- The UK government (the “Government”) has published its first full year annual report (the “Report”) covering the period from 1 April 2022 to 31 March 2023 (the “Reporting Period”).
- The Government received 866 notifications. The vast majority – 93% – of notified transactions were approved within the initial 30 working days without further assessment. While the number of notifications is fewer than the 1,000-1,830 annual notifications anticipated, a large number of transactions were still reviewed – this does not support the Government’s assertion that the National Security and Investment Act (“NSIA” or the “Act”) is “light-touch” and “proportionate”.1
- Of transactions that were “called in” for an in-depth review, the Government reached a decision on whether to clear or call in the transaction on average within 27 or 28 working days in respect of voluntary and mandatory notifications, respectively. Of the acquisitions called in for assessment after the initial 30 working days, 37% were associated with the Military and Dual Use sector, 29% with Defence and 29% with Advanced Materials – sectors that would be linked with national security issues on their face.
- Acquirers associated with China represented the largest proportion – 42% – of transactions called in for assessment, indicating a heightened sensitivity towards “China origin investments” in the UK. The Report, however, emphasizes that the regime does not target any particular origin of investment.
Overview
The NSIA grants the Secretary of State powers to scrutinize and intervene in certain acquisitions to safeguard the UK’s “national security” (an undefined concept). The criteria for notification are broad and the Government recognizes that the vast majority of transactions are “technical” filings that would not raise national security concerns on their face.
The Government’s first full year Report features various statistics, including on notifications filed by dealmakers, call-ins and clearances made by the Government, the time taken by the Government to assess notifications, the sectors associated with the acquisitions, and the countries of origin of investment. Decisions taken under the NSIA are not published, other than short notices of the few transactions resulting in final orders, whereby the Secretary of State either approves a transaction subject to conditions, unwinds or blocks the transaction completely (“Final Orders”). The Report does not provide insights into the Government's substantive analysis of notified transactions.
Notifications and Call-ins
The following data points are noteworthy from the Report in relation to the number of notifications and call-ins:
- During the Reporting Period, the Secretary of State received 866 notifications. Of these, 671 were mandatory notifications, 180 were voluntary notifications, and 15 were retrospective validation applications (i.e., in respect of transactions that were notifiable but closed without the Government being notified under the NSIA). Only 43 notifications were rejected by the Secretary of State and the main reason for “rejection” was that the notification should have been a mandatory notification. Investors should carefully consider whether a target’s activities fall within the definitions set out in the Notifiable Acquisition Regulations to determine whether a notification should be mandatory or voluntary.
- Out of the 65 transactions called in for assessment, as illustrated in Figure 1, 10 had not been notified under the NSIA by the parties. This demonstrates that the Government actively monitors deal activity and uses its own initiative powers to call-in transactions for review.
Timing
Unsurprisingly, all cases were decided within the statutory timelines prescribed by the Act. Of all transactions notified, 93% were cleared within 30 working days without being called-in for assessment. With respect to transactions that were called in, the Government reached a decision on whether to clear the transaction or to call in the transaction for an in-depth review on average within:
- 28 median working days for a mandatory notification; and
- 27 median working days for a voluntary notification.
However, the process can take significantly longer than the statutory timelines might indicate, particularly when remedies are being considered, as the time periods referenced in the Report do not include days when the Investment Security Unit “stops the clock” whilst parties respond to information or attendance notices post call-in.
Sectors
The Defence sector accounted for 47% of mandatory notifications received, more than double that of the next largest sector for mandatory notifications, Critical Suppliers to the Government at 22%.The following charts show the percentage of call-ins split by sector (each call-in may be associated with more than one sector so the percentages add up to more than 100%) and the number of Final Orders made by sector.
Origin of Investment
The origin of investment depends on the location of the immediate acquirer’s headquarters or the headquarters of its ultimate beneficial owner, amongst other factors. The UK and the U.S. were the most common origins of investment associated with acquirers making accepted notifications. Interestingly, investment associated with China accounted for 42% of call-ins and attracted the largest number of Final Orders made whilst only representing 4% of notifications, demonstrating that Chinese investment continues to be an important focus area for the Government.
The charts below show the percentage of call-ins made by origin of investment for the five countries eliciting the highest number of called in transactions (acquirers can be associated with more than one origin of investment and acquisitions can have more than one acquirer, so percentages may add up to more than 100%) and the number of Final Orders made by associated origin of investment.
Final Notifications and Final Orders
There were 57 final notifications, whereby a transaction is cleared after being called in for assessment (“Final Notification”), given during the Reporting Period, equating to 79% of the total called in acquisitions in the Reporting Period. There were 15 Final Orders made. This equates to less than 2% of the total notifications in the Reporting Period. Five of the 15 Final Orders included blocking or unwinding a transaction, with the other Final Orders involving conditions such as implementing governance arrangements to protect sensitive information or requiring a party to complete a security audit or meet physical security requirements. One Final Order has since been revoked, leaving 14 Final Orders in effect at the end of the Reporting Period. This figure is higher than the estimate of 10 transactions per year requiring remedies that was included in the Government’s Impact Assessment.
Conclusions
The NSIA has made its mark on deal-making, subjecting a large number of transactions to notification and delayed closing in the first full reporting year, with only a small number of transactions raising any national security concerns. But it is also correct to note that the Government is responding quickly to notifications and has adhered to, as it should, the statutory timeframes set out in the NSIA. Dealmakers should be reassured by the fact that the vast majority of transactions notified were cleared within 30 working days without being referred for national security assessment.
The Government has not shied away from using its call-in powers in an attempt to mitigate risks to national security and will presumably continue to do so. Companies must consider the new regime before entering into transactions as, in practice, the review process can have a significant impact on deal timetables and the consequences of non-compliance can be significant. As awareness of the NSIA increases globally – including its sanctions of imprisonment of up to five years, fines of up to 5% of the group’s worldwide turnover or £10 million (whichever is higher) and transactions closed in breach of the NSIA being legally void – it would be unsurprising if the share of notifications of transactions with non-UK investors increases in subsequent reports on the NSIA.
The authors would like to thank Trainee Solicitor Lara Morant for her contribution to this OnPoint.
[1] National Security and Investment Act annual report 2022-2023, Foreword, page 4. The NSIA has “suspensory effect” – transactions which trigger mandatory notification require split signing and closing with a delay of about 27-28 working days (see statistics above) to closing.
