The National Security and Investment Act 2021 ("the NSI Act" or "the Act") came into effect on 4 January 2022 and introduces a new national security regime which allows the UK government to scrutinise and intervene in certain qualifying acquisitions of entities or assets that may potentially pose a threat to UK national security (for more details also see our insight here). The government has been monitoring the performance of the Act since its introduction and launched a Call for Evidence. It ran from November 2023 to January 2024, to gather views on how the system can be more business friendly, whilst still maintaining national security protections.
Acquisitions meeting certain requirements are subject to a mandatory notification requirement, whereas others not falling within the scope of these requirements may be voluntarily notified. The Secretary of State in the Cabinet Office (currently Deputy Prime Minister, Oliver Dowden) has the power to ‘call in’ acquisitions for detailed scrutiny. If, following scrutiny of an acquisition, the Secretary of State believes, on the balance of probabilities, that a risk to national security has arisen or may arise, the Secretary of State may make a final order. A final order may impose certain conditions, prevent the acquisition from completing, or unwind it if the acquisition has already taken place. The government confirmed in its most recent annual report (covering the period from April 2022 to March 2023) that 65 notifications were called in for an in depth review, and final orders were imposed in relation to 15 (as of the time of the response to the Call for Evidence, this figure is now 20). For further information regarding the operation of the regime please read our insight here, and for further details of findings in the annual report and trends in relation to clearances and call-ins – refer to our other insight here.
The Call for Evidence Response
The government's response to the Call for Evidence states that feedback received – from interested parties including law firms, trade bodies, academic institutions, and businesses operating in the Act's 17 "sensitive sectors" – was generally positive.
However, in response to the feedback received, the government plans to focus on five key areas between now and Autumn 2024:
- publishing an updated statement on how the Secretary of State expects to exercise the call-in power (the Section 3 Statement) in May 2024;
- publishing updated market guidance in May 2024;
- consulting on changes to the mandatory notification areas by Summer 2024;
- considering certain technical exemptions to the mandatory notification requirement for inclusion in legislation to be laid in Autumn 2024; and
- making further improvements to the operation of the NSI system.
With these changes, the government hopes to ensure that the NSI regime is as pro-business and pro-investment as possible, without compromising the government’s ability to conduct proper scrutiny.
The Section 3 Statement
The NSI Section 3 statement sets out how the Secretary of State expects to exercise the power to give a call-in notice. The current statement provides information on what the Secretary of State is seeking to protect by using the call-in power and sets out the risk factors determining the likelihood of a qualifying acquisition giving rise to a risk to national security (and therefore whether to call in the acquisition).
Respondents to the Call for Evidence requested more clarity on the areas of the economy the government considers most sensitive and how the government assesses the national security risks of a transaction. The government therefore intends to publish an updated Section 3 Statement which provides clarification in relation to these points.
Market Guidance
The NSI Market Guidance was last updated in April 2023. It provides information about how the Secretary of State uses certain powers under the Act and how parties can interact with the system most effectively. With 81% of respondents requesting further guidance, updated Market Guidance is to be published in May 2024, with topics including the application of the Act to academia and outward direct investment.
Updates to sensitive areas
There are currently 17 sensitive areas of the economy subject to mandatory notification requirements. In the Call for Evidence, the government sought views on whether to expand this list. The government is consequently looking to introduce Semiconductor and Critical Minerals sensitive areas (both currently captured by the Advanced Materials sector), and is considering adding a new sensitive area relating to water. The government will launch a formal consultation regarding updates to the mandatory area definitions by summer 2024.
Technical exemptions to the mandatory notification requirement
The Call for Evidence also invited feedback on whether some targeted exemptions from mandatory notification may be appropriate, for certain types of transactions which tend to confer either minimal levels of control or no additional control. Respondents generally responded positively to potential exemptions for public bodies; the appointment of liquidators, official receivers and special administrators; certain internal company reorganisations; and transactions involving Scots law share pledges.
Whilst the government is willing to bring forward secondary legislation, to exempt the appointment of liquidators, official receivers and special administrators, it appears less receptive to the other proposed exemptions. The government's response states that the feedback suggested businesses do not fully understand the national security risks in transactions involving Scots law share pledges and by public bodies, subsequently re-asserting the fact that the government must not compromise national security protections.
However, such exemptions have not been definitively ruled out: the government's Investment Security Unit (ISU) is to undertake a national security risk assessment to understand whether exemptions for these transactions are feasible.
Improving the operation of the NSI system
The government also received feedback regarding changes to the ISU's operational processes, notification forms and the NSI Notification Service portal. A number of improvements to the portal have been already implemented or trialled, such as fixing issues with its firewall. The ISU will look to assess the technical feasibility of suggestions received, with a view to incorporating these in the future.
Looking ahead
With the changes to be brought about in the government's five key areas, to be staggered throughout the year, the full impact of the response to the Call for Evidence will not be felt immediately. The updated Section 3 Statement and market guidance is due to be published in May 2024. This may provide some immediate assistance, but businesses will likely be more interested in the potential changes to the mandatory notification areas and exemptions to the mandatory notification requirement coming further down the line.
The upcoming public consultation on the mandatory area definitions should give rise to some clarification of the definitions and guidance on some of the more vaguely defined sensitive areas. The response to the Call for Evidence states that a number of respondents flagged they would like clearer definitions or guidance for the Artificial Intelligence, Defence and Critical Suppliers to Government areas. This aligns with our own experience when considering whether a client's transaction falls within the scope of the regime: Artificial Intelligence currently captures a very broad range of activities, including some that do not present any obvious national security threats. We have also observed the lack of clarity in relation to which activities may fall within the scope of the Defence sensitive area.
Whilst the proposed introduction of Semiconductor and Critical Minerals sensitive areas is not intended to change the overall scope of the activities (covered by the Regulations), but rather provide increased clarity in relation to these sectors, the potential introduction of water as an area subject to mandatory notification may capture a number of companies which currently fall outside the Act's scope. Businesses in the water sector will therefore likely be paying close attention to this development, and may wish to share their views when the government consults on this change later in the year.
Businesses, whose internal reorganisations currently are caught by the mandatory notification regime, even where the control over the target changes very little and the re-organisation is unlikely to raise national security concerns, may be disappointed that the government is currently planning only to introduce a technical exemption from the mandatory notification system for the appointment of liquidators, official receivers and special administrators. However, the fact that the ISU is planning to undertake a risk assessment to understand whether such an exemption for certain internal re-organisations could be possible, suggests that there is at least openness to the possibility of such an exemption.
Whilst the scope of proposed changes is currently perhaps more limited than some may have hoped, it should at least go some way towards making compliance with the regime easier for businesses undertaking transactions. Further clarity in relation to the scope of sensitive areas should help businesses be more confident as to whether a notification needs to be made and avoid unnecessary notifications.
