UK government announces timetable for changes to the National Security and Investment Act regime

The UK Cabinet Office has published the outcome to its call for evidence issued on 13 November 2023 in relation to the National Security and Investment Act 2021 (NSIA). 

The response published on 18 April follows the government seeking views on how the NSIA regime could be more business friendly while maintaining and refining the protections to national security.

Under the NSIA regime, the UK government has the power to intervene in a broad range of transactions on national security grounds.

High-risk sectors

The government has identified 17 sectors where it considers national security risk to be highest. This list of high-risk sectors is subject to review and change. Transactions in these sectors where more than 25% of the votes or shares, more than 50% of the votes or shares, or 75% or more of the votes or shares in a qualifying entity is acquired must be notified to the Investment Security Unit.

The scope of NISA is wide reaching and it has become clear in the three years since it was enacted in April 2021 that it is not simply a tool to block Chinese acquirers of sensitive UK assets, as more deals are blocked or are permitted to proceed only subject to conditions to protect national security.

The Cabinet Office, following its call for evidence, which included responses from 110 firms, organisations and institutions, has set out the changes it intends and an indicative timeframe for the rest of 2024.

May 2024

The government will provide an updated statement in May on what the secretary of state will take into account when exercising the  call-in power.

It will also publish an updated market guidance in May. This will include factors that the government expects to take into account when assessing risk, the application of the NSIA regime to academia, research and outward direct investment, as well as how time limits for the regime are calculated.

The government will also consider providing further guidance on the application of mandatory notification to automatic enforcement provisions in secured lending agreements

Summer 2024

A formal public consultation on updating the Notifiable Acquisition Regulations will be launched this summer and will specify the 17 sensitive areas of the economy that are subject to the NSIA mandatory notification requirements.

This includes proposals to create standalone areas for the semiconductor and critical minerals sectors as well as considering adding water to the list of mandatory notification areas.

Autumn 2024

If parliamentary time allows, the government intends to lay legislation in the autumn on technical exemptions to the mandatory notification requirement (including the appointment of liquidators, official receivers and special administrators).

Additionally, the Investment Security Unit will undertake a thorough national security risk assessment, before deciding whether to make targeted exemptions for internal reorganisations, Scots law share pledges and public bodies to make transactions in those categories simpler, quicker and more deliverable.

This assessment will aim to understand whether exemptions for these transactions are feasible and whether they can be designed in such a way that they do not compromise the integrity of the NSIA.

The Cabinet Office confirmed that it is not considering a fast-tracked process for certain types of acquirers such as those who have already had a prior transaction cleared through the NSIA system. This is because some targets are so sensitive the screening will always be warranted. However, it is considering further improvements to the Investment Security Unit's operation processes and paperwork, following feedback.

Possible changes if Labour is elected

In November 2023, Labour's shadow secretary for business and trade voiced his concern at the government's "worrying" decision to water down screening rules for foreign investments. This was based on comments by Oliver Dowden, the secretary of state in the Cabinet Office when the consultation was launched, that the government was looking to scale back the UK's investment screening regime to make it "more business friendly". From the Cabinet Office's response to the call for evidence, Labour's concerns here haven't fully materialised.

Labour's stated approach is an extension of its "securonomics" plan unveiled by Rachel Reeves last year and continued in the "National Securonomics" paper by the influential think tank Labour Together.

This paper suggests that the 17 areas should be handled through three clusters: clean energy, digital and advanced manufacturing. Notably, the paper suggests incentivising British funds and companies to invest in particularly promising British companies, although this is coupled with a suggestion of the need for a clear position on when to use NSIA powers to defend against foreign investment that could pose genuine security risks.

Although this indicates that there is a potentially more protectionist approach under consideration, the paper is clear that Britain will require supply chains deeply connected with trusted partners. Australia, the US, Japan and the EU are mentioned in the report.

Osborne Clarke comment

Businesses seeking investment or active in the M&A arena are likely to feel disappointed that this call for evidence does not appear to have led to as many changes as the government suggested back in November.

The government had appeared to suggest it would likely be refining the scope of the NSIA, especially with regards to often unproblematic internal reorganisations and this is something which would be strongly welcomed by the corporate dealmaking community.

While the guidance to be published in May will prove useful, there will, nevertheless, be disappointment that targeted exemptions for certain internal reorganisations will only be considered after a further risk assessment.

Given that these changes would require further legislation, they are unlikely to happen in the short term, especially with UK parliamentary elections expected later this year.