UK Government publishes Annual Report on the National Security and Investment Act

The NSI Act regime continues to impact acquisitions across a broad range of sectors

On 11 July 2023, the UK Government published its second Annual Report (“Report”) on the National Security and Investment Act 2021 (“NSI Act”).  The Report summarises how the NSI Act regime operated in the period from 1 April 2022 to 31 March 2023 (the “Reporting Period”), the first full 12 month reporting period since coming into force on 4 January 2022.  While (unsurprisingly) the Report does not comment on substantive matters, the statistics presented in the Report provide helpful context on processes and timelines, as well as an indication of where the UK Government’s focus has been to date. 

The Report reinforces our reflections from earlier this year (The UK National Security and Investment Act 2021: reflections one year on).  In summary:

• the regime is capturing a broad range of acquisitions across a number of sectors;
• similarly, acquisitions which have been prohibited outright or cleared with remedies also span a number of sectors including e.g. defence, communications, energy, advanced materials and computing hardware;
• a significant proportion of acquisitions which have been subject to further assessment and ultimately prohibited or cleared subject to remedies have involved entities associated with China (although UK and US deals, amongst others, have also resulted in remedies being imposed).

The Report confirms the vast majority of acquisitions (c.93%) are cleared within the initial 30 working day review period, which accords with our experience in straight-forward cases.

However, it is also our experience that where acquisitions are ‘called in’ for further assessment, the ability of the Investment Security Unit (“ISU”) to ‘stop the clock’ on acquisitions by issuing Information Notices, and to propose further voluntary time extensions beyond the statutory 105 working day total time period, means that in practice for some cases timelines can extend for significant periods of time, which is something to bear in mind in acquisition planning. 

Key Figures and Takeaways

Procedure

• Notification

The NSI Act contains a mandatory notification requirement for acquisitions of target companies who are active in at least one of 17 ‘sensitive’ sectors.  A voluntary system sits alongside this, where acquisitions can be notified where they fall outside of the mandatory system in the interests of business certainty, given that the ISU holds a residual power to review unnotified acquisitions post-completion (and can ultimately order divestment, or impose other remedies). 

If a notifiable acquisition completes without clearance, it is legally void.  It is possible to submit a retrospective notification to remedy the voidness, albeit fines can still be imposed in these circumstances. 

The Report shows that 866 notifications were received in total in the Reporting Period.  This is fewer than initially predicted.  The Impact Assessment for the NSI Bill, published in November 2020, estimated that the ISU would receive between 1,000 and 1,830 notifications each year. 

Of the 866, c.77% of these were mandatory notifications, c.21% were voluntary notifications and c.2% were retrospective notifications.

The fact that 180 voluntary notifications were made is interesting; it may suggest that businesses are taking a cautious approach where acquisitions fall on the fringes of the mandatory regime or there is a question over interpretation of the sector definitions (some of which remain open to interpretation). 

• Call-In for further assessment

The UK Government also has the power to ‘call in’ acquisitions for further investigation if it reasonably suspects a qualifying acquisition may give rise to a risk to national security.  As noted above, the vast majority of notified acquisitions (92.8%) were cleared in the initial review period without being called in.

The UK Government issued 65 call-in notices in the Reporting Period of which 10 were issued for non-notified acquisitions.  This highlights that the ISU is actively monitoring the market for acquisitions which it considers may raise national security issues. 

17 call-in notices were issued following voluntary notifications, which emphasises that acquisitions which do not fall within the 17 key sectors can still give rise to national security concerns.  Therefore it is important to consider whether a voluntary filing may be appropriate in the circumstances for any given acquisition, in particular based on the nature of the target business and the nationality of the acquirer.

• Final Outcomes

Following a call-in notice the ISU will either issue a Final Notification (i.e. clearance), or a Final Order prohibiting the deal or requiring remedies to address national security risk.

Of the 72 acquisitions that the UK Government assessed further in the Reporting Period, c.79% went on to be cleared without remedies, which may be seen as an encouraging statistic for acquirers finding themselves subject to a call-in notice.

15 acquisitions were subject to a Final Order; 5 acquisitions were blocked or subject to an order to unwind, with the remaining 10 being cleared subject to remedies. 

Taking a step back, this means that less than 1% of acquisitions notified to the ISU were subject to outright prohibition.  That accounts for c.7% of acquisitions subject to further assessment following a call-in notice (which, as above, may be seen as an encouraging statistic). 

This tends to suggest that while the regime is broad-ranging in scope and catches a significant number of deals, the UK Government is (as one might expect) mindful of the regime being overly interventionist, given that this may have a chilling effect on investment into the UK. 

• Timing

The ISU reached a decision to clear or call in each acquisition within the initial 30 working day period on all occasions during the Reporting Period. The average time for a decision was 25 – 27 working days.

For those acquisitions that were called in – from the point of call-in, it took on average:

1. 31 working days to issue a Final Notification;
2. 77 working days to issue Final Order.

The report notes that all cases were decided within the statutory timelines, providing welcome certainty for businesses.  However, as noted above, given the ISU’s ability to stop the clock through the issuance of Information Notices during the in-depth review period, and its ability to ask parties to agree to further voluntary extensions to the statutory time periods, in our experience some cases can in practice take substantially longer than the 105 working day period set down in the legislation. 

Sector focus

• A significant number of the acquisitions called in for further assessment have related to three sectors, namely Military and Dual Use (37%), Advanced Materials (29%), and Defence (29%). However, call-in notices have also been issued across a broad range of sectors, including Satellite & Space Technology (12%), Artificial Intelligence (“AI”) (11%) and Computing Hardware (11%).
• Final Orders have also been across a range of sectors, but most frequently in Military and Dual-use, Advanced Materials, Defence, AI and Data Infrastructure.

The number of Final Orders made, by area of the economy[1] are:

Nationality of acquirer[2]

• The origin of investment associated with the most call-in notices was China, with 42% of all call-ins during the Reporting Period. However, acquisitions by entities associated with the UK accounted for 32% of call-in notices, the USA for 20%, and Canada for 14%. 
• Acquisitions by entities associated with China accounted for 8 of the 15 Final Orders, while acquisitions by entities associated with the UK and US accounted for 4 and 3 Final Orders respectively. However, it is worth noting that acquirers can be associated with more than one origin of investment, and so for example where the UK is identified as an associated jurisdiction, here may also be another associated jurisdiction for that transaction which is the source of the national security concern.
• It should also be noted that a significant number of notifications made in the Reporting Period were submitted by acquirers having their origin of investment in the UK (58%) or USA (26%), which may also be reflected in the percentage of call-in notices and Final Orders relating to UK and US deals. By contrast, acquisitions involving Chinese acquirers accounted for just 4% of notifications received in the reporting period, which makes the above percentages rather stark. 

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[1]               Please note: ‘Others’ includes: (a) Satellite and Space Technology, (b) Quantum Technologies, (c) Cryptographic Authentication, (d) Critical Suppliers to the Government, (e) Critical Suppliers To The Emergency Services Sectors, (f) Academic Research And Development In Higher Education

[2]               Please note: The percentages in this section of the Report add up to more than 100% because acquirers can be associated with more than one origin of investment, and there can be more than one acquirer per acquisition, so one acquisition may be counted to two or more origins of investment.

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