The NSI Act came into force in January, and here we give a summary of the government's report on the operation of the regime, and share our own experience and learnings so far.
The National Security and Investment Act 2021 ("NSIA") came into force on 4 January 2022. It established a new national security regime in the UK, providing the UK government with sweeping powers to block, permit, or permit with conditions, transactions that give rise to national security risks. The regime was introduced after a spate of high-profile and politically controversial acquisitions of British companies, including the sale of DeepMind to Google in 2014 and the sale of ARM to SoftBank in 2016. We published a blog with more details of the UK’s new regime.
Section 61 of the NSIA requires the publication of an annual report on the new regime by the Secretary of State for Business, Energy and Industrial Strategy ("BEIS"). The report must include the number of notifications received, their type, and the time taken to process them. The first annual report was published on 16 June 2022, and provides helpful insights into the first three months of the NSIA's operation.
A mandatory notification is required under the NSIA where the activities of the target company fall within one or more of the regime's 17 mandatory sectors. In addition, a voluntary notification may be made where the target company's activities otherwise raise national security concerns. In the first quarter of 2022, 222 notifications were received by the Investment Security Unit ("ISU") of which 196 were mandatory, 25 were voluntary, and one was a retrospective validation application.
These numbers are slightly below the UK government's original estimates, but still show positive engagement with the new regime. Although some have suggested this demonstrates that advisors are confident in analysing the operations of businesses against the NSIA's mandatory sectors, we consider that it also indicates that the notification process is not too time-consuming (a short form, and a relatively quick turn-around by the ISU), and a desire – in the context of the penalties for failure to make a mandatory notification – to 'play it safe'.
Unsurprisingly, the mandatory sectors with the most notifications were: defence, military and dual use, critical suppliers to government, artificial intelligence, and data infrastructure. This reflects, perhaps, the wide scope of these sectors as currently defined.
The ISU has said that it is monitoring notifications and will update the definitions of the mandatory sectors if it considers that the 'wrong' types of notifications are being submitted. The UK government also intends to publish 'market guidance notes' in due course – it will be interesting to see whether any of its clarifications result in a reduction in the volume of notifications made.
A particularly interesting aspect of the report concerns the number of notifications called in for review when compared with the numbers of notifications made. Of the 200 notifications 'accepted' by the Secretary of State, 17 were called in for review. Of these, three were cleared while the other 14 were still being assessed at the end of the reporting period.
We see that military and dual use, defence and critical suppliers to government generated the most call-in notices, and disproportionately so. This is not unexpected given the clear national security implications of these sectors.
Although AI formed part of a relatively high number of mandatory notifications, it is underrepresented when it comes to call-in notices. This reflects our experience, which is that the wide definition of AI sees relatively benign AI use falling within scope.
First retroactive call-in notices
The NSIA also enables the government to retroactively call in transactions which completed between 12 November 2020 and 3 January 2022, the day before its entry into force. We recently advised a media client on one of the first-ever retroactive call-ins. We note that the intrusive nature of a call-in interim order (which, in effect, amounts to a freezing/hold separate order), coupled with multiple requests for information, can seriously affect the day-to-day operations of a business.
The average time taken to inform parties that their notification had been accepted was three to five working days.
After a notification is accepted, there is a 30-working day window in which the Secretary of State can decide to call in a transaction for a more detailed assessment. The report found that this timeline was met in every case, and that the average period for a decision to be made was 22-24 working days. Transacting parties will welcome speedy processing of applications and the certainty provided by the ISU staying within anticipated timelines.
The first report warns against drawing conclusions based on only three months' worth of data. However, the findings so far reflect our own practical experience of the NSIA and interactions with the ISU. The new system appears to be operating efficiently and within envisaged timelines. However, the wide definitions of some of the mandatory sectors covered by the NSIA is leading to some precautionary notifications being made and increasing transactional costs for many companies. Retroactive call-in notices and interim orders also have the potential to cause significant business disruption, although the ISU has been open to discussing alternative interim terms with affected parties while the transaction is under review.
Please get in touch with us to discuss the impact that the NSIA could have on your transaction and business.
With thanks to Trainee Solicitor, Daniel Shapland, for his contribution to this article.
Sign up to our email digest