The National Security and Investment Act (NSIA) came into force in the UK on 4 January 2022. It creates a mandatory obligation to secure clearance for certain types of transactions in specific sectors before completion, assessing the potential national security risks related to investment in or acquisition of businesses with activities in the UK, say Marc Israel, partner at White & Case and Kate Kelliher, associate.
The mandatory notification requirement applies to certain transactions in 17 "sensitive sectors", which include communications, data infrastructure, defence, and energy. Within each of these sectors are specific qualifying criteria. It is important to note that the Government can still decide to review transactions on national security grounds, even if they do not trigger mandatory notification.
The obligation to notify lies with the prospective investor, and notifications are submitted to the Investment Screening Unit ("ISU") within the Cabinet Office. The Secretary of State in the Cabinet Office ("SoS") retains final decision-making powers.
It is notable that since the NSIA's incorporation, there have been four different SoS, each with different approaches towards the NSIA. For example, the first NSIA SoS, Kwasi Kwarteng, decided to not call in the Nexperia / Newport Wafer Fab transaction.
This decision was then reversed by Grant Shapps, after which the transaction was subsequently prohibited and resulted in the unwinding of the completed transaction. The current SoS, Oliver Dowden, is yet to block a transaction but has imposed conditions on three different transactions since assuming the NSIA mandate in February 2023.
Under the NSIA, transactions can be reviewed even where mandatory notification is not required. Where a mandatory filing is triggered, the notification is made by the investor, whereas voluntary filings can be submitted by any party involved in the transaction (i.e., the investor, the seller, or the target itself), but the procedural and substantive processes are overview the same.
Once a filing is submitted there is an initial "review period" of 30 working days, within which most notifications will be cleared. If, however, the authorities determine that there are potential national security risks, a "call-in notice" will be issued, bringing the transaction into an assessment review phase, also of 30 working days, subject to an initial extension of 45 working days.
The SoS will then block the transaction or subject the deal to certain conditions determined on a case-by-case basis, but can include targeted divestments, undertakings related to management and key staff, or sensitive information ring-fencing.
Common feature of M&A transactions
Since it has been in force, the NSIA is now a standard consideration in M&A deals with a UK connection. A second NSIA Annual Report was published on 11 July 2023, providing insights into the review process from April 2022 to March 2023. The report demonstrated that during the first full year of the NSIA's operation, the ISU received 866 notifications with the vast majority (over 90%) being cleared without call-in. In terms of those that are called-in, there is an obvious trend related to investor origin, with Chinese investors responsible for just 4% of accepted notifications but 42% of call-ins.
Global trend towards more stringent scrutiny of Foreign Direct Investment ("FDI")
Since the NSIA came into force, there have been five prohibitions and 12 transactions subjected to conditions following call-ins. These conditions have been exclusively behavioural, typically focused on ensuring the security of sensitive information and safeguarding continuity of critical supply in the UK.
This scrutiny forms part of a wider global trend towards more stringent scrutiny of FDI screening worldwide. At an EU level, Member States have expanded their investment screening regimes, driven by the European Commission ("EC").
The EC's Second Annual Report, published in September 2022 anticipated that all 27 Member States will soon have a national FDI review process in place, though not obliged to do so by the Screening Regulation. Indeed, new national security regimes in Bulgaria, Sweden and Ireland are already either on the books or due to come into force over the next year.
Comparably unusual regime
The NSIA imposes broader obligations compared to similar regimes of global counterparts. The NSIA differs as (i) target entities do not need to have a subsidiary or other presence in the UK for a notification to be tiggered (other than a requirement to make sales in the UK); and (ii) screens all investors regardless of origin, including UK investors. Even UK-on-UK investments require a notification if the mandatory criteria are satisfied and have been subject to conditions.
The NSIA also provides for retrospective review. The SoS has the power to issue a call-in notice for any deal closed from 12 November 2020. This is restricted to six months from the day the SoS became aware of the transaction, or five years from the date of the acquisition. This extends beyond the scope of classic "defence" deals. Of the five prohibited transactions mentioned above, two of these were blocked via retrospective review.
Looking ahead
The first appeal of an NSIA order is in the works, as Nexperia have expressed a clear intention to challenge the unwinding decision. This will reveal the ISU's process in relation to appeals as well as delving into what has been considered something of a black box process to date.
Regardless, the NSIA has established itself as a core consideration for investors in UK businesses and merits careful and considered planning early in transaction timelines.
By Marc Israel, partner at White & Case and Kate Kelliher, associate The authors were assisted with this article by Chloe Edwards, a trainee solicitor.
