The UK government is considering steps to make the regime more business-friendly, while maintaining and refining essential national security protections.

The National Security and Investment Act 2021 (NSIA), the UK’s first standalone regime for screening investments on national security grounds, has been in force for two years. In light of a recent call for evidence, we consider in this article the UK government’s “small garden, high fence” approach — “safeguarding the UK against the small number of deals that could be harmful to […] security whilst leaving the vast majority of transactions unaffected” — and how dealmakers have responded to the challenges posed by the NSIA regime.

CURRENT STATE OF PLAY

The NSIA requires that certain transactions in specified sectors of the UK economy are notified to and approved by the UK Secretary of State prior to implementation, and permits the UK Secretary of State to call in a broad range of transactions across the UK economy for in-depth national security review.

At present, the NSIA creates additional administrative steps for investors whose transactions are caught by the regime, in particular the mandatory notification requirement. These steps exists even for transactions that present no plausible national security concern. Indeed, the mandatory notification requirement extends to certain internal reorganisations, debt-to-equity restructurings, de-SPAC transactions in which no single investor acquires control of the target company, and acquisitions of companies whose activities are caught by the wide scope of the NSIA but have no national security sensitivity.

However, our overall experience is that the NSIA has, for the most part, been operated efficiently, with a pragmatic and business-friendly ethos. The vast majority of notified deals are approved within the initial 30-working-day review period (93% of notified transactions according to the UK government’s most recent Annual Report into the NSIA), and the notification form is relatively short (albeit not well designed for more complex deal structures, in particular those involving private equity funds, but this can usually be navigated).

CALL FOR EVIDENCE

In late 2023, the Secretary of State issued a call for evidence designed to solicit views on “how the system can be even more business friendly while maintaining and refining the essential protections we need to protect our national security”. As part of a wider pattern of the UK government showing a willingness to engage with investors, advisors, and other parties, the call for evidence has sought views on the scope of the mandatory notification obligation, including:

• The definitions of UK economy sectors covered by the mandatory notification obligation — the UK government is contemplating changes to the definitions of sectors such as Artificial Intelligence, Advanced Materials, and Defence, which have been heavily criticised for their perceived excessively broad scope and lack of clarity.
• The types of transaction covered by the mandatory notification obligation — for example, the UK government is exploring an exemption from the mandatory notification obligation for some internal reorganisations, as well for the appointment of liquidators, receivers, and special administrators.

That said, the call for evidence is not restricted to reducing the NSIA’s scope. The UK government has indicated that it is considering expanding the reach of some of the definitions of the sectors of the economy covered by the mandatory notification requirement, such as adding “generative AI” to the existing Artificial Intelligence definition, but potentially narrowing other parts of that definition. Furthermore, the UK government is considering adding a new Critical Minerals sector, which was also recently cited as a sector of interest by authorities responsible for national security screening in allied jurisdictions.

HONED APPROACH?

The call for evidence points to the UK government attempting to hone the scope and operation of the NSIA, narrowing its application where it is currently too broad, while expanding its reach to address the ever-evolving national security landscape. This strategy does appear to be borne out by the statistics. During the one-year reporting period covered by the UK government’s most recent NSIA Annual Report, 65 transactions were called in for an in-depth review (i.e., beyond the initial 30-working-day review period). Of these, five transactions were then either blocked or were subject to an order to unwind, and 10 were approved subject to conditions.

The NSIA provides the UK government with far-reaching powers to intervene when it determines that a transaction raises national security concerns, but it appears to be exercising that power with restraint. That said, even if the UK government proceeds with these changes, many transactions that pose no apparent national security concern likely will continue to be subject to an NSIA mandatory notification obligation.

M&A IMPACT

In this context, dealmakers should continue to assess the likelihood of a potential NSIA process from the outset of any deal process — as, even when national security concerns appear implausible, the NSIA provides for potentially severe sanctions for completing a transaction without first obtaining approval where required. To the extent that national security concerns are foreseeable, investors will need to ensure a comprehensive strategy is in place for promptly and effectively engaging with the UK government and addressing any concerns.

With the European Commission also proposing new enhancements to European Union national security screening, and national regulators refining local regimes, dealmakers clearly have a significant amount of regulation to keep up with and navigate, making expert cross-border legal counsel essential.