The UK’s national security and investment regime came into effect on 4 January 2022. On 16 June, the UK government published its first report on the operation of the regime for the period between 4 January and 31 March (Report). The Report shows that during the initial three-month period, the UK government received 222 notifications, out of which it only called in for investigation 17 transactions, clearing three (with the remaining 14 pending at the end of the reporting period).
The UK’s new national security and investment regime under the National Security and Investment Act (NSI Act) enables the UK government to review and intervene in certain acquisitions on national security grounds.
The NSI Act allows the UK secretary of state to investigate certain acquisitions that meet the legal criteria set out in the NSI Act. Acquisitions of entities active in 17 particularly sensitive sectors of the UK economy are subject to mandatory preclosing notifications.
The UK secretary of state has the power to “call in” acquisitions for a further assessment based on factors including (1) target risk—i.e., whether the target is or could be used in a way risking national security; (2) acquirer risk—i.e., whether the acquirer has characteristics that may give rise to national security concerns should it purchase the target; and (3) control risk—i.e., whether the level of control acquired over the target may give rise to national security concerns. The NSI Act also provides for voluntary notification of acquisitions in sectors outside the 17 sectors subject to mandatory notification. Acquisitions of stakes in qualifying entities of as low as 25% and acquisitions of material influence over qualifying entities may be subject to a review under the NSI Act.
Following a national security review under the NSI Act, the UK government may (1) clear a relevant transaction; (2) impose conditions, such as restricting permitted share ownership levels or controlling access to commercial information or sensitive sites; (3) unwind a closed transaction; or (4) block a proposed transaction.
Transactions subject to the mandatory filing regime that close prior to receiving clearance under the NSI Act will be void. Non-compliance with the NSI Act risks significant criminal and civil sanctions, including financial penalties of up to 5% of total worldwide turnover or 10 million British pounds ($13.9 million)—whichever is higher—for acquirers that fail to submit a mandatory notification, as well as criminal liability for directors. For a more detailed overview of the NSI Act, refer to our previous publications, UK National Security and Investment Act Comes Into Force on 4 January 2022, and The UK’s Proposed New National Security Investment Screening Regime: Standalone, Mandatory, And Broad In Scope.
The Report shows that over the initial three-month period of the NSI Act, (1) the volume of notifications received is slightly lower than had been initially anticipated; (2) the UK government is reviewing notifications within the statutory deadline; (3) the notifications called in for further assessment constitute a small fraction of the overall number of notifications received (8%); and (4) the focus of the reviews is on acquisitions of entities active in the defence sectors, the military and dual use sectors, and with respect to certain critical suppliers to the UK government.
The Report sets out that during the initial three-month period, the UK government received 222 notifications, of which 178 were made under the mandatory notification regime and 22 under the voluntary notification regime. Of the 222 notifications, the UK government called in only 17 transactions for an in-depth review (8% of the notifications made). Of these 17 transactions that were called in for further assessment, the UK government cleared three, with the remaining 14 still under review at the end of the reporting period.
Table 1 – Volumes of notifications under the NSI Act
Prior to the introduction of the NSI Act, the Impact Assessment for the NSI Bill had estimated that the Investment Security Unit (ISU), the unit within the Department for Business, Energy, and Industrial Strategy (BEIS) tasked with reviewing notifications under the NSI Act, would receive between 1,000 and 1,830 notifications each year. Therefore, the number of notifications during the first three-month period of the Act fall below that estimate.
SECTORS OF FOCUS
According to the Report, the ISU received mandatory notifications in the sectors set out in Table 2 below. Table 3 sets out the sectors associated with call-in notices. As these tables indicate, most mandatory notifications and call-in notices were with respect to the defence sectors, the military and dual use sectors and with respect to certain critical suppliers to the UK government.
Table 2 – Mandatory notifications received by sector
Table 3 – Sectors associated with call-in notices
The Report also sets out that the average time in which the UK government accepted a notification as complete was three working days.
With respect to called-in transactions, the UK government reached a decision on whether to clear the transaction or to undertake an in-depth review on average within 24 working days.
Under the NSI Act, the initial review period following mandatory notification is 30 working days from the point the ISU accepts a notification as complete. The UK government has stated that it expects to clear a large majority of notified transactions within this initial period, and the ISU’s practice to date supports this. If a transaction requires an in-depth review, there is an additional 30 working days’ review period, with the possibility of an additional 45 working days (and further extensions beyond this, subject to agreement with the acquirer).
It is difficult to draw any material conclusions on the operation of the UK’s FDI regime during this short initial period. However, while the types of transactions being called in for investigation depend on the investment activity during this period, the initial operation of the regime shows a sensitivity by the UK government relative to the areas of military and defence, critical suppliers to the UK government, as well as telecoms and access to sensitive data.
It is also noteworthy that the ISU does not appear to have been overwhelmed by the number of notifications but has been able to sieve through them to identify a small proportion of 8% transactions for further assessment.
The focus and practical application of the NSI Act will become clearer once the UK government publishes in-depth Phase 2 decisions and market guidance notes, providing further practical advice on the NSI Act. The next UK government annual report on the enforcement of the NSI Act will cover the period between 1 April 2022 and 31 March 2023 and will provide additional insight into how the UK FDI regime operates in practice.
 These 17 sensitive sectors are: (1) advanced materials; (2) advanced robotics; (3) artificial intelligence; (4) civil nuclear; (5) communications; (6) computing hardware; (7) critical suppliers to government; (8) cryptographic authentication; (9) data infrastructure; (10) defence; (11) energy; (12) military and dual-use; (13) quantum technologies; (14) satellite and space technologies; (15) suppliers to the emergency services; (16) synthetic biology; and (17) transport.
 Under the NSI Act, critical suppliers to the UK government are entities contracted to access very sensitive UK government data, assets, or estates, all of which might be subject to attack from the UK’s adversaries.