Small garden, high fence: UK national security consultation concludes and results awaited

The National Security and Investment Act 2021 (the “NSI Act”) has been with us since 4 January 2022 and gives the UK government power to scrutinise and intervene in acquisitions that are deemed to have an impact on national security.

Under the regime, certain sensitive acquisitions must be notified to the government and receive clearance before they can be completed. Companies may also make a voluntary notification to the government where they are buying or investing in a Target whose activities fall outside of those which require a mandatory notification, but where the transaction could give rise to national security concerns.  Failure to make a mandatory notification will cause the transaction to be void in law and risks civil or criminal penalties (or both) for the buyer or investor, as well as for individual officers of the buyer or investor.

Mandatory notification regime

There are 17 key sectors which are subject to the mandatory notification regime. The regime currently applies to all Targets active in those sectors with no exemptions having been carved out to date.  The regime also applies to transactions which lead to the consolidation or acquisition of control of 25 per cent or more of a Target’s shareholdings or voting rights. Crucially, there is no de minimis in terms of transaction value, whatever the transaction type.

Further details regarding the workings of the NSI Act, including how the mandatory notification regime works, were set out in HLaw’s summary published back in May 2021.

The Rt Hon Oliver Dowden CBE MP in his foreword to the government’s call for evidence stated that the NSI Act has been functioning well and as expected, in line (he says) with the government’s objective of capturing acquisitions that may require scrutiny based on their impact on national security.

NSI Act annual report 2022 and 2023

The government’s NSI Act annual report 2023 (preparation of which was a statutory requirement per section 61 of the NSI Act) covered the period 1 April 2022 to 31 March 2023. The report revealed that out of the 866 notifications received, 93% were given the government go-ahead within a 30-day period. In 15 cases, the government issued final orders to block, unwind or impose conditions on acquisitions.

This was the first annual report to be published that covered a period of a full year, the previous and first NSI Act annual report 2022 covering only a period of three months.

Call for evidence 2023

On 13 November 2023, the government launched a call for evidence seeking feedback from those stakeholders (both inside and outside the UK) that have interacted with the NSI Act thus far or who have the NSI Act in consideration.

The call for evidence aims to understand the following:

• the impact of the regime on businesses and investors and their experience interacting with the process;
• whether the scope and requirements of the system are proportionate and effective; and
• how well stakeholders understand the system, how it is likely to be used and what national security risks may be posed by investments (and acquisitions).

The government is asking whether there are types of acquisitions that stakeholders believe should not be subject to mandatory notification and how transaction timelines have been affected for those involved.

Next steps following the call for evidence

The call for evidence closed on 15 January 2024. The government is now in the process of reviewing the responses received and has signalled (in the call for evidence) that it may contact those who submitted responses at a later date with follow-up questions.

The government has stated in the call for evidence that it would like to use the responses received from stakeholders to hone the scope of the regime, improve the notification and assessment process and develop the government’s public guidance and communications on how the NSI Act works.  The Rt Hon Oliver Dowden CBE MP went on to say that no changes to primary legislation are being considered at this point in time, but depending on the responses received, consideration will be given to whether a more detailed consultation on specific measures or legislative changes are necessary.

Refinement to scope of 17 defined activities / areas

The government was seeking feedback in the call for evidence regarding whether stakeholders think that any of the activities within the 17 defined sensitive areas are unlikely to create national security risks, or where compliance with mandatory notification places substantial burdens on businesses and investors.

Further, the government is looking at amending definitions and clarifying its guidance on some of these sectors (including AI, advanced materials, communications, data infrastructure, energy and synthetic biology).

In this firm’s experience, we are seeing that the scope of these sensitive areas is being interpreted widely by stakeholders on transactions and their advisors and the scope of business activities triggering a referral is much wider than one might have thought would be the case back in 2021.  AI for instance is now embedded in the tech stack of a large proportion of UK tech companies.

Artificial Intelligence companies

AI is one of the more hotly-debated areas which is subject to the mandatory notification regime.  If an acquisition or investment meets the applicable thresholds and the answers to each of the following two questions is ‘yes’, a notification must be made in relation to the relevant transaction:

• Does the Target carry out research into, or develop or produce goods, software or technology that use AI?
• Is the AI work of the Target used for one of the following applications: identification or tracking, advanced robotics or cyber security?

The regulation surrounding AI has purposefully been drafted so as to capture Targets that do not necessarily identify as ‘AI companies’.  This is achieved by the regulation focusing on the specific work that a Target undertakes rather than whether the Target is solely focused on AI or incorporates or develops AI as part of a wider approach to their sector or business.

This has not been popular among stakeholders who have provided feedback to the government, prior to the call for evidence, that the regime is capturing unnecessary acquisitions that pose no national security risks. Accordingly, the government is looking for information on:

• Whether there are activities within the AI section of the regulations that should be removed; and
• Whether new areas should be added to the regulations that are currently not in scope (‘generative’ AI for instance).

Internal reorganisations

Internal reorganisations can often fall under the scope of the mandatory notification regime even though there may be no change in ownership and control of the Target.

The government stated in the call for evidence that it is – in particular – looking for information on the extent to which internal reorganisations are caught, with the view of exploring an exemption.  The call for evidence went on to say that the government has so far received feedback from stakeholders to say that this mandatory notification is in the context of group restructures with no change of control at all is disproportionate.

Liquidation / bankruptcy

A further exemption from the mandatory notification system is being considered by the government in relation to the appointment of liquidators, special administrators and official receivers.  Currently, subject to certain conditions being met, where a liquidated entity / bankrupt individual holds shares in a solvent entity and transfers those shares to a liquidator (upon their appointment), a mandatory notification may be required.  By contrast, the appointment of administrators is exempt from mandatory notification (per paragraph 6(2) of Schedule 1 of the NSI Act) (though the appointment of special administrators is not).  Note that special administration is a process that concerns businesses providing a statutory or public service or supply (or businesses where there is wider public interest) and aims 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.

While the government stated in the call for evidence that few notifications in relation to the appointment of liquidators, special administrators and official receivers have been received, feedback has been voiced by stakeholders as to the misalignment between the treatment of liquidators, special administrators and official receivers and the treatment of administrators.  Further, the appointment of liquidators, special administrators or official receivers usually involve time-pressured situations that pose low national security risks.  Having to submit a mandatory notification adds a layer of complexity and further compliance burdens in already stressful processes.

The alignment of the system for appointing liquidators, official receivers, and special administrators with that for administrators would, no doubt, be welcomed by the insolvency community.

Automatic enforcement provisions

In a secured lending context, a senior lender will often have the benefit of a charge over the Target’s shares. Enforcing the charge may require a mandatory notification as it would often involve transferring voting rights from a borrower to a lender.  Mixed feedback has been received by the government in this area with certain stakeholders claiming that this can be problematic to loan markets, while others have reported that loan markets have already adjusted to the mandatory notification system.

While an exemption is not currently being explored in this area, the government welcomed general feedback in the call for evidence from stakeholders as regards the effect on loan markets.

Final thoughts

The goal of the government, as stated by the Rt Hon Oliver Dowden CBE MP in his foreword to the call for evidence, is to use a “small garden, high fence” approach i.e. an approach which safeguards the UK against the small number of acquisition and investment transactions threatening our national security whilst leaving the large majority of transactions unaffected.

The government appears to be listening to stakeholders by trying to reduce the compliance burdens on both businesses and investors. With the call for evidence being launched merely two years after the NSI Act came into force, it is a welcome step in the right direction to achieving such an approach.  It will be interesting to see how the results of the call for evidence feed through into revisions to the regime in due course.

This piece was written by Sanya Bhambhani with input from Ted Dewhurst and 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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