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Protecting the nation’s family silver – National Security and Investment Act: Annual Report 2023

August 2023
Paul Henty and Jonathan Booton


The National Security and Investment Act 2021 (NSIA) came into force on January 4, 2022, empowering the UK Government with broad authority to scrutinize acquisitions and investments that may have implications for national security.  On a day-to-day level, it is operated and enforced by the Investment Security Unit (ISU), a division of the Department of Business and Trade.

the NSIA has expanded the ability of the UK Government to investigate closed and anticipated mergers and investments which would take place in sensitive areas of the economy, covering both share and specific asset purchases associated with seventeen areas of potential sensitivity.

Under the NSIA, certain transactions must be notified to the Secretary of State (though in practice reviewed by the ISU), with failure to comply potentially resulting in legal consequences. The government holds the power to impose conditions, unwind transactions, or block acquisitions entirely, with no minimum threshold for transactions and no limitations to foreign buyers.

The NSIA requires the Government to report on the functioning of the NSIA annual reporting. The most recent report was published on 11 July 2023 and is the first NSIA annual report to cover a whole year (NSIA Report). The NSIA Report, provides an overview of the regime’s operations from April 2022 to March 2023 (the Reporting Period).

The report outlines a high level of activity, both in terms of the number of notifications being made by corporate parties involved in the m&a process, as well as the exercise of review powers by the ISU.  This is consistent with our own recent experience on deals, where NSIA considerations are “front and centre of advisers’ concerns”, with transactions routinely being subject to some level of regulatory scrutiny.

Coexistence with the merger control regime

The NSIA functions alongside the existing UK merger control regime set out in the Enterprise Act 2002 (“EA 02”).

The principal purpose of the EA 02 regime is to facilitate regulatory oversight to protect competition.  The EA 02 allows the Competition and Markets Authority (“CMA”) to investigate mergers or acquisitions where:

  • the transaction would enhance or create a share of supply above 25%in relation to the supply of goods of any description, at least one-quarter of all the goods of that description which are supplied in the United Kingdom (Section 23(3) of the EA 02); or
  • the target has a UK turnover in excess of £70 million (Section 23(1)(b) of the EA 02).

Even where it has jurisdiction to examine mergers, the CMA is only likely to exercise that power where it considers there to be a realistic prospect that the merger may lead to a substantial lessening of competition (SLC) in any affected market.  It will only be able to block a merger outright where it can demonstrate a SLC.

Because the EA 02 and NSIA cover different concerns, it is possible that parties may need to submit deals for consideration by both the CMA and ISU.  For transactions with a cross-border impact (e.g. where the target has a strong presence in overseas jurisdictions), filings may also be needed with foreign regulators.

Overview of the NSIA

The focus of the NSIA is the protection of national security and the UK national interest rather than competition.

To that end, the NSIA sets out a notification regime offering potential acquirers different methods of notification of a transaction under the NSIA:

  • Mandatory notifications – This requires notification under the NSIA if the target engages in specified activities in one or more of 17 sensitive sectors (e.g. defence, critical suppliers to the Government, military and dual use, civil nuclear and artificial intelligence). Areas of the economy in relation to which mandatory notifications were given can be found on page 15 of the NSIA Report here. Failure to notify a transaction when required to do so may render the transaction null and void.
  • Voluntary notifications – Even in circumstances where a mandatory notification is not required, parties can submit voluntary notifications. Areas of the economy in relation to which voluntary notifications were given can be found on page 16 of the NSIA Report here. These include for example advanced materials, goods services related to human health, construction and space or satellite technology).  Parties may decide to make a voluntary notification where they believe there is a risk of call in but wish to try to control the narrative presented to overseeing regulators (which may be preferable to allowing their competitors to do the job for them).

Whether a notification is submitted or not, the government may call in qualifying acquisitions (relating to areas in either the mandatory or voluntary lists) where they reasonably suspect the acquisition may give rise to a risk to national security.   The ISU obtains intelligence about transactions from news and internet sources, as well as from the UK companies registrar.

There are civil and criminal penalties for completing a notifiable acquisition without gaining the necessary approval. A civil penalty may be imposed up to a maximum of either 5% of an organisation’s global turnover or £10 million, whichever is greater.

There are few surprises in terms of the areas listed on the mandatory list.  Computer hardware for example would include computer chips, which are an essential and much sought after component in the digital economy.  The current spat between the US and China which has seen the US ban the export of certain high-end chips to the PRC and in retaliation, China has threatened to cut off the supply of metals used to make microchips.

Data industries are also an area of potential acute sensitivity.  In 2019, CFIUS (the US committee authorised to review certain transactions involving foreign investment in the United States) blocked the acquisition of Grindr, a dating app, by a Chinese enterprise.  It was reported there were fears that the app may contain sensitive personal data.  Possessing that data could have led to the delivery of compromat, that could be used as leverage against any service users who were also Government officials.

Once a notification is submitted and accepted the NSIA requires the notification to be assessed within a review period. A transaction is then either cleared or subject to a Call in Notice.

  • Call in Notice – A call-in notice signifies that the transaction will be subject to more detailed review. This triggers a 30-working day “assessment period”, which may be followed by another 45-working day “additional period” (that can be further extended with the notifying party’s consent).

Once the review is complete, transactions will either be cleared, and a ‘Final Notification’ issued or subject to a ‘Final Order’.

  • Final Notification – The transaction is cleared, and notification issued. This enables the parties to go ahead with the acquisition in confidence that the Government cannot use NSIA powers again in relation to the acquisition.
  • Final Orders – The Secretary of State may make a final order to impose necessary and proportionate remedies that mitigate risks to national security arising from the acquisition. This may include blocking an acquisition from happening or ordering an acquirer to unwind the acquisition.

Executive Summary

In the 2022 Reporting Period, the Secretary of State received 866 notifications. 671 were mandatory notifications, 180 were voluntary notifications, and 15 were retrospective validation applications (this is a mechanism enabling the retrospective validation of unnotified transactions). 92.8% of the notifications were cleared within 30 days.

65 acquisitions were issued with Call in Notices. 37 were made following a mandatory notification and 17 following a voluntary notification. One Call in Notice was made to a retrospective validation application and 10 Call in Notices were issued for acquisitions that had not been notified. On average the government took 28 working days for mandatory notifications and 27 working days for voluntary notifications to decide to issue a Call in Notice.

Of the 65 acquisitions issued with Call in Notices 37% were associated with the Military and Dual Use area of the economy, 29% with Defence, and 29% with Advanced Materials. 42% of call-ins were of acquisitions involving acquirers associated with China, 32% with acquirers associated with the UK, and 20% with the USA (an acquisition can be associated with more than one country).

The Secretary of State made 57 Final Notifications and 15 Final Orders (and one final order was revoked). As you may have noticed these figures do not align with the 65 acquisitions issued with Call in Notices. This is because some Call in Notices may straddle a reporting period and have been carried over into this Reporting Period.

As outlined above the Secretary of State intervened on 15 occasions on the basis of national security, issuing Final Orders to block, unwind or impose conditions on acquisitions. Out of the 15 Final Orders made, 5 were blocked or subject to an order to unwind the acquisition. There is not much detail in the report concerning the 5 that were blocked or unwound other than to say that no financial assistance has been given during the Reporting Period and there were no appeals against penalties or costs. There were no criminal prosecutions concluded during the Reporting Period.

What are dual use goods?

These are goods and technologies which do not have an overtly military use but could be applied for a military purpose.  Sometimes it is not obvious as to whether or not a product is “dual use”.  They are listed in Schedules to the UK Export Control Order 2008, as well as the EU Dual Use Regulation (EU) 2021/821.  Commonly, the export of goods to non-EU destinations will require a the exporter to apply for and obtain a licence EU exports are covered by an Open General Export Licence).

Key takeaways

  1. Chinese investment gained the most scrutiny – In the Reporting Period it was those transactions where the origin of investment was from China that gained the most scrutiny both in terms of Final Notices and Final Orders. However, this is not all bad as 40% of Final Notices related to transactions where the origin of the investment was China. This means that a large proportion of transactions involving Chinese investment still proceeded. This caution aligns with our own experience in dealing with regulators: not only in the field of the NSIA but also with HMRC’s customs division.
  2. Sector scrutiny – There has been considerable focus around five key areas being: Defence, Critical Suppliers to Government, Military and Dual Use, Data Infrastructure and Artificial Intelligence. This could be as a result of the broadness of the definitions in these sectors such as Defence. The definition of Defence applies to companies at all levels of the supply chain and can include contractors and subcontractors who provide goods or services (there does not have to be a military application). However, this also could be because these relate to key sensitive areas being prioritised by the government at the moment. Businesses should consider whether any of their product inventory could be considered to constitute “dual use” goods.
  3. Timeframes – 92.8% of the notifications were cleared within 30 days. This should provide some certainty and allow parties to plan around the timelines proposed under the NSIA when planning transactions.

Those of our clients that operate in key areas such as Defence, Critical Suppliers to Government, Military and Dual Use, Data Infrastructure and Artificial Intelligence and across the supply chain in these areas should be mindful of the potential for mandatory notification and the importance of getting the submission correct to avoid delays in the timeline. As outlined above, those involved in these key areas should also consider whether they need to build in NSIA review into the sale or acquisition process, especially given that on average it took 81 working days to issue a Final Order.

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