On 10 September 2024, the UK Cabinet Office published its Annual Report (see here) on the operation of the National Security and Investment Act (“NSI Act“), covering the period from 1 April 2023 to 31 March 2024 (the “Reporting Period“).
This is the third annual report published by the Government, as per its statutory requirements under the NSI Act, and provides key data and statistics into the operation of the Act during the second full year of its operation. It also marks the first annual report published under the new Labour government (although the previous Conservative government was still in power for the duration of the Reporting Period).
Whilst the Government has provided limited indication so far on how it intends to use the NSI Act, the foreword to the Report by the Chancellor of the Duchy of the Lancaster (the current decision-maker) ties the operation of the regime to the Government’s growth agenda, noting that it is “committed to ensuring the Act protects our national security, and does so as effectively, efficiently and transparently as possible – giving investors the certainty they need to kickstart growth across the UK.”
The key takeaways from the report are as follows:
- The number of notifications submitted and the transactions reviewed under the NSI Act remain broadly the same compared to the previous year (approx. 900), although there was a slight dip in the proportion of notifications called-in for an in-depth (i.e. second phase) review (4.4% compared to 7.2% in the previous year).
- The number of deals that were subject to a final order (i.e. either cleared with conditions or outright prohibited) was 5 (down from 15 in the previous year), although none of the 5 deals was subject to an outright prohibition. 10 deals were withdrawn by the parties before a decision was issued.
- Deals involving investors from China continued to be heavily scrutinised but deals with acquirers from the USA, Canada, France and the UAE were also subject to final orders.
- The most reviewed areas of the economy (by target activity) were the defence and military and dual-use sectors, although deals involving academic research and higher education collaboration have started to receive greater attention.
- The Government is continuing to use most of its 30 working days statutory period to conduct its initial screening of all notifications. For more complex deals, the Government is likely to take at least 2-4 months from the point of notification to issue a decision.
1. Number of notifications reviewed and transactions “called-in”
During the Reporting Period, the UK government received a total of 906 notifications and reviewed a total of 847 notifications (with a small number of notifications rejected because they were incomplete or did not meet the requirements of the notification criteria).
Of the 847 notifications reviewed, the number of notifications “called-in” for an in-depth, second phase review – because the Government considered the relevant transactions gave rise to a “risk to national security” – was only 37 (4.4% of total notifications received, down from 7.2% for the previous reporting period from April 2022 to March 2023). Out of the 37 notifications called-in, 22 were as a result of mandatory notifications whereas 15 were made voluntarily.
In addition, the Government called-in 4 deals where a notification was not made but where the Government considered that it had jurisdiction to review the transaction under the NSI Act. This brought the total number of deals called-in for review to 41 (down from 65 in the previous reporting period).
Of the 41 deals that were called-in for review, 33 resulted in a final notification (where the deal was eventually cleared unconditionally or the notification was withdrawn by the parties) and 5 resulted in a final order that saw conditions imposed on the deal (down from 15 in the previous year). No deal was outright prohibited during the Reporting Period.
The small percentage of overall notifications that were called-in is perhaps an indication of the previous Government’s stated objective of adopting a “small garden, high fence” approach when it came to using its foreign investment screening powers under the NSI Act.
2. Deals involving investors from China remain heavily scrutinised, but investments from the USA, EU and the Middle East are also being caught
Whilst the NSI Act does not screen investments based solely on the identity or nationality of the investor, China-based investments have been subject to a higher degree of scrutiny by the Government in the nearly three years since the Act came into force. For instance, out of the 5 transactions that have been outright prohibited to date under the NSI Act, 4 of the deals had a China-based investor.
The data from the latest Reporting Period reflects a similar picture of investments from China being more heavily scrutinised compared to investments from other countries. In particular:
- Of the 41 deals called-in, 41% related to acquisitions involving an acquirer associated with China (the highest proportion for any single country);
- Of the 33 notifications that resulted in a final notification, 48% involved acquirers associated with China (again, the highest proportion for any single country); and
- Of the 10 deals that were withdrawn during the in-depth review period, 8 were associated with China (again, the highest amount for any single country).
Nevertheless, the Government continues to scrutinise deals from “friendly” jurisdictions. Notably, the 5 deals that were subject to a final order during the Reporting Period included investors from Canada, France, the USA and the UAE (as well as investors based in the UK).
3. Defence, military and dual-use, and academic research are the most sensitive sectors
The area of economy (based on the target’s UK activity) that received the highest number of call-ins by the Government was defence (34% of all call-ins), closely followed by military and dual-use (29%). This is largely in line with the statistics from the previous reporting period which saw 37% of all call-ins involving a target that was associated with the military and dual-use sector.
These statistics suggest the Government is limiting the use of its screening powers to deals where the target is active in supplying goods or services that concern the most sensitive elements of the UK’s critical infrastructure and technology. A closer look at the 5 deals that were subject to a final order during the Reporting Period shows targets that were active in: (i) satellite and communications services, (ii) naval and propulsion systems for nuclear submarines, (iii) atomic clocks, (iv) semiconductors; and (v) assets relating to underwater lasers.
Also of note is the high proportion of deals where the target’s activities were associated with academic research and development in higher education (24%, behind only “defence” and “military and dual-use”). Whilst this category is not a defined mandatory notification sector, deals involving collaborations or licensing deals between university spin-outs and research groups – that involve the potential transfer of key assets or IP out of the UK – have been the subject of a number of reviews under the NSI Act (including the first ever deal that was outright prohibited under the regime).
Reflecting its growing interest in this sector of the economy, the Government recently issued market guidance aimed at providing further clarity on the scenarios where higher education institutions and other research organisations could be caught within the scope of the NSI Act (see our previous blog post here).
4. Updates around the notification procedure and enforcement
The notification and review procedure has frequently been described by market participants as being somewhat of a “black box” process owing to a perceived lack of transparency and substantive engagement with the Investment Security Unit, especially during the review period for more complex deals.
The latest Report offers some useful insight on the operation of the NSI Act, especially around the timing of reviews:
- The average number of working days for a mandatory notification to be accepted as being complete following submission is 6 (up from 4 during the previous reporting period);
- The average number of working days for a mandatory notification to be called in for an in-depth review following the acceptance of the notification was 29 (out of a maximum statutory period of 30 working days); and
- The average number of working days for a mandatory notification to be issued with a final order following the submission of the notification was 86 working days (i.e. 105 calendar days).
These statistics show that, on average, the Government is taking slightly longer than before to accept a notification before commencing the substantive initial screening period. Similar to previous years, the Government is also using up most, if not all, of its statutory timeframe of 30 working days to conduct its initial, first phase screening of a notification.
For more complex deals, where an in-depth review appears to be likely, the figures from the latest Report suggest that market participants should expect a total review period of at least 2-4 months from the point of submitting the notification to receiving a final decision.
Finally, the Government confirmed that it did not issue any penalties nor were there any criminal prosecutions concluded for non-compliance with the NSI Act during the Reporting Period. However, 34 offences werecommitted by parties completing notifiable acquisitions without prior approval (penalties were not imposed in any of these cases – instead the parties were contacted to request that steps were taken to prevent any recurrence).
5. What’s next?
As noted above, the new Labour government has yet to put forward any concrete announcements regarding its priorities under the NSI Act or whether it intends to carry through any of the proposed reforms to the NSI Act that were signalled by the previous government earlier this year (see our previous blog post here).
We will continue to monitor developments on the NSI Act, with any further updates posted on this blog.
