The government has begun publishing changes to the National Security and Investment Act 2021 (NSI Act). This is the first step in the government's stated plan to fine-tune the NSI regime since it entered into force in January 2022.
Background
The NSI Act came into force on 4 January 2022, creating a new standalone regime allowing the Investment Security Unit (ISU) to scrutinise different types of transactions with a UK nexus in the interest of protecting national security. If necessary, the government may impose conditions on, or even block, deals that could give rise to a national security risk. Read our briefing note summarising the key provisions of the NSI Act here.
In November 2023 the government published a Call for Evidence which gathered views from stakeholders on the impact of the NSI regime on businesses and investors. In particular, the government aimed to assess whether the scope and requirements of the NSI regime are proportionate and effective, in addition to informing its review of the 17 specified sectors relevant to mandatory notifications. In March 2024, the government published its Response to the Call for Evidence, setting out the key areas of focus for 2024. Read our summary on the Call for Evidence and Response here and here.
On 21 May 2024, the government published updated guidance on the scope and application of the NSI Act and an updated section 3 statement on how the Secretary of State intends to exercise the power to call in a transaction for an in-depth investigation.
Below we focus on the key changes set out in the updated guidance and section 3 statement.
Updated market guidance
The updated market guidance aims to improve comprehension of and compliance with the NSI regime. The amendments address several areas highlighted by respondents to the Call of Evidence and include the following:
- Guidance on higher education: new guidance has been published on the application of the NSI regime to higher education and research-intensive sectors, including specific examples intended to assist universities and academics in determining when a particular transaction or collaboration will amount to a "qualifying acquisition" and how to contact the Research Collaboration Advice Team.
- New guidance on outward direct investment: the government has provided explicit guidance and specific examples on how the NSI regime can apply to scenarios involving outward direct investment where the acquisition leads to a party gaining control over a qualifying entity or asset that is outside the UK, but the relevant UK-nexus criteria are met. The rationale for including this section seems to lie in the general trend towards considering proactive screening of outbound investment for sensitive sectors with both the US and the European Commission assessing the need for restrictions.
- More guidance on timelines: guidance on how long the review process under the NSI regime will take in practice, including how statutory timelines are calculated and the limited circumstances in which timeframes may be expedited where parties are suffering from material financial distress.
Updated section 3 statement
The NSI regime empowers the Secretary of State to issue a call-in notice to undertake an in-depth investigation of potential national security concerns arising from transaction which involve the acquisition of "control" over a target which the requisite nexus to the UK. The so-called "section 3 statement" sets out guidance on how the Secretary of State will exercise this call-in power.
The updated section 3 statement reaffirms the government's reluctance to define "national security". It does not set out exhaustive circumstances in which national security is, or may be, considered to be at risk; this protects the government's ability to intervene where necessary. The updated section 3 statement also includes several statements about the purpose of the NSI regime, including statements that the NSI Act is a "proportionate and targeted regime", which likely will frame the Secretary of State's decision to exercise the call-in power.
The updated section 3 statement also provides further guidance in relation to each of the target, acquirer and control risks that may lead to a transaction being called in for review. In particular:
- Target risk: in relation to both entities and assets, the guidance confirms that a connection with activities in the 17 sensitive areas of the economy which trigger a mandatory notification are more likely to be considered high risk, and therefore called in, as are transactions involving entities with a sensitive supply chain relationship to the government. The updated statement also includes an example of when the incorporation of a new entity could be called in (when it includes a change of control over an existing entity or asset). Regarding assets, the new section 3 statement provides examples of where national security could be at risk, all of which relate to dual-use capabilities. They are helpful in that they highlight areas that the government may want to investigate, such as the potential to repurpose the asset in a manner which could undermine national security, security processes and governance structures.
- Acquirer risk: country of origin will not be the sole factor considered when making a call-in decision; political, military and state-backed influence will also be relevant particularly where those links are to countries with high degrees of government surveillance or with powers to compel acquirers to share data or provide assistance. Acquirer intent and historic behaviour will also be considered. The government has also confirmed that acquisition of certain targets would be considered so sensitive as to warrant a review, irrespective of acquirer risk. In addition, the guidance also notes that national security may also be put at risk by a UK acquirer with poor information security or by acquirers that have been previously cleared.
- Control risk: the government will assess "control" in the round, having regard to historic patterns of voting/shareholder activism and, if necessary, it may also use information gathering powers to determine whether the combination of shares and voting rights being acquired will enable the acquirer to materially influence the behaviour of the target. In particular, the government will consider any risk arising from cumulative investments across a sector or supply chain.
The new guidance and section 3 statement provide welcome clarification in respect of the intended application of the NSI regime. However, it remains to be seen whether they provide the increased transparency of the NSI regime that parties have been seeking since introduction of the regime in January 2022.
What next?
Given the upcoming general election in the UK and the resulting dissolution of parliament, it is unclear whether amendments to the NSI regime will be a priority for an incoming government and whether outbound direct investment will remain an area of focus. However, the government's Response indicated that we can expect a consultation on the 17 sensitive areas of the economy that are subject to mandatory notification requirements and consideration of technical exemptions to the mandatory notification requirement later in the year. We will continue to monitor these changes and provide updates on them.
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