology transfer risks when reviewing asset acquisitions;
• acquirers, including where the Government may perceive there to be risk from UK acquirers or acquirers who have already had investments cleared under the NSIA regime; and
• how decisions are made, including additional examples of how the Government assesses target risk, acquirer risk and control risk.

Target risk

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:

• A UK investor acquiring 49% of a UK start-up which is developing innovative technology using AI. The target risk is likely to be high as the developing technology could have dual-use applications. While the acquirer risk is likely to be low, it is unclear who the ultimate beneficial owners are from the complex fund structure.
• A university has a licence agreement to transfer intellectual property relating to novel research into AI applications within robotics. The acquirer is a large third party logistics provider, which is minority-owned by an investment firm incorporated in a jurisdiction where the government is able to access private-sector data.
• The target is a UK-incorporated supplier of components to international civil aerospace customers and a subcontractor to the UK Ministry of Defence. The acquirer (an overseas business that develops products related to commercial satellite launch capabilities) is due to establish a joint venture with the target.

Acquirer 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: 

• the acquirer's past behaviour;
• the intent of the acquisition;
• the sectors in which the acquirer operates and its existing capabilities;
• whether the acquirer has made cumulative acquisitions across a sector or linked sectors;
• any ties or allegiances to a state or organisation which is hostile to the UK;
• whether intelligence agencies in the country of origin can compel organisations and individuals to carry out work on their behalf, share data and provide support, assistance and cooperation; and
• whether the acquirer is, or has been, subject to UK or foreign sanctions in connection with activity that may indicate a risk to national security.

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

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: 

• An overseas acquirer with a large portfolio across the UK communications sector is acquiring a company which operates a UK public communications network. Target risk is considered to be high but the acquirer risk is low as the acquirer is a publicly listed company which has previously invested in the UK. Control risk is likely to be high as the acquisition may give the acquirer a cumulative level of control across the sector which could create supply dependencies.
• A global asset management firm (which is a major investor in the European energy sector) is looking to acquire a minority shareholding in a UK-incorporated energy infrastructure supplier. The acquirer will gain voting rights proportionate to its shareholding and will also have the right to appoint a non-executive director to the target's board. The statement indicates that in this case the Investment Security Unit may make use of its information gathering powers to determine whether the acquirer would have the ability to materially influence the target's policy.

Outward direct investment

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. 

Market guidance

The updated market guidance contains a new section on how long the notification process takes:

• Accepting / rejecting a notification: the Government aims to accept or reject notifications within five working days, but this may take longer in certain cases if an acquisition or specific issue is complicated.
• Review period: begins on the day that a notification is accepted and can last up to 30 working days.
• Assessment period: begins on the day on which the acquirer is notified that the acquisition has been called in. The initial assessment period is 30 working days but this may be extended by an additional 45 working days if the Government believes further time is required to assess the transaction. The assessment period may also be extended further with written agreement from the acquirer. The guidance also highlights that the clock will be stopped if an information notice or attendance notice is issued.

Further work 

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.