The long-awaited review of the UK’s National Security and Investment Act 2021

Almost two years after the entry into force of the UK National Security and Investment Act 2021 (NSIA), on 13 November 2023 the UK government announced a call for evidence as it seeks to address some of the potential shortcomings identified in the operation of the UK national security regime.

The review

Acknowledging that the burdens placed on businesses by compliance with the NSIA should be minimised, and recognising that the great majority of deals notified so far under the NSIA posed no national security risk (based on the statistics relating to the latest reporting period, only 7.5 per cent of cases notified needed a detailed review and only 1.6 per cent of notifications required remedies), the government is now inviting interested parties to provide feedback on a number of aspects of the NSIA; in particular:

• Exempting from the mandatory notification regime transactions that give minimal levels of control to the acquirer or which do not present any real change of control – most notably internal reorganisations, but also transient transfers of control, such as the appointment of liquidators or the exercise of step-in rights by lenders.
• Reducing the scope of some of the 17 mandatory sectors (notably artificial intelligence and defence) whose definition was rather vague. This should help alleviate the burdens on parties to completely innocuous transactions.
• On the other hand, expanding and/or clarifying the scope of other sectors such as communications, critical suppliers to government and data infrastructure.
• Creating new standalone mandatory sectors – among which is semiconductors.
• Increasing transparency on the process – although the call for evidence points out that, despite ongoing criticism, a number of improvements have already been made in this sense, such as introducing both routine and explanatory calls at key stages and providing names of senior contacts.
• Possibly expanding the amount of information requested via the notification forms, with a view to minimise or at least reduce follow-up information requests.

Areas not on the reform agenda

Somewhat unsurprisingly, the UK government is not considering exempting certain types of acquirers – most notably UK buyers; in the first two years of operation, UK investments ranked at the top of both deals having been called in for in-depth review and deals subject to final orders, second only to China.

Another peculiarity of the UK NSIA and which renders it particularly broad when compared to other regimes – namely the possibility of capturing deals involving targets with only sales but not a physical presence in the UK – does not appear to be on the agenda for possible reform, at least for now.

The UK government has also missed a chance to explicitly address concerns that have been raised in regard to the remedy process – most notably the lack of transparency and the reduced scope for any negotiations around remedies; it remains to be seen whether these will be brought to the government’s attention by respondents.

Conclusion

Yet, the government’s openness to reforming and targeting the UK regime further is certainly welcome news to businesses and a clear opportunity to reduce regulatory burden; it also shows a degree of pragmatism, dynamism, as well as sensitivity to business needs on the government’s part.

All in all, far from being an acknowledgment of policy failure from the government, the review process is a natural evolution of a regime which was always understood to be part of a learning process and which was always designed to be reviewed within the first three years of its operation.

The government is clearly and sensibly trying to focus on areas that are of potential concern and reduce the amount of no issue filings, having realised that it had initially cast the net too widely; internal restructuring is clearly an area where a substantive impact on national security is highly unlikely to arise and which, currently, makes the UK a bit of an outlier across Europe. Addressing the vagueness of some of the definitions and categorisations in the mandatory sectors should also solve another important issue that has so far left businesses somewhat dissatisfied and which has prompted a number of precautionary filings. Having had experience of a sufficiently high number of filings will undoubtedly enable the government to understand which areas to focus on and tailor the relevant definitions and scope of its review accordingly.

Overall, while it is clear that the bulk of the NSIA will remain intact, the call for evidence represents an important opportunity for dialling back a rather expansive regime and for ensuring that business resources, their advisers and the government are channelled where genuine concerns could arise, avoiding as much as possible unnecessary red tape. This will be all the more important going forward given the NSIA is now firmly embedded in the UK’s M&A landscape.

John Schmidt is a partner and Ludovica Pizzetti is counsel at Arnold & Porter
arnoldporter.com