Introduction
The government is required to prepare an annual report setting out statistics in relation to aspects of the function of the regime, such as the number of notifications accepted, number of call in notices made, and number of final orders made. The information in the annual report can provide useful insights into trends, such as which particular areas of the economy are more likely to be affected by the regime, and how long parties to acquisitions can expect to wait before hearing back from the ISU (the Investment Security Unit, the body responsible for administering the act) after submitting a notification.
Background to the Act
The National Security and Investment Act 2021 ("the NSI Act" or "the Act") came into effect on 4 January 2022 and introduces a new national security regime which allows the UK government to scrutinise and intervene in certain qualifying acquisitions of entities or assets that may potentially pose a threat to UK national security. Acquisitions meeting certain requirements are subject to a mandatory notification requirement, whilst others not falling within the scope of these requirements may be voluntarily notified. The Secretary of State in the Cabinet Office (currently Deputy Prime Minister, Oliver Dowden) has the power to ‘call in’ acquisitions for detailed scrutiny. If, following scrutiny of an acquisition, the Secretary of State believes on the balance of probabilities that a risk to national security has arisen or may arise, the Secretary of State may make a final order. A final order may impose conditions, prevent the acquisition from completing, or unwind it if the acquisition has already taken place. For further information regarding the operation of the regime, please read our insight here.
The first annual report was published in June 2022 and covers only the first three months of the Act's operation, from January 2022 to March 2022. This more limited time frame, the Act being in its early days of effect, and the fact that mergers and acquisitions activity had been lower than typical due to a surge in the COVID Omicron variant at the end of 2021, means that the findings from the first annual report were subject to some caveats. This second annual report, published in July 2023 and covering the operation of the Act from April 2022 to March 2023 is not subject to such concerns, and therefore we can more comfortably draw conclusions based on observations of trends in the report.
The Annual Report's Findings
Accepted and rejected notifications
The ISU received 866 notifications over the reporting period, of which 671 were mandatory notifications, 180 were voluntary notifications, and 15 were retrospective validation applications. As explained in our insight, "qualifying acquisitions" of entities which fall within the scope of one or more of 17 sensitive areas of the economy will be subject to a mandatory notification requirement, while acquisitions of assets or entities which fall outside the scope of the mandatory notification system but still may raise national security concerns can be voluntarily notified. Of those 866 notifications, 43 were rejected, with 22 being mandatory notifications and 19 being voluntary notifications. The most common reason for rejecting a notification was that the acquisition has been notified using the wrong form (23 notifications rejected out of 43 in total). 12 should have been mandatory, 11 should have been voluntary.
The fact that the vast majority of the notifications submitted were accepted suggests that notifiers generally appear to have a good understanding of the application of the Act's thresholds and the scope of the sensitive areas. However, the fact that proportionately more voluntary notifications were rejected and required to be re-submitted as a mandatory notification than the other way around is indicative of the broad reaching scope of the Act and the desire of the government to ensure it reviews all notifications that may potentially fall within sensitive areas of the economy.
Both mandatory and voluntary notifications were accepted on average within 4 working days; this broadly aligns with our own experience of submitting notifications.
Clearances vs call ins
766 notifications proceeded to review. 65 call in notices were issued, meaning that 711, or 92.8% of them, were notified within the 30 working day initial review period that no further action was required. All notifications were either called in or cleared within the statutory time limit of 30 working days after being accepted. This should provide reassurance to parties to notifiable acquisitions who may be concerned that the 30 working day review period will be exceeded and affect the planned timeline for their transaction.
Sensitive areas
Whilst the government's powers cover all areas of the economy, acquisitions of entities that carry out particularly sensitive work in 17 areas of the economy are subject to mandatory notification requirements (subject to other elements such as a sufficient connect to the UK and a relevant share of control threshold being passed). For a comprehensive description of the scope of each of those 17 sensitive sectors, we recommend referring to this government guidance. For discussion of updates to government guidance since the Act came into force, please read our insight here. The annual report provides an insight into the trends affecting these different sectors.
Of particular note is that fact that of the mandatory notifications received, 47% related to the Defence sector. This reflects our experience of the scope of the Defence sector being particularly broad, and somewhat vaguely defined- this is presumably given the particular importance of defence to UK national security and the desire of the government to avoid the risk of any potentially risky acquisitions in the sector not being picked up by the mandatory notification requirements. However, the consequence of this is that many notifications will need to be notified because they fall within the scope of this expansive sensitive area, even if they do not present any apparent threats to national security, thus causing some inconvenience to the acquisition parties who must wait for clearance.
It is clear that the Defence sector, along with acquisitions falling within the scope of the "Military and Dual Use" area of the economy, is of particular concern to the government, given that the most common sensitive areas of acquisitions called in for detailed review was Military and Dual Use, followed by Defence. Similarly, of the 15 final orders made, 4 related to targets in the Military and Dual Use sensitive area, and 3 in the Defence sensitive area.
Conversely, whilst Critical Suppliers to the Government (a sensitive area with a rather broad scope, covering a large number of government contracts) was the area of the economy with the second most mandatory notifications, less than 10% of call-in notices issued and only one final order related to this sensitive area.
Whilst the vast majority of acquisitions will be cleared regardless of which area of the economy the target is active in, it is useful for parties to acquisitions to be aware of these trends and the government's apparent focus on certain sensitive areas over others.
Origin of investment
A final trend which is worth noting is that whilst the majority of accepted notifications (58%) relate to investments associated with the United Kingdom and less than 5% relate to China, 42% of all call-ins relate to acquisitions where the acquirer has links to China: more than any other country, including the UK. Additionally, eight of the 15 final orders made involved acquirers associated with China. It seems clear that having links to China is a significant acquirer risk factor; parties to such acquisitions should be aware of the significantly increased likelihood of their acquisition being called in, and the potential impact this may have on their transaction. For further discussion of risk factors, please refer to our insight and the government's statement on factors it expects to consider when deciding whether to exercise the call in power: these include not just acquirer risk, but also "target risk" and "control risk".
Conclusion
The NSI Act annual report provides a number of insights which likely reassure businesses who anticipate that they may be subject to the Act's notification regime in the future: the vast majority of notifications are cleared, and the 30 working day initial review period has never been exceeded, providing a degree of certainty for parties planning their acquisition timelines. Conversely, parties to acquisitions involving acquirers associated with China can benefit from the knowledge that this appears to be a key concern for the government, and prepare accordingly.
However, whilst this annual report does demonstrate the existence of certain trends reflecting the government's concerns, companies seeking to draw conclusions based on these trends should do so with caution. The government will take into account the risk factors mentioned above when deciding whether to call in acquisitions, but the Act intentionally does not set out the circumstances in which national security is, or may be, considered at risk. This is to ensure that national security powers are deemed sufficiently flexible. Consequently, the government has a significant amount of discretion when exercising its powers, and therefore it must be understood that each decision will ultimately be treated on a case-by-case basis.
