The National Security and Investment Act 2021 (the “NSIA”) introduced a new national security screening regime in the UK and came into effect at the beginning of this year.
The NSIA establishes a mandatory notification and approval regime for transactions in 17 sensitive areas of the economy and gives the government powers to scrutinise other transactions to protect national security. Read more about the NSIA here.
On 16 June 2022, the Department for Business, Energy & Industrial Strategy (“BEIS”) published its first annual report (the “Report”), providing information about the functioning of the NSIA regime in its first three months of operation (from 4 January 2022 until 31 March 2022). Future annual reports will cover years from 1 April to 31 March.
A reminder of the NSIA’s mandatory and voluntary regimes
Under the mandatory regime, parties must submit a notification to the Investment Security Unit (“ISU”) at BEIS if they acquire more than 25%, 50% or 75% of votes or shares (or the ability to block or pass resolutions) in a target entity active within certain specified sectors in the UK.
The 17 sectors caught by the mandatory regime are: advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to government, critical suppliers to the emergency services, cryptographic authentication, data infrastructure, defence, energy, military and dual-use, quantum technologies, satellite and space technologies, synthetic biology and transport.
The voluntary regime applies to all sectors of the economy, and parties are encouraged to voluntarily notify any “trigger events” which they consider may be of interest from a national security perspective. In addition to the thresholds under the mandatory regime, trigger events for the voluntary regime include the acquisition of “material influence” over a company and acquisitions of a “right or interest” in a qualifying asset (such as land or intellectual property).
The UK Government also has extensive “call-in” powers to review qualifying transactions that have not been notified up to five years post-completion. However, if the Government has been made aware of the transaction, the call-in period is reduced to six months.
The Report’s findings
The Report states that 222 notifications were made in the relevant period. There were:
196 mandatory notifications, 178 of which were accepted (91.3%), seven of which were rejected (3.6%), and 11 of which were still being evaluated as at 31 March 2022
25 voluntary notifications, 22 of which were accepted (88%), one of which was rejected (4%), and two of which were still being evaluated as at 31 March 2022
one retrospective validation application (for an acquisition that had completed without approval and would otherwise be legally void), which was accepted (100%).
Reasons for rejection included:
several mandatory notifications should have been voluntary notifications
one mandatory notification should have been a retrospective validation application
insufficient information was provided
the notification covered multiple qualifying acquisitions that should instead have been submitted as two notifications.
Areas of the economy
Mandatory notifications have been received for acquisitions taking place in each of the 17 sensitive areas of the economy. Most of the mandatory notifications related to five key sectors – defence, military and dual use, critical suppliers to government, artificial intelligence and data infrastructure – which mirrors our experience to date.
The list of sectors of the UK economy that are covered by the voluntary notification regime is wider than the 17 sensitive sectors that are covered by the mandatory regime. In relation to voluntary notifications, as at 31 March 2022 most of the voluntary notifications were made in respect of professional, scientific and technical activities, followed by data infrastructure, other service activities (which are detailed in the Report), energy and computing hardware.
The average time to inform parties that a notification has been accepted as complete (which starts the clock for the first 30 working day period) was three to five working days.
Once the Secretary of State has accepted a notification, they have 30 working days to decide whether to call in the acquisition for a more detailed assessment or to clear it.
The Report states that this time limit was met in every case, and that the average number of working days to call in a notification once accepted was 22-24 working days (with the shortest time being 11 working days and the longest time being 30 working days). Again, this is consistent with our experience.
Of the 222 notifications received, 17 were called in for further scrutiny (7.7% of all notifications). 13 of these were mandatory notifications (6.6% of mandatory notifications were called in) and four of these were voluntary notifications (16% of voluntary notifications were called in). Of those 17 call-ins, three were cleared during the period covered in the Report and the other 14 were still undergoing assessments by the reporting deadline.
Call-in notices mainly concerned transactions in the military and dual use (seven), defence (six) and critical suppliers to government (six) sectors (some acquisitions which were called in were associated with more than one area which is why the total number of call-ins associated with each area is higher than the total number of call-ins).
All called-in notifications had their assessments completed within the first post-call-in review period of 30 working days with the average number of working days between calling in a notification and issuing a final notification being 24 working days. At the date of the Report, no post-call-in review periods had been extended into a second review period of 45 working days.
The Government has publicly announced that two transactions would be called in under the NSIA: (i) China-backed Nexperia’s acquisition of a stake in Newport Wafer Fab and (ii) the increased stake in BT by French billionaire Patrick Drahi. It will be interesting to see how the reviews of these transactions play out as, if made public, they have the potential to showcase what types of remedies could be expected, how long the review process is likely to take, and what issues the UK Government is likely to focus on.
No penalties for breaches of offences under the NSIA had been issued as at 31 March 2022. There were also no criminal prosecutions or judicial reviews of decisions under the NSIA.
MoU between BEIS and the CMA
A Memorandum of Understanding (“MoU”) on the operation of the NSIA was published on the same day as the Report, setting out the parameters for cooperation, coordination and information sharing between BEIS (and the ISU within it, which has responsibility for the operation of the NSIA) and the UK Competition and Markets Authority (“CMA”), the competition regulator in the UK. It covers the informal engagement between the bodies in relation to transactions that are notified to both of them, in order to avoid the unnecessary duplication of work (and inconsistency of results).
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