UK Government consults on changes to National Security and Investment Act regime

On 13 November 2023, the UK Government published a Call for Evidence to consider changes to the National Security and Investment Act 2021 (the Act.)

Key takeaways

• Deputy Prime Minister, Oliver Dowden, has advocated “narrowing and refining” the Act through a “small garden, high fence” approach, which safeguards against a small number of harmful deals whilst leaving the vast majority of transactions unaffected.
• The nine-week consultation invites interested parties to comment by completing this survey.
• In particular, the Call for Evidence will consider:
  
  
  • introducing targeted exemptions from mandatory notification; and
  • clarifying and/or expanding the scope of the existing sensitive sectors requiring mandatory notification and introducing new sensitive sectors.
• The Act remains highly relevant for transactions involving companies with UK activities or UK assets. Although the proposed changes are likely to reduce the number of transactions covered by the Act, it will remain broad in scope.

Background

The Act, which came into force on 4 January 2022, 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, and introducing a voluntary notification process (underpinned by a "call-in" power) for other transactions. For further background, please refer to our Quickguide.

The Government has now published a Call for Evidence, which will run until 15 January 2024, inviting 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.

The scope of the mandatory notification requirements

The Government is considering whether some targeted exemptions from mandatory notification may be appropriate, for example where the acquisition tends to give either minimal levels of control to the acquirer or does not present any real change in control. For example:

• Internal reorganisations, which can currently require mandatory notification even where there is no change in ultimate control. Stakeholders have provided feedback that this is a disproportionate requirement which results in a significant volume of notifications which raise no substantive issues.
• The appointment of liquidators, official receivers and special administrators. Stakeholders have expressed concern that mandatory notification requirements can be incompatible with the need to act quickly where a target is in financial distress. However, the Government does not propose to exempt from the mandatory regime transfers of control to a lender under automatic enforcement provisions.
• Scots law share pledges (which result in legal ownership of the shares being transferred to the lender but control remaining with the borrower) and acquisitions by public bodies.

The Government is also interested in whether any of the activities currently caught by the 17 sensitive sectors (which trigger a mandatory notification) are unlikely to create national security concerns or where the current scope of the regime places significant burdens on businesses. Areas which the Call for Evidence highlights include:

• refining the scope of the Artificial Intelligence sector, recognising that the current scope may capture uses of AI which do not present national security risks . The Government is also considering adding new areas such as ‘generative AI’;
• expanding the scope of the Communications sector to cover smaller networks;
• clarifying and expanding the scope of the Data Infrastructure sector, to cover colocation data centres;
• refining and clarifying the scope of the Defence sector, following feedback that it is difficult to assess whether activities are in scope (resulting in acquisitions that do not raise national security concerns being notified);
• updating the Energy sector to add multi-purpose interconnectors in line with the Energy Act 2023;
• clarifying and expanding the scope of the Suppliers to the Emergency Services sector – the Government is considering whether sub-contractors providing sensitive services to the emergency services or requiring access to sensitive locations should be covered; and
• clarifying the scope of the Advanced Materials, Critical Suppliers to Government, and Synthetic Biology sectors.

The Government is also considering some other potential expansions in scope to the mandatory sectors, including the possibility of creating standalone  Semiconductors and Critical Minerals sectors.

The notification and assessment process

The Government considers that it has already made a number of improvements to increase transparency, but invites comments on the process, including the use of notification forms and the NSI Notification Service, and how the ISU communicates with parties.

Comment

The Government's commitment to review both the scope of the Act and how the regime operates in practice is welcome. It follows widespread feedback in the almost two years since the Act came into force that its application to internal reorganisations, and the broad and sometimes unclear scope of some of the mandatory sectors (including areas such as AI and Defence), has meant that acquisitions were being notified which, on their face, should not raise any national security concerns, inevitably increasing the uncertainty and burden on transactions involving those activities. The Call for Evidence provides businesses and stakeholders with an opportunity to provide feedback on how the regime has been operating and how it might be improved going forward.

The commitment to consider further improvements to enhance the transparency of the review process is also to be welcomed, given concerns that the review process has operated as a "black box" with little visibility for the companies involved.