Introduction
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, as explained in our insight here. The Government has been monitoring the performance of the Act since its introduction, and while still a comparatively new law, the government has now launched a Call for Evidence to gather views on how the system can be more business friendly whilst still maintaining national security protections.
Background
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. The Government confirmed in its most recent annual report (covering the period April 2022 to March 2023), 65 notifications were called in for an in depth review and final orders were imposed in relation to 15. For further information regarding the operation of the regime, please read our insight here, and for further details of findings in the annual report and trends in relation to clearances and call ins, please refer to our insight here.
The Call for Evidence
The Government will use this Call for Evidence to consider changes to the NSI regime in particular on:
- the scope of the NSI system’s mandatory notification requirements, including possible updates to the 17 sensitive sectors;
- NSI operational processes, including updates to the notification forms and notification portal; and
- the Government's public guidance and communications about the Act.
The Government's stated goal is to gain an increased understanding of the impact of the regime on businesses and investors, and their experience interacting with the process; whether the scope and requirements of the system are proportionate and effective; and how well stakeholders understand the NSI system and the national security risks it seeks to address.
Mandatory Notification - Internal Reorganisations
It is currently possible for internal reorganisations to fall within the scope of the mandatory notification regime, even where the control over the target changes very little and the re-organisation is unlikely to raise national security concerns. This can therefore be disproportionately burdensome on businesses undergoing such re-organisations. In recognition of this, the Government is therefore exploring an exemption for some internal reorganisations.
Additionally, the Government is considering whether some targeted exemptions from mandatory notification may be appropriate in other scenarios where the acquisition gives rise to either no change in control or minimal levels of control to the acquirer.
Sensitive Areas of the Economy
The government acknowledges that the majority of acquisitions do not present a national security risk, with 93% of notifications in the financial year 2022-23 being cleared without needing a detailed assessment, and therefore the government is interested in finding ways to minimise the burden (including delays) that the regime places on businesses undertaking transactions. In turn, it hopes to use the Call for Evidence to inform the review of the 17 sensitive areas of the economy subject to mandatory notification requirements, with the objective of ensuring that they only capture deals which pose genuine potential for national security risks.
Particular points of review the Government is concerned with include:
- Advanced Materials: improving clarity in relation to this sensitive area, with feedback saying that this area is too complex and could be structured more clearly.
- Artificial Intelligence: receiving feedback whether this sensitive area captures activities that do not present national security risks, whether there are activities that stakeholders believe should be removed and whether new areas should be added – for example, ‘generative AI’, which is currently not in scope.
- Communications: considering whether the sensitive area should capture public electronic communications networks or services (PECN/S) with a UK turnover of less than £50 million;
- Critical Suppliers to Government: the Government has received feedback that it is sometimes difficult for businesses to know if certain suppliers come under this area.
- Data Infrastructure: considering adding entities that own, operate, manage, or provide services to, colocation data centres.
- Defence: feedback has stated that stakeholders sometimes find it difficult to understand whether their activities bring them into scope of this area of the Regulations, and the Government is therefore considering whether the Regulations and guidance for this sector might be improved to reduce the likelihood of capturing acquisitions that do not raise national security concerns, and providing clarity as to what activities are captured.
- Energy: the Government is proposing a new asset definition and licensable activity in the Energy Bill 2022/2023 for multi-purpose interconnectors (MPIs), which will eventually replace the individual terms for interconnectors and transmission. The Government is therefore considering adding MPIs to this sensitive area to ensure that reference to these assets remain covered.
- Suppliers to the Emergency Services: the Government is considering whether sub-contractors providing those goods and services to the emergency services specified in the Regulations should be brought into scope of mandatory notification.
- Synthetic Biology: feedback has stated that the definition of synthetic biology is too complex, making it difficult for parties to know if they are covered. The Government is therefore looking into simplifying this.
The Call for Evidence also floats the idea of potentially introducing new sensitive areas. These would be creating a Semiconductors and a Critical Minerals area, both of which currently fall within the scope of Advanced Materials. The goal of this is not to change the overall scope of the activities covered by the Regulations, but rather provide increased clarity in relation to these sectors.
Comment
When considering whether a client's transaction falls within the scope of the NSI Act regime, we have encountered a number of the issues highlighted by the Government in the Call for Evidence, such as the fact that Artificial Intelligence captures a very broad range of activities which include some which do not present any obvious national security threats. The wide scope of the sensitive area means that it covers businesses which develop or produce goods, software or technology that use AI, and therefore has the effect of capturing entities that do not necessarily identify as "AI companies" and are not necessarily involved with the development of the AI itself. We have also observed the lack of clarity in relation to what activities may fall within the scope of the Defence sensitive area. Therefore, the fact that the Government is welcoming feedback with the goal of addressing such concerns is a very positive sign.
Similarly, the fact that the Government is considering excluding some internal reorganisations from the scope of the regime is indicative of a desire to be more business friendly. If changes are brought about in response to feedback received, then we can expect some internal reorganisations- and potentially other kinds of transactions which present no national security risks- to be much less likely to be caught by the mandatory notification requirements, which is good news for businesses who may be frustrated by the current wide reaching scope of the NSI Act regime.
If changes are brought about to the regime, reflecting not just those already set out in the Call for Evidence, but also those that may be raised by stakeholders in response to it, this will likely make compliance with the regime easier for businesses undertaking transactions. Further clarity in relation to the scope of sensitive areas will be greatly appreciated by parties to acquisitions, who will be able to be more confident as to whether a notification needs to be made, and avoid wasting their time with unnecessary notifications.
Additionally, changes to the notification forms and notification portal will hopefully make the process smoother for those who are in fact required to make a notification.
Next Steps
This presents a valuable opportunity for businesses who have interacted with the NSI Act regime to share feedback based on their experiences which may help to improve the system in the future. The call for evidence will close on 15 January 2024 and anyone can respond online at this link.
