United Kingdom: Foreign direct investment regulations

Overview: national security interventions

Public interest interventions and the new national security regime

Until early in 2022 there was no dedicated regime for reviewing acquisitions by foreign purchasers in the United Kingdom on national security grounds. Instead, there is a power under the Enterprise Act 2002 (EA02) for the relevant Secretary of State to issue an intervention notice in respect of any transaction meeting certain thresholds (reflecting, for the most part, the thresholds used to determine whether the UK’s Competition and Markets Authority (CMA) has jurisdiction to review the transaction for merger control purposes) (the public interest or PIIN regime). Such an intervention may be issued at any time before the earlier of the CMA’s deadline for issuing a Phase I merger decision or the date on which the CMA issues a Phase I merger control decision. The Secretary of State may ultimately impose remedies to address any substantive public interest concerns, including potentially prohibiting (or requiring parties to unwind) a transaction.

The PIIN regime allows intervention only on the grounds specified in Section 58 EA02, which until 3 January 2022 were:

• national security;^[2]
• accurate presentation of news and free expression of opinion in newspapers;
• media plurality;
• maintenance of the stability of the UK financial system; and
• maintenance in the United Kingdom of the capability to combat, and mitigate the effects of, public health emergencies.^[3]

The Secretary of State may specify, by order, new grounds for intervention.^[4]

The National Security and Investment Act 2021 (the NSI Act) introduced a new stand-alone regime empowering the Secretary of State for Business, Energy and Industrial Strategy (BEIS) to review acquisitions of entities and assets for UK national security purposes (the NSI regime). From 4 January 2022, this has replaced the PIIN regime insofar as concerns national security. New mandatory notification requirements apply to relevant transactions completing on or after that date, and other transactions (including those that had already completed on or after 12 November 2020) may now be called in for review.^[5] The NSI regime is administered by the new Investment and Security Unit (ISU) (an operational unit within BEIS).

Transactions falling outside the scope of the NSI Act continue to be capable of review under the PIIN regime insofar as they relate to media, the financial system or public health. In this guide, we focus on the national security regime as it applies under the NSI Act.

Scope

The general scheme of the NSI regime is not limited to specific sectors but allows the Secretary of State to review transactions that she or he considers may give rise to a risk to the UK’s national security.^[6] The NSI Act makes additional provision, however, for mandatory notification of certain transactions concerning target businesses that have activities within one or more of 17 sectors specified for this purpose under the accompanying notifiable acquisitions regulations.^[7]

Jurisdiction and notification requirements

Transactions will be within the scope of the NSI regime whenever a ‘trigger event’ occurs in respect of a ‘qualifying entity’ or ‘qualifying asset’. For this purpose:

• a ‘qualifying entity’ means, broadly, any entity that is not an individual and (1) is formed or recognised within the United Kingdom, (2) carries on activities in the United Kingdom, or (3) supplies goods or services to persons in the United Kingdom;^[8]
• a ‘qualifying asset’ means land, tangible movable property or ideas, information or techniques that have industrial, commercial or other economic value, provided that the asset is (1) situated within the United Kingdom (in the case of land or movable property only), (2) used in connection with activities carried on in the United Kingdom, or (3) used in connection with the supply of goods or services to persons in the United Kingdom;^[9] and
• a ‘trigger event’ includes any of the following (which are considered in the NSI Act to constitute acquisitions of control):^[10]
  • in respect of a qualifying entity:
    • an increase in the percentage of shares or voting rights held by the acquirer from (1) 25 per cent or less to more than 25 per cent, (2) 50 per cent or less to more than 50 per cent, or (3) less than 75 per cent to 75 per cent or more;
    • an acquisition of voting rights in the entity that, whether alone or in aggregate with voting rights already held, enable the acquirer to secure or to veto any class of resolution governing the affairs of the qualifying entity; or
    • an acquisition of rights or interests that, whether alone or in aggregate with rights or interests already held, enable the acquirer materially to influence the policy of the qualifying entity (unless the acquirer already held interests or rights that enabled it to do so). The government interprets this concept of ‘material influence’ in light of the approach taken under the UK merger control regime (but having regard to the context of the NSI Act)^[11] and, as such, acquisitions of a 15 per cent stake, or potentially less, may in particular circumstances be sufficient to bring a transaction within the scope of the NSI regime;^[12]
  • in respect of a qualifying asset, an acquisition of rights or interests in relation to the asset that enable the acquirer to:
    • use the asset, or use it to a greater extent than prior to the acquisition; or
    • direct or control how the asset is used, or to do so to a greater extent than prior to the acquisition.

Importantly, this means acquisitions of minority interests (e.g., by a third-party investor) could constitute trigger events, and parties considering such steps should always check whether they may be within the scope of the NSI Act. It is also notable that the government considers that intra-group reorganisations are within the scope of the NSI regime.^[13] Thus, any transaction in which an immediate controlling interest over an entity or asset changes hands might be reviewable, or even trigger a mandatory filing requirement, even if the transaction is entirely intra-group and does not result in any change in the ultimate ownership of the entity or asset. This is an unusual position, differing in particular from the approach taken under UK merger control rules as well as a number of other foreign direct investment regimes, and will inevitably increase the number of technical filings made each year. It is noted that the government’s first annual report on the NSI regime^[14] refers to having ‘pragmatically’ accepted a single notification to cover multiple qualifying acquisitions where they contribute to a single effect, citing internal group reorganisations as an example of this. While this approach seems unsurprising, it does imply that intra-group reorganisations (or indeed any other transaction involving multiple transaction steps) could be viewed as comprising multiple notifiable transactions. It remains to be seen whether there are examples where the government might choose to review each such step as a separate transaction.

Mandatory notification will be required when a transaction involves an acquisition of ‘control’ (as defined above in the context of a trigger event but excluding the ‘material influence’ limb) over a qualifying entity (i.e., not a qualifying asset) that carries on specified activities in the United Kingdom in one or more sectors of the economy specified in regulations for this purpose (each a ‘specified activity’).^[15] These transactions must be notified to the Secretary of State and clearance obtained prior to completion.

Under the notifiable acquisition regulations (NARs),^[16] specified activities are:

• advanced materials;
• advanced robotics;
• artificial intelligence;
• civil nuclear;
• communications;
• computing hardware;
• critical suppliers to government;
• cryptographic authentication;
• data infrastructure;
• defence;
• energy;
• military and dual-use;
• quantum technologies;
• satellite and space technology;
• suppliers to the emergency services;
• synthetic biology; and
• transport.

The NARs provide detailed lists and definitions of each specified activity, and the government has published guidance to assist parties in assessing whether any of the specified activities is engaged.^[17] Given the specificity and often detailed nature of these categories, assessing whether a target’s activities fall within the scope of one of the specified activities will generally require active cooperation from the target. This will inevitably add a degree of uncertainty for potential buyers in less obvious cases, particularly in the case of an uncooperative target or when the opportunity for pre-bid due diligence is limited.

Voluntary notification is available for, among other things, transactions that comprise trigger events in relation to qualifying entities that do not carry on specified activities. Submission of a voluntary notice reduces to 30 working days (from six months or longer) the period in which the Secretary of State can decide to issue a call-in notice.

‘Call-in’ power

The Secretary of State has the power to call in for review any transaction in which a trigger event has taken place or will take place in relation to a qualifying entity or qualifying asset, if the trigger event has given rise or may give rise to a risk to national security. This power is exercisable at any time up to six months after the Secretary of State becomes aware of the transaction, provided this is also within five years of the relevant trigger event.^[18]

Where a transaction has been the subject of a mandatory or voluntary notification, however, the Secretary of State must decide whether to issue a call-in notice within 30 working days of the notification being accepted by the Secretary of State.

It is understood that the ISU actively monitors markets for transactions that may give rise to national security concerns. In addition, the NSI Act grants the government extensive information gathering powers, enabling it to request any information necessary to inform an assessment of the national security risks of a transaction. This may include requesting information in circumstances where no notification has been submitted so as to enable the Secretary of State to determine whether to exercise the call-in power.

The ability to call in a transaction applies to any transaction that completed on or after 12 November 2020, and, where the Secretary of State had become aware of such a transaction prior to the NSI regime coming into force, the six-month period within which that transaction may be called in was deemed to have started on the day the NSI Act came into force (i.e., 4 January 2022) and has therefore now expired. The mandatory notification requirement does not apply to transactions completed before the NSI regime came into force.

In accordance with Section 3 of the NSI Act, the Secretary of State has published a statement of policy intent (also known as the Section 3 Statement) on the scope of the call-in power.^[19]

Types of investors

The NSI regime is not explicitly targeted at specific categories of investor but applies, in principle, equally to investors of any kind. It is not dependent on an investor’s nationality or domicile, or the existence of trade relationships between the United Kingdom and any other country, and is applicable to both UK investors and foreign investors. In practice, concerns around ownership of UK businesses or assets by overseas entities might be taken into account by the Secretary of State when deciding whether to review a transaction and how to finally determine the investigation. Potential concerns may not always be in the public domain and will ultimately depend on prevailing views within the government.

During the development of the NSI regime, the government indicated that its focus would be on acquirers who are likely to be directly hostile to the interests of the UK’s national security or owe allegiance to others who are hostile. The government has stated that it is affiliation to hostile parties, rather than foreign ownership itself, that would be problematic and that, for example, state-owned enterprises, sovereign wealth funds or similar entities are not inherently more likely to pose a security risk, particularly if they have a history of passive or long-term investments or pursue long-term investment strategies.^[20] Conversely, although transactions involving foreign acquirers may still be more likely to be called in than those involving UK acquirers, the government has confirmed that transactions involving UK acquirers will be subject to mandatory notification requirements and may be called in.^[21]

Extraterritoriality

The NSI regime captures acquisitions outside the United Kingdom if the target meets the criteria of a qualifying entity or qualifying asset. These criteria effectively require a connection to the United Kingdom but, in certain circumstances, the NSI regime is capable of applying to transactions in which neither the target, the acquirer nor the seller has a direct presence in the United Kingdom (although the mandatory notification obligation applies only to acquisitions of qualifying entities carrying out a specified activity in the United Kingdom). Remedies orders, where relevant, may apply to a person’s conduct outside the United Kingdom if they are a UK national, an individual ordinarily resident in the United Kingdom, a body incorporated or constituted under the law of any part of the United Kingdom, or carrying on business in the United Kingdom.^[22]

The government considers that acquisitions of entities or assets outside the United Kingdom are generally less likely to give rise to national security risks than those located within the United Kingdom and are therefore less likely to be called in. The level of risk to national security will generally be linked to the strength of the connection of the asset or entity to the United Kingdom.^[23]

The government has also published guidance intended to assist parties in assessing whether overseas transactions will fall within the scope of the NSI Act.^[24] The guidance addresses topics such as the circumstances in which the presence of staff or the transport of products into the United Kingdom will bring a business within the scope of the NSI regime, as well as how the government anticipates engaging with overseas parties. It also notes that, although the government may bring enforcement action against parties or transactions outside the United Kingdom, in some cases formal enforcement might not be plausible or desirable, and that, in such cases, the government might instead pursue alternative means of protecting UK national security, such as cutting out specified parties from its supply chains.

Commentary

In practice, deciding whether to make a voluntary notification is likely to depend largely on an assessment of the likelihood of the transaction being called in for review. When there is a potential risk to national security, it may be advisable to notify the transaction voluntarily in the interests of legal certainty, given the length of time during which the Secretary of State’s call-in power could potentially be exercised.

The government has chosen not to detail the circumstances in which national security is, or may be, considered at risk; the intention is to ensure that the NSI regime is ‘sufficiently flexible to protect the nation’, while also stressing that the NSI regime will not be used arbitrarily, reflecting the UK’s standing as an economy that is open to investment.^[25] This is understandable, perhaps, given the inherent sensitivity and secrecy of national security interests and is similar to the position in many other FDI regimes.

In its Section 3 Statement, the government indicates that the 17 sectors listed as specified activities in the NARs are also sectors it considers to be more sensitive as regards national security and as such, even when mandatory filings are not triggered, transactions in these sectors and related sectors are more likely to be called in for review.^[26] In the first three months of the regime, the most common areas in which mandatory notifications were made were defence, military and dual use, critical suppliers to the government, artificial intelligence, and data infrastructure.^[27] Over half of all mandatory notifications fell within either the defence or military and dual-use categories.^[28] The most common areas of the economy subject to voluntary notifications were professional, scientific and technical activities, data infrastructure, service activities, energy and computing hardware (although it is noted that only 23 voluntary notifications were made during that period).^[29]

The Section 3 Statement also identifies the following key risk factors for its assessment of the likelihood of a risk to national security:^[30]

• Target risk: the nature of the target and whether it is being used, or could be used, in a way that poses a risk to national security. The government indicates that this is most likely to arise in transactions in or closely linked to the specified activities.
• Acquirer risk: characteristics of the acquirer such as the sector, or sectors, of activity, technological capabilities and whether it has links to entities that may seek to undermine or threaten the interests of the United Kingdom. This would include having regard to the persons with ultimate control of the acquirer, any other interests already owned by them and any links to criminal or other illicit activities.
• Control risk: the amount of control the acquirer gains of an entity’s operational business or future strategy, or control or use of an asset. It is noted that the Secretary of State is ‘less likely’ to have concerns based solely on the degree of control acquired.

As regards asset acquisitions, the Secretary of State expects to call in only rarely acquisitions of assets that are not in areas linked to the specified activities. Moreover, the Secretary of State expects to call in acquisitions of assets much less frequently than acquisitions of entities.^[31]

Notwithstanding the above, there remains comparatively little guidance, and very little decisional practice, by which parties might assess the call-in risk for any given transaction anticipated or carried out since 12 November 2020. The government has so far published announcements in respect of only a very small number of cases, and only those cases where the transaction has been the subject of a call-in notice. The announcements in those cases reveal no details as to the government’s reasons for calling in the transaction.^[32] Given the government’s intention not to routinely make public the fact of a call-in notice having been issued,^[33] it may take some time for a body of decisional practice to become available. This lack of clarity is particularly acute for parties assessing as yet unsigned transactions, who seek to assess the appropriate extent of due diligence and the question of whether conditions precedent or other contractual protections may be needed.

Parties are able to seek informal guidance from the ISU as to the application of the new regime to particular transactions, both prior to and after formal commencement of the NSI Act, and investors may wish to make use of this option.

The Section 3 Statement also raises a number of issues that may need to be addressed in the future, including:

• the statement, in the description of control risk, that high levels of control ‘may enable parties to reduce the diversity of a market, or influence the market’s behaviour, in a way that may give rise to a risk to national security’. This appears to conflate the notion of control over an enterprise with that of market power;
• the extent to which a single risk factor could be sufficient to prompt the issue of a call-in notice (the Section 3 Statement indicates that ‘[t]he Secretary of State expects that, when calling in an acquisition, all 3 risk factors will be present, but does not rule out calling in an acquisition on the basis of fewer risk factors’);^[34] and
• a general need for greater clarity as to how the regime might be applied in specific circumstances or to specific categories of transaction (e.g., acquisitions of land, financing transactions or equity underwriting).

As regards the latter of these, the Secretary of State has, for example, published guidance on the application of the regime for the higher education and research-intensive sectors^[35] and in the energy sector,^[36] as well as more generally applicable guidance on the application of the regime to certain types of transactions such as temporary acquisitions of control.^[37] This advice focuses on identifying whether transactions may fall within the scope of the NSI Act, however, rather than addressing the issue of substantive risk and the exercise of the call-in power.

The review process

Where a mandatory notification is required under the NSI regime, this must be submitted to the ISU before the relevant acquisition of control has occurred. Voluntary notifications may be submitted from the point at which arrangements are in progress or contemplation which, if carried into effect, would result in a trigger event taking place in relation to a qualifying entity or qualifying asset (i.e., they need not be submitted prior to completion).

The government has published notification forms setting out the initial information that is required for a notification,^[38] together with guidance on completing and registering a notification form.^[39] In view of the fairly high-level nature of the categories listed, it is likely that additional information will be required during the course of the review.^[40] The Secretary of State may reject notifications on certain grounds specified in the NSI Act and, therefore, in practice a short period of informal pre-notification contact may be required to ensure that some notifications are accepted.^[41] The government has stated that in the first three months of the regime, a total of seven mandatory notifications and one voluntary notification were rejected, out of a total of 185 mandatory notifications and 23 voluntary notifications reviewed.^[42] The reasons given for rejection included (1) submission of a mandatory notification where a voluntary notification should have been submitted; (2) submission of a mandatory notification after the transaction had completed (i.e., where the parties should instead have applied for retrospective validation); (3) failure to provide sufficient information; and (4) notifications covering multiple acquisitions, which should instead have been submitted as multiple notifications.

Once the Secretary of State formally accepts a notification, she or he has 30 working days within which to decide whether to issue a call-in notice or to clear the transaction. If a transaction has not been notified, the Secretary of State may issue a call-in notice at any time up to six months after the Secretary of State becomes aware of the transaction, providing this is also within five years of the relevant trigger event.^[43] Neither the NSI Act, the Section 3 Statement nor any published guidance indicate when the Secretary of State may be taken to have become aware of a transaction for this purpose.^[44]

The Secretary of State has a further 30 working days from the issue of a call-in notice in which to review the transaction,^[45] extendable by up to 45 working days (or longer with the agreement of the purchaser). If the Secretary of State considers that a transaction gives rise to national security risks and that it is necessary and proportionate to make a final order for the purpose of preventing, remedying or mitigating that risk, she or he may issue a final order for this purpose (and a further extension of the review period may be agreed with the acquirer if the Secretary of State is considering whether to make a final order, or its terms). The review period may also be paused in the event that the Secretary of State issues information requests.^[46]

At present, there are no formal proposals for an NSI equivalent to the ‘undertakings in lieu’ process available in merger cases. The NSI Act does not make provision for such a process, and given the time limits for calling in a transaction (especially when parties have submitted a notification), the process might not be feasible in any event. Transactions that raise apparent concerns, therefore, appear more likely to be called in for detailed assessment than would be the case in an equivalent merger review.

In its first report on the new NSI regime,^[47] the government considers that the process under the new regime is inherently more efficient than under the PIIN regime, as the 30 working day period to call in a transaction is much shorter than the four months allowed for intervention under the PIIN regime. Based on the period from 4 January to 31 March 2022, it indicates that:

• the average time to inform parties that a notification has been accepted as complete was three working days;
• the average time to decide whether to call in a transaction was 24 working days in the case of mandatory notifications, and 23 working days in the case of voluntary notifications;
• the shortest time for deciding whether to call in a transaction was 11 working days, and the longest was 30 working days; and
• the average time between the issue of a call-in notice and the issue of a final notification (i.e., a final decision clearing the transaction without remedies^[48]) was 24 working days (although this covers only three transactions in which final notifications had been issued by the end of the reporting period).^[49]

Sanctions for non-compliance

A transaction completed in breach of the mandatory notification and clearance requirement will be void,^[50] though in certain circumstances retrospective validation may be obtained.^[51]

Completion in breach of the standstill obligation, or failure to comply with an interim or final order, can additionally result in fines of up to 5 per cent of worldwide turnover or £10 million (whichever is the greater), imprisonment of individuals for up to five years, and disqualification of directors for up to 15 years.^[52]

In the case of voluntary notifications, or transactions called in without any notification being made, the Secretary of State has the ability to impose an interim order while the review is being conducted. Interim orders and final orders are enforceable by way of court order.^[53] It appears likely that these interim orders will operate in a similar manner to the initial enforcement orders (IEOs) regularly imposed by the CMA when investigating the potential effects of a merger on competition. In the merger control context, the CMA routinely imposes broad IEOs prohibiting integration in completed mergers, and although doing so in anticipated mergers is less common, it is not unknown.^[54]

Substantive assessment process and main evaluation criteria

The Secretary of State will assess whether the transaction has given rise, or may give rise, to a risk to national security. The government has not yet issued any guidance as to how it expects the substantive test to be applied under the NSI Act,^[55] and although the Section 3 Statement is informative to a degree, it is unlikely to provide enough detail for parties to assess the risk in a given transaction. Matters affecting national security may not be known publicly and, therefore, it may be difficult for investors to rule out a risk that national security concerns might be identified and, thus, guidance in this regard is clearly desirable.

Whereas meaningful examples of published decisions under the PIIN regime were relatively sparse, there have already been eight published decisions in which remedies have been imposed under the NSI Act. These cases provide an early indication of the types of concerns that the government is likely to seek to remedy, which include:

• protection of sensitive information and technology from unauthorised access^[56] or hostile actors;^[57]
• preventing transfers of intellectual property that could be used to build defence or technological capabilities that may present a national security risk to the UK;^[58]
• preventing transfers of capabilities that could be exploited to introduce features into dual-use technologies, including automatically and/or without the knowledge of the user;^[59]
• preserving the security of important UK infrastructure assets,^[60] and ensuring the continued effective operation of critical national infrastructure;^[61] and
• preserving continued supply to the UK government of strategic capabilities.^[62]

It is to be expected that, with a more regular and numerous caseload, decisional practice under the NSI Act will continue to develop much more quickly than was the case under the PIIN regime, providing some much-needed clarity for investors.

Outcomes

The Secretary of State will have powers to clear a transaction, prohibit it or approve it subject to conditions. The lawfulness of these decisions will be appealable on judicial review grounds.^[63]

Where required, conditions imposed to address national security concerns are likely to focus on access to sensitive sites, access to confidential information, supply chains, intellectual property transfer, compliance, monitoring and personnel.^[64] The 2018 National Security and Investment White Paper lists the following examples of potential remedies, many of which reflect remedies that had been agreed or imposed under the PIIN regime:

• Access condition: limiting access to a particular site operated by the acquired entity to certain named individuals.
• Information/operations condition: only personnel with appropriate UK security clearances have access to confidential information or that only those personnel should be part of the operational management of the business.
• Supply chain condition: a new acquirer retains an acquired entity’s existing supply chain for a set period.
• Intellectual property condition: restricting the transfer or sale of intellectual property rights (to be tailored to the individual circumstances of the case and the national security risks identified).
• Access condition: requiring that access to dual-use technologies and information about their design, materials, uses or supply chains be restricted to certain named individuals within the investor company or a third party associated with them.
• Compliance condition: imposing supervisory measures, periodic reporting or other actions (to be decided case by case) that should be taken to ensure compliance with UK regulatory regimes.
• Monitoring condition: requiring that a senior minister (or their representative) be given access to information on the company’s activities.
• Personnel condition: requiring the acquirer to secure a senior minister’s approval for the appointment of any directors and other key personnel.
• Structural condition: requiring the retention of UK staff in key roles at a particular sensitive site.
• Proximity condition: requiring the relevant person (most likely a person with title, control or interest over the proximate site) to maintain such measures as a senior minister may specify (e.g., physical or personnel security, or restrictions on access).

To this list of potential remedies may be added other examples from the PIIN regime which, although not referenced in the White Paper, seem highly likely to be relevant in NSI Act cases. For example, in both Connect BidCo/Inmarsat and Advent/Cobham, the parties gave undertakings concerning the maintenance of strategic capabilities and protection of sensitive information, and it is to be expected that both these objectives will be pursued under the NSI Act.

By way of illustration, notices of final orders made under the NSI Act are published on the government’s website.^[65] As of 4 October 2022, eight such notices had been published. The nature of remedies imposed in these cases is described only at a very high level, but it is apparent that remedies imposed have included the following:

• a requirement to implement enhanced controls to protect sensitive information and technology from unauthorised access, and to provide rights of access to premises and information so that relevant agencies are able to audit compliance with the security measures;^[66]
• prohibition of a transfer of intellectual property;^[67]
• prohibition of an acquisition of an entity engaged in the development of electronic design automation products used in the building of cutting-edge integrated circuits;^[68]
• unspecified measures designed to mitigate the risk to national security;^[69]
• a requirement for the purchaser to acquire UK government approval for appointment of a power offtake operator, together with restrictions on the sharing of information from the operator to the acquirer;^[70]
• a requirement to have controls to protect information from unauthorised access, and to assure that strategic capabilities continue to be provided to the UK government;^[71]
• conditions restricting the sharing of information from the target to the acquirer, and restricting the influence of the acquirer over appointments of some staff members within the target;^[72] and
• a requirement to keep the target’s research, development and manufacturing capabilities in relation to certain technologies within the UK.^[73]

Businesses should not assume that it will always be possible to agree remedies, nor that a proposal of remedies will avoid a full investigation, and the government will have the power to block (and potentially unwind) transactions as a last resort. Indeed, it is already clear that the government is prepared to use its powers ultimately to block transactions: as of 4 October 2022, it had already done so twice (see the final orders in the SCAMP-5 and SCAMP-7 vision sensing technology and the Pulsic/Super Orange HK cases), in contrast with having never formally done so under the PIIN regime (although there were a number of examples of parties agreeing to terminate their transactions).

In its impact assessment of the proposed measures, the UK government indicated that it envisages between 1,000 and 1,830 notifications to be made each year under the new regime,^[74] with around 70 to 95 detailed national security assessments being undertaken each year.^[75] Although these figures seem low, in comparison the UK government has intervened (by means of a PIIN) in just 14 transactions on national security grounds since 2003 (with two reviews ongoing at the time of writing). Notably, the government has said it anticipates that remedies will be imposed in around 10 transactions per year (i.e., very few transactions should merit the imposition of remedies).^[76] In its first annual report on the NSI regime, the government stated that it had received 222 deal notifications^[77] in the first three months of the new regime, of which 17 were called in for review (being 13 out of the 196 mandatory notifications, and four of the 25 voluntary notifications, with 13 notifications remaining under consideration). It is noted that whereas the number of notifications is somewhat below the rate of notifications anticipated, the proportion of transactions being subjected to in-depth review is consistent with the government’s expectations. Of the 17 transactions called in, three had been cleared and 14 remained under assessment at the end of the reporting period.

Practical insights and strategic guidance for investors

Until the introduction of the NSI regime, there was no formal notification process for foreign investments with the potential to raise national security concerns in the United Kingdom, beyond a merger notification. With the introduction of the NSI regime and, in particular, the Secretary of State’s call-in powers, investors now need to make mandatory filings in certain transactions, and in others decide whether to take the risk of completing without clearance or to proactively make a voluntary notification. Early experience of the NSI regime has made clear that the government is willing to make use of the NSI review mechanisms and associated remedies options, including its ability ultimately to prohibit transactions that it considers give rise to national security risks (having done so formally twice in the first nine months of the regime). The lack of detail in published decisions makes it difficult to assess the severity of other remedies, but it is also clear that measures are being imposed more frequently than had been the case under the PIIN regime.

In light of the significant sanctions that may be imposed for non-compliance, the potential breadth of the NSI regime and the lengthy look-back period for calling in a non-notified transaction, it is important to consider early on in a transaction whether a target’s activities might be seen as ‘closely linked’ to a specified activity and, therefore, whether a voluntary notification would be prudent. In this regard, it is clear from the Section 3 Statement that the government has sought to retain significant discretion for the Secretary of State in determining when to use their call-in powers and to allow room for practice to develop over time. Although this is perhaps not surprising, it has brought at least initial uncertainty and, thus, it may be expected that parties and advisers will take a cautious approach in the early stages of the NSI regime, both around the mandatory notification requirements and with regard to transactions that might be called in after completion, and that there may be a significant volume of informal approaches and voluntary notifications being submitted, which might not be entirely necessary. A knock-on effect of this may be a relatively high number of transactions being made conditional on obtaining clearance under the NSI Act and, to some extent, the practical effect may be more akin to an entirely mandatory filing regime.

Although the government emphasises that the call-in power is not intended to be an arbitrary tool to limit foreign investment, its practical impact on foreign investment in the United Kingdom remains to be seen. There is a clear risk that the new regime may act as a deterrent, particularly in circumstances where, for example, the mandatory notification and standstill obligations, combined with a greater risk of detailed and more lengthy assessment for certain acquirers, could be enough to disadvantage some bidders in fast-paced auction processes. It may be hoped that, as a body of decisional practice emerges, any such uncertainty will reduce and, with it, any effects on investors.

Reform proposals

The introduction of the NSI Act marks the culmination of a government policy that has been developing for a number of years. Although it presents a significant change to the UK’s mechanisms for addressing foreign investments, arguably it does no more than bring the United Kingdom into line with other jurisdictions that have had these regimes for some time.^[78]

Notes