On 18 April 2024, the UK Government published its response to the call for evidence that it launched in December 2023 asking for stakeholder feedback on a number of areas of potential change to the UK’s National Security and Investment Act (“NSI Act“).
The call for evidence, launched nearly two years after the UK’s first, standalone foreign investment review regime came into force (see here), sought views on a broad range of questions concerning both the scope and process of the NSI Act. It signaled an intent from the UK Government to make the existing regime more pragmatic for market participants whilst maintaining the government’s stated position of having a “small garden, high fence approach” when it comes to scrutinizing investment into the UK.
The UK Government stated that it had received 110 full responses to its call for evidence and noted that the overall feedback regarding the operation of the system had been “positive”. In response to the feedback received, the Government has announced a series of actions and further consultations – set out below – that it will undertake between now and Autumn 2024 (subject to parliamentary time).
Publishing an updated statement on how the Secretary of State expects to exercise its call-in power
The Government will publish an updated Section 3 Statement on how the Secretary of State expects to exercise its call-in power. Under the provisions of the NSI Act, the Secretary of State has the power to proactively investigate (i.e., “call-in”) a transaction if it reasonably suspects the acquisition has “given, or may give, rise to a risk to national security“.
Whilst this criterion is undefined under the NSI Act legislation – and has been broadly interpreted by the UK Government – the existing Section 3 Statement (see here) sets out a number of factors that the Secretary of State will take into account when deciding whether to exercise its call-in power including: (i) the risk profile of the target; (ii) the risk profile of the acquirer; and (iii) the degree of control that will be acquired through the transaction.
Respondents to the consultation requested more clarity on the areas of the economy that the Government considers most sensitive and on how the Government assesses the national security risks of a transaction. In response, the Government has confirmed that it will be publishing further guidance and updating the Section 3 Statement in May 2024 to help businesses to “better understand” the types of deals where the Government may intervene and why.
The Government has ruled out introducing a fast track process for notifications made by certain types of acquirer (e.g. those who have already had a prior transaction cleared through the NSI Act).
Publishing updated market guidance
The Government noted a number of areas where a significant number of respondents requested specific guidance in relation to the application of the NSI Act. These include: (i) how the Act applies to transactions in academia and research areas; (ii) how statutory time limits are captured; and (iii) the scenarios where the NSI Act can apply to Outward Direct Investment.
In response to this feedback, the Government has announced that it will also be publishing further market guidance in May 2024 addressing the aforementioned topics. The market guidance published by the Government to date in relation to the NSI Act can be found here.
Consulting on changes to the mandatory notification areas
A majority of the respondents (63%) provided feedback on potential changes to the scope of the 17 specified areas of the economy (the “Mandatory Notification Sectors“) that are subject to the NSI Act’s mandatory notification regime (see the full list here). Respondents requested clearer definitions on the scope of a majority (9 out 17) of the Mandatory Notification Sectors including: Artificial Intelligence, Advanced Materials, Critical Suppliers to Government, and Defence.
In response to this feedback, the Government will launch a formal public consultation on updating the Mandatory Sector Definitions by the summer of 2024. This will include proposals for a standalone Semiconductor area and a Critical Minerals area (both of which are currently covered by the “Advanced Materials” sector). The Government is also exploring the possibility of adding Water to the areas of the economy subject to a mandatory notification requirement.
Considering certain technical exemptions (including internal reorganisations) to the mandatory notification regime
The Government has acknowledged the feedback received from market participants that there should be targeted exemptions from the mandatory notification regime for certain types of transaction that tend to confer either minimal levels of control or no additional control (including internal reorganisations). In particular:
- 25% of all respondents supported an exemption for the appointment of liquidators, official receivers and special administrators from the NSI Act’s mandatory notification system.
- 27% of all respondents provided feedback on possible exemptions for certain internal company reorganisations.
- 15% of all respondents provided feedback on exempting transactions involving Scots law share pledges.
- 30% of all respondents provided suggestions on exemptions for public bodies.
In response, the Government will bring forward secondary legislation to exempt the appointment of liquidators, official receivers and special administrators.
The Government is also considering whether to implement exemptions for certain internal reorganisations, Scots law share pledges and public bodies – however, before deciding to do so, it will undergo a feasibility assessment to better understand whether such exemptions can be designed in a way that does not “compromise the integrity of the NSI Act”.
The Government notes that the implementation of any such exemption will likely be achieved through legislation to be introduced in Autumn 2024 (subject to the UK parliamentary timetable).
Improving the operation of the NSI Act system (including the online notification service)
The Government has also acknowledged the feedback received for improvements that can be made to the notification process itself, with 19% of respondents seeking greater transparency and engagement from the Investment Security Unit (the “ISU”) during the course of substantive reviews. The Government has noted it will consider further such improvements to the notification process based on the feedback received although it has ruled out making any further changes to the notification form itself for the time being.
Respondents also flagged some of the technical issues encountered with the Government’s online notification portal, in particular the issue of a “firewall” block that prevents users from entering certain text within the online form. The ISU has stated it is aware of this issue and will continue to make improvements to the notification system.
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Overall, the UK Government considers that the NSI Act is working well but intends to ensure that its foreign investment review regime anticipates future national security risks in a proportionate way, that both encourages investment and also allows for more agile scrutiny of sensitive transactions. We will monitor developments from the UK Government and post further blog with updates.
