UK Government Confirms Commencement Date and Scope of NSI Regime
The UK Government has announced that the National Security & Investment Act (“NSIA”) will come into force on January 4, 2022. The NSIA introduces mandatory notification and pre-clearance requirements for certain qualifying acquisitions of control of companies active in 17 ‘core’ sectors. The NSIA also enhances the powers of the UK Government to call-in for review other transactions which fall outside the mandatory notification regime but where national security concerns are considered to arise. The NSIA applies to all investors, irrespective of nationality, including those from the UK. To support the legislation, the UK Government has established an Investment Security Unit (“ISU”) within the Department of Business, Energy and Industrial Strategy (“BEIS”) to manage and lead the assessment of filings that are received, including voluntarily, under the NSIA regime. An overview of the NSIA is provided in our earlier blogs – UK National Security and Investment Bill is published and the National Security & Investment Law is approved by Parliament.
New Guidance and Regulations Provide Clarity on Scope of the NSI Regime
On July 20, 2021, as part of a process of preparing for the implementation of the NSIA that will be on-going up to January 2022, the UK Government also published a range of guidance regarding the NSIA, including:
- an overview of the new regime and how companies may prepare for the NSIA;
- specific guidance for the higher education and the research intensive sector;
- information on the potential impact of the NSIA on transactions occurring overseas; and
- details on how the NSIA will operate alongside other regulatory powers.
Importantly, draft regulations were also published setting out in full the definitions of the 17 ‘core’ sectors in which mandatory elements of the NSIA (the “Notifiable Acquisition Regulations”). The sector definitions have been clarified as compared to prior draft definitions and will provide a basis for companies to assess whether their activities fall within scope of the mandatory filing requirements. Where there is uncertainty about the application of any given definition, the ISU will provide some guidance, and voluntary notification will remain an option for businesses wishing to obtain regulatory certainty in the context of a transaction.
While the sector definitions provided in the Notifiable Acquisition Regulations are in substantially final form, further amendment is possible as those Regulations pass through the UK parliament for approval. The final Notifiable Acquisition Regulations are expected to become law later this year.
Parties working on transactions that are expected to complete on or after 4 January 2022 can now determine with greater certainty the application of the NSIA to transactions, including through the inclusion of more accurate conditions and other contractual obligations within deal documentation.
The confirmation of the NSIA commencement date and near-final sector definitions in the Notifiable Acquisition Regulations will also assist parties in better assessing the potential for a retroactive call-in under the NSIA of any transaction that may raise national security concerns and which occurs between November 12, 2020 and 3 January 2022. While the UK Government has been careful to clarify that these retroactive call-in powers will be used sparingly, parties to certain transactions (e.g. within the 17 core sectors and/or presenting other national security risk factors) need to remain mindful of the possibility of call-in. The ISU is operational and able to respond, informally at least, to questions regarding the application of the NSIA.
UK Government Retains an Expansive Call-in Right
Further ahead, regulatory risk assessment of the UK M&A and transaction landscape will need to factor in the NSIA, including in respect of transactions that may fall outside the mandatory notification regime.
Under the NSIA, the UK Government (in common with other comparable regimes) has the power to call-in any transaction for review on grounds of national security, whether or not the subject of the transaction is in, or adjacent to, the 17 core sectors for which mandatory filing requirements apply. Among the documents released on 20 July, was the launch of a public consultation (open until August 30, 2021) on the UK Government’s draft Statement of Policy Intent concerning the use of this broad call-in power.
The statement sets out three risk factors that the Government will use to decide whether a transaction may pose a national security risk. These are:
- target risk – i.e. whether the target of the acquisition could pose a national security risk;
- control risk – i.e. whether the amount of control acquired through the acquisition poses a risk to national security; and
- acquirer risk – i.e. whether the acquirer has characteristics that suggest there may be a risk to national security.
The draft Statement of Policy Intent indicates that it is not necessary for all three risks to be present for a transaction to be called-in. Target risk and/or acquirer risk alone might be sufficient to give rise to a national security concern in some instances, whereas control risk would usually be considered in relation to one or both of the other risk factors.
More broadly, the reservation of an expansive call-in power reflects the constantly evolving landscape of national security threats. The decision not to define national security within the legislation reflects the Government’s view that including a specific definition could unduly hinder its ability to act when the nature of threats to national security change. In addition, the call-in power provides the basis for the voluntary aspects of the NSIA regime applicable to asset and other transactions.
Policy Considerations of the NSIA
As the implementation of the UK’s NSIA regime approaches, the inherent tensions of foreign direct investment in today’s interconnected world are becoming increasingly clear. For the UK, this is perhaps particularly so as it seeks to reshape its domestic and international policy following Brexit and works out the balance between the need to attract foreign investment and the political pressure to control better the origin and scope of that investment.
The nature of foreign investment review, and specifically the broad reach of the NSIA (with the 17 core sectors reaching right across the UK’s economic waterfront from artificial intelligence to transport) means that, in practice, the review of investments occurs across a number of government departments. This is something the Parliamentary Foreign Affairs Committee recognised, when it argued in its 14 July 2021 Report, that the Foreign, Commonwealth & Development Office should have a role in considering geopolitical risks in M&A activity in the UK. While cross-government coordination is very much appropriate with a view to ensuring that decision-making is informed and robust, the number of actors involved can also present risks of congestion.
Indeed, two recent interventions in the semiconductor sector — both formally by the Department for Culture, Media and Sport under the UK’s existing public interest and national security regime in respect of Nvidia/ARM; and informally via a Prime Ministerial instruction to monitor proposed investment Newport Wafer Fab — highlight the range of actors that may be involved in national security considerations.
The NSIA seeks to moderate this complexity in a number of ways, including by:
- placing the management of NSIA filings with the ISU,
- conferring the final national security and investment decision on the Secretary of State for BEIS, and
- setting out statutory review periods that are intended to be shorter and better defined than under the UK’s predecessor ‘public interest’ regime.
For these reasons, while the change to the UK’s investment landscape presented by the NSIA is significant and adjustment in planning and deal timelines will be required, the refreshed and apparently streamlined process proposed by the NSIA regime includes features that can be potentially welcomed by investors.