What can businesses learn from the UK National Security and Investment Act's Third Annual Report 2023-2024?

The National Security and Investment Act 2021 (NSIA) Annual Report for the period 1 April 2023 to 31 March 2024 provides a comprehensive overview of the Act's implementation and its impact on national security and investment in the UK. This Insight analyses key findings from the report for in-house lawyers and stakeholders involved in M&A within the UK.

The report details the notifications received, call-in notices issued, final notifications and final orders. It also covers the time taken to screen acquisitions, the origin of investments, and compliance and enforcement actions. The document underscores the government's commitment to safeguarding national security while maintaining an open and transparent investment environment.

Slight increase in notifications

The government received 906 notifications during the reporting period, marking a 4% increase from the 866 received in the previous period. Of these, 876 were accepted compared to 806 in the previous period, meaning the notification acceptance rate increased by just over 8.5%.

This uptick suggests heightened awareness and compliance among businesses regarding the NSIA's requirements. Once again, approximately half of rejections were because the acquisition should have been notified under a different notification type, indicating the importance of obtaining professional help when making an NSIA notification.

Call-in notices

A total of 41 acquisitions were called in and subject to a more in-depth review, a notable 37% decrease from the 65 acquisitions reviewed in the previous period. This reduction suggests a more targeted approach in scrutinising acquisitions that may pose national security risks.

Over half of call-in notices were issued following a mandatory notification and just over a third were following a voluntary notification. 10% were issued following non-notifiable acquisitions. This indicates the necessity of understanding the NSIA process early on in a transaction, as it is still likely that a transaction which does not fall within the mandatory sectors will be called in for further review.

Final notifications and orders

The government issued 33 final notifications and five final orders in this reporting period. This is a marked decrease from the previous period, when 57 final notifications and 15 final orders were made. However, it is important to note the limitations of this data: notifications, call-in notices and final notifications/orders relating to the same transaction can occur in different reporting periods.

The majority of final notifications and orders were related to transactions in the defence and military and dual-use sectors, reflecting the stringent review process for acquisitions in these sensitive sectors.

Areas of the economy

The defence sector attracted the most interest from the Investment Security Unit (ISU), with the highest proportion of notifications, call-ins, final notifications and final orders. This was followed by the critical suppliers to government and military and dual-use sectors.

The statistics paint a similar picture to the previous reporting period, although notably communications has a much higher share of call-in notices in this reporting period, 25% compared to 9% previously.

Origin of investment

The UK and China were the most significant origins of investment for call-in notices. 41% of these were associated with China and 39% the UK. The USA also had a substantial presence, accounting for 22% of call-ins. This continues a similar picture from the previous reporting period. The report notes that a single transaction can be associated with more than one jurisdiction and so percentages may add up to more than 100%, as in this case.

Acquirers associated with China accounted for the largest proportion of final notifications, with 48%. The UK was second in this list with 42% and the USA was third with 21%.

Acquisitions by entities associated with the UK and USA were the origins of investment with the largest number of final orders, with two each, followed by the United Arab Emirates, France and Canada with one final order each. For comparison, acquisitions by entities associated with China had the largest number of final orders (eight) in the previous reporting period.

Timeframes

There has been an increase in the average time taken by the ISU to accept or reject a notification of any kind. Mandatory notifications took approximately six days to be accepted (a 50% increase compared to four days last year) and 13 to be rejected compared to four and ten in the last reporting period. The average number of days to call-in an acquisition has also slightly increased, moving from 28 to 29.

The average number of working days between calling in an acquisition and issuing a final notification has remained similar. Interestingly, the report states that the time taken to issue a final order from calling the transaction in has dropped by almost 50 days. However, the report caveats this, saying that "given the small number of final orders (5) issued in this reporting period, no conclusions should be drawn about any trends in the time taken between calling in an acquisition and issuing a final order."

Compliance and enforcement

Following in the same vein as the last reporting period, no penalties were issued during the reporting period, but 34 offences of completing notifiable acquisitions without approval were identified. In these cases the parties were contacted to request that the issue does not reoccur.

This indicates a need for continued vigilance and education to ensure compliance with the NSIA, even though the consequences of non-compliance still seem to rest largely on the impact of an unexpected review on deal timing and the potential risks of having to unwind a transaction rather than through monetary penalties or criminal sanctions.

Osborne Clarke comment

The NSIA annual report 2023-2024 gives substantial insight into the operation of the Act, especially when compared with previous reports. The NSIA continues to focus on acquisitions with a Chinese investment source although acquisitions involving the UK, US and a number of other jurisdictions have also been scrutinised. Although timeframes regarding some aspects of the NSIA have increased, there is a limited amount of insight that can be drawn from this due to differences in the reporting periods, as indicated by the government.

Although the government still refrains from taking criminal enforcement action under the NSIA, this does not mean its powers under the Act are ineffective. The impact on deal timelines and the potential for having to unwind a completed transaction are all risks that mean a company must take specialist advice when considering a transaction that may be affected by the NSIA.