News & Insight

National security April 25, 2024
Small garden, high fence: UK government responds to call for evidence

Small garden, high fence: UK government responds to call for evidence

On 13 November 2023, the UK government launched a call for evidence in relation to the National Security and Investment Act 2021 (the “NSI Act”) with the aim of ensuring that the United Kingdom remained a business-friendly environment nonetheless. That call for evidence closed on 15 January 2024 and the results have been awaited since.

Response to the call for evidence

The government published a response to the call for evidence on 18 April 2024 (the “Response”) in which details have been provided as to how it intends to fine-tune the national security regime going forward.

110 responses were received from a variety of institutions (including law firms, banks, trade bodies, etc). Of the respondents, 75% had been involved in transactions which had gone through the NSI system. The government went on to say that the overall feedback received suggested that the “operation of the system and business understanding on how the NSI Act works was positive”.

The Response sets out five key areas of focus which the government is seeking to address between now and autumn 2024.

  1. Publish an updated NSI Section 3 Statement (in May 2024)

The government had published a statement in 2021 (which was made under section 3 of the NSI Act) which set out how the Secretary of State expects to exercise its power to give a ‘call-in’ notice. A transaction may be ‘called in’ for assessment if the Secretary of State reasonably suspects the transaction has given or may give rise to a national security risk or arrangements are in progress which, if carried into effect, will result in a transaction that may give rise to a risk to national security.

The Response noted that respondents requested information on how the government assesses the national security risks of any given transaction. They also requested further clarification on those areas of the UK economy which the government considers the most sensitive. Accordingly, the government will publish an updated ‘section 3 statement’ which aims to provide clarity on the factors considered by the Secretary of State when assessing and exercising the call-in power.

  1. Publish updated market guidance (in May 2024)

The Response stated that there were various calls for further guidance across a range of areas, including how the NSI Act applies to transactions in academia and research and how the NSI Act can apply to outward direct investment (“ODI”). In order to address these questions, the government will publish further market guidance on the various areas cited by respondents, including guidance on how the NSI Act applies to academia and ODI.

The government was particularly interested in receiving feedback from stakeholders as regards the impact of the mandatory notification regime on automatic enforcement provisions in a secured lending context. The government had previously stated that they were not looking to explore an exemption in relation to these provisions.

This has been confirmed in the Response and the government is looking at where it can provide further guidance in this area. The Response reported that 20% of all respondents had already reflected the mandatory notification requirements in the terms of their lending agreements and that 12% of respondents stated that it had affected their approach to secured lending or had created uncertainty in the market. The government went on to say that in practice, only a very small number of notifications had been received in respect of these types of transactions.

  1. Consulting on changes to the mandatory notification areas (by summer 2024)

There are currently 17 key areas which are subject to the mandatory notification regime. The government sought feedback in the call for evidence on existing areas and their definitions as well as possible additions to the 17 key areas. In the Response, it has been announced that a formal public consultation will be launched in summer 2024 as regards updating the mandatory area definitions.

The Cabinet Office went on to say that the drafting of new definitions will capture any current and future risks and noted that “circumstances can change quickly and the regulations must be adaptable to that reality”. Presumably this will be an area which the government will have to constantly monitor to ensure that the legislation is able to keep up with market practices and terminology.

  1. Technical exemptions to the mandatory notification requirement (in autumn 2024)

An exemption was being considered by the government in relation the appointment of liquidators, special administrators and official receivers. By contrast, the appointment of administrators is already exempt from mandatory notification. Special administration is a process aimed at businesses providing a statutory or public service or supply (or businesses where there is wider public interest). The goal of the process is to achieve a better outcome for key stakeholders than possible under a standard administration procedure by trying to preserve the continuation of the entity’s services / business operations.

The Response noted that 25% of all respondents supported an exemption for the appointment of liquidators, special administrators and official receivers.  It was also stated that the current mandatory notification system for the appointment of liquidators could “detrimentally impact entities in financial distress”. The Report detailed that the government will introduce secondary legislation to exempt the appointment of liquidators, official receivers and special administrators.

Internal reorganisations can also fall under the mandatory notification regime even where there is no change in ownership or control. This has received mixed feedback. The government has not currently carved out an exemption for internal reorganisations but has instead instructed the Investment Security Unit (an operational unit responsible for addressing and mitigating national security risks) to undertake a thorough national security risk assessment to investigate whether exemptions for internal reorganisations can be introduced without compromising national security.

  1. Improvements to the operation of the NSI system

The call for evidence sought feedback from stakeholders on the notification forms, the notification portal and the Investment Security Unit’s processes. In the responses received, the government received calls for greater transparency around the operation of the system and opposed further information being requested on the notification form amongst a number of other responses.

The government and Investment Security Unit will consider the responses received before making any further improvements.

Concluding thoughts

The government set out in the Response that it intends to continue to monitor the performance of the NSI Act and will fine-tune and refine the legislation accordingly. Given the NSI Act’s relatively recent implementation in 2022, this proactive approach seems to reflect a welcome commitment to ensuring the regime remains as business friendly as possible while protecting the UK’s national security, thus trying to maintain the ‘small garden, high fence’ approach.

This piece was written by Sanya Bhambhani with input from Henry Humphreys.  Do please reach out to a member of the team if you would like to discuss matters relating to the NSI Act or anything relating to corporate finance and M&A generally.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice and is not to be relied upon.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

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