On 13 November 2023, the UK government launched a Call for Evidence in relation to the operation of the UK National Security and Investment Act 2021 (the ‘NSIA’), inviting interested stakeholders to provide feedback on the regime. Oliver Dowden (the UK’s Deputy PM and the key decision maker under the NSIA) has stated that the UK government’s objective is to ensure that its powers “remain up to date, proportionate and transparent for businesses, while protecting the UK’s national security”.[1]
Background and context
Given the broad scope and complexity of the UK’s investment screening regime, the past (almost) two years of it being in effect have given rise to significant questions about its impact on investment in the UK. The timing of the Call for Evidence coincides with a requirement to review and report on the regulations which detail the scope of the transactions that must be mandatorily notified under the NSIA, known as the Notifiable Acquisition Regulations (the ‘NARs’)[2] before 4 January 2025. The government is consulting on:
- the scope of the 17 key sectors in which target activities can trigger mandatory notification requirements – there is potential for the government to refine, expand and/or repackage a number of the sectors in the NARs;
- the circumstances in which mandatory notification requirements apply – exemptions from mandatory filing requirements may be introduced, particularly for some categories of internal reorganisations and certain insolvency scenarios; and
- the broader procedural elements of and the government’s guidance and communications on the NSIA.
Mr Dowden has made clear that he does not currently intend to introduce primary legislation to enact any resulting amendments, suggesting that he will instead rely on existing provisions within the NSIA that provide for the ability to include in the NARs the circumstances in which transactions can require mandatory filings, including when exemptions should apply. Following the Call for Evidence, the government will consider whether any further consultation is required before amending the current form of the NARs. Any amendments or updates to the NARs can be expected to be made via a statutory instrument requiring parliamentary approval.
Key takeaways
1. Potential exemption for internal reorganisations
The UK government is considering whether all internal reorganisations should continue to be subject to mandatory (and suspensory) notification requirements under the NSIA. Internal reorganisations are currently subject to mandatory filings if they involve a direct or indirect acquisition of shares crossing various thresholds in an entity that is active in one of the 17 key sectors set out in the NARs, even if the identity of the ultimate beneficial owner does not change. Such reorganisations are commonplace and can be implemented for a variety of reasons which have no national security implications, including corporate rationalisation, tax planning, or preparation for a sale or for an IPO process. At the extreme, this can, for example, subject financial investment firms with extensive investment portfolios to a process of having to review the entirety of their investments in detail to check them against the specific activities covered by the 17 key sectors in the NARs. This may be needed, for instance, where a new holding company is inserted near the top of a group structure. In this example, the activities of multiple portfolio companies can ultimately cause the internal reorganisation to be notifiable.
The government is requesting feedback on whether there are types of internal reorganisations that are “more or less likely to result in substantive changes in who controls or influences an entity” and whether there is scope for an exemption for some internal reorganisations, while ensuring that the government remains aware of “particular reorganisations that warrant scrutiny”. It is likely to be challenging in practice for the government to identify internal reorganisation transaction structures that are inherently innocuous. However, the government might consider creating exemptions for reorganisations that do not change the nationality or ultimate controller of any entity in a holding structure, or introduce any entities which are exposed to new investors (e.g., an acquisition by a different fund controlled by the same financial investment firm, but with a different set of investors or limited partners sitting behind it). The government may also consider maintaining the mandatory notification requirements, but removing the requirement to delay implementation until clearance is obtained.
2. Other exemptions
The government is further considering exemptions to address the requirement for technical filings following the appointment of liquidators or receivers who acquire shares in qualifying entities during insolvency proceedings. This would bring the treatment of liquidators and receivers in line with the existing exclusion provided for the appointment of administrators, who are not treated as holding the relevant shares during insolvency proceedings under the NSIA. The government acknowledges that mandatory filings in these circumstances are rare and is considering whether a requirement to notify such transactions could present challenges in time-pressured situations where national security risks are very low, given that on-sales would likely be subject to approval in any event (notwithstanding assurances in the government’s current guidance that expedited clearances will be considered for parties in financial distress).
Separately, the government has considered and ruled out the prospect of introducing exemptions for certain categories of low-risk acquirers (i.e., the idea of a ‘white list’ of investors featuring low risk parties based in the UK or other jurisdictions who have already been vetted and cleared for national security risks), on the basis that a target entity may be sensitive and a transaction may require remedies to mitigate national security concerns regardless of the acquirer’s identity. This is in line with the consistent view held by government since the inception of the regime that it should remain “country agnostic”, as reiterated most recently in the NSIA Annual Report 2022-2023.[3]
3. Updating the mandatory sectors
The Call for Evidence indicates that the UK government is considering amending the scope and content of the 17 key sectors set out in the NARs. The potential changes to the sectors referenced in the Call for Evidence can be broadly categorized as follows:
i. Sectors to be refined and clarified, with the following objectives:
- Advanced Materials – to reduce complexity and improve structure.
- Artificial Intelligence (’AI’) – to exclude obviously innocuous businesses from scope, while ensuring that this sector is current in that it captures targets pursuing new AI-related activities which may raise national security issues that are not currently within scope of the NARs (e.g., generative AI).
- Critical suppliers to Government – to make clearer the interplay between this and other relevant sectors for government suppliers (e.g., defence or communications).
- Defence – to provide more guidance to clarify the types of activities that are in scope.
- Synthetic Biology – to simplify the application of this sector to an entity’s activities in practice, e.g., by clarifying when specific exceptions (which are currently quite complex) apply.
ii. Sectors to be “repackaged” and more intuitively presented:
- Semiconductors – semiconductors and certain activities related to them are currently captured by the Computing Hardware and Advanced Materials sectors.
- Critical Minerals – the key list of critical minerals is currently embedded in the complex wording of the Advanced Materials sector and is also, separately, due to be updated.
iii. Sectors which may be expanded:
- Communications – through a reduction of the £50 million turnover threshold which applies to qualifying entities in this sector.
- Data Infrastructure – to include colocation data centres, i.e., data centres that can be rented by various customers (tenants) to house their own network(s), servers, and storage equipment.
- Suppliers to Emergency Services – to catch more of the supply chains that feed into the operation of the UK’s emergency services.
- Energy – to bring entities that hold licences or exemptions in relation to interconnectors or transmission (which can also involve sensitive activities) within scope of the regime.
Concluding remarks
As we approach almost two years of operation, a review of the effectiveness of the UK’s screening regime is timely, and any attempt to improve and clarify the scope of the sectors and to introduce exemptions to take low to no-risk technical triggers out of the regime is clearly to be welcomed. Those who have encountered the regime should certainly take advantage of the opportunity to provide feedback with a view to informing the government’s thinking on how it could be improved. In terms of process and timing, the deadline for input is 15 January 2024, and the review of at least the NARs must be completed before January 2025, although the forthcoming election introduces a degree of uncertainty as to whether and when any changes will be implemented and therefore when any potential benefits will be felt.
Marissa Oluwadare, London Trainee Solicitor, contributed to the drafting of this alert.
For background on the UK’s foreign investment screening regime, please see some of our previous alerts:
[1] Deputy Prime Minister reviews national security powers to respond to geopolitical and tech threats
[2] The National Security and Investment Act (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021.
[3] National Security and Investment Act 2021
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