Updates to the UK National Security and Investment Act in These Dangerous and Uncertain Times

Key Points

• On Thursday, the UK government announced its intention to improve the workings of the NSIA, “in these dangerous and uncertain times [when] our economy is increasingly the target for our adversaries.”¹
• In November 2023, the UK government published a Call for Evidence²  on the NSIA and, after having received 110 full responses, the UK government is now focused on taking action to fine-tune the NSIA and its related practices to ensure that the UK investment screening regime is “as business-friendly as possible”.
• In May 2024, the UK government will publish updated guidance on (i) the types of transactions the Secretary of State is most likely to exercise its call-in power with respect to, (ii) how the NSIA applies to transactions in the academia and research areas, (iii) how statutory time limits are calculated, (iv) the application of the NSIA to outward direct investment and (v) the applicability of the NSIA to certain lending structures.
• Before summer 2024, the UK government will also launch a consultation on potentially updating the definitions for the 17 sensitive areas of the economy.
• The UK government will also undertake a national security assessment to ascertain whether, for instance, certain internal reorganisations could be exempted from the scope of the mandatory notification regime.
• The Call for Evidence and the subsequent steps the UK government is proposing to take seek to ensure that the NSIA regime remains proportionate and as pro-investment and business-friendly as possible, while at the same time providing the UK government with the tools it needs to closely scrutinise transactions that may give rise to potential national security concerns.

The UK government published a Call for Evidence on the National Security and Investment Act (NSIA) in November 2023. The purpose of this Call for Evidence was to ensure that the NSIA is “as business-friendly as possible”, a trait deemed important as the UK government considers it vital for the economy that businesses are able to launch, germinate, scale-up, buy, sell, trade and invest in the United Kingdom (UK) with minimal impediments.

The Call for Evidence allowed for interested parties to comment on the functioning of the NSIA from a business perspective. Some of the key areas of focus for the Call for Evidence included “narrowing and refining” the scope of the mandatory notification regime, providing more clarity on when a filing is required and providing notifying businesses with better communication and increased certainty throughout the NSIA screening process. The UK government received 110 full responses to the Call for Evidence³  and, on the basis of those responses, has decided to focus on five key areas:

1. Publishing an updated statement on how the Secretary of State expects to exercise the call-in power. The responses received by the UK government made it clear that businesses and their advisors need more clarity on the areas of the economy that the UK government considers most sensitive and how the UK government assesses the national security risks of a transaction. The current guidance on this topic dates from November 2021 (generally referred to as the Section 3 Statement) and, whilst helpful, only broadly refers to the most sensitive sectors of the economy as the 17 areas of the economy subject to mandatory notification as well as “activities closely linked to the activities in these 17 areas of the economy (for example, they are related to transport but are not within the definition of transport in the regulations)”. The government has now undertaken to update this guidance which, based on Akin’s own experience, is a welcome development among practitioners and the business community. While Akin and other respondents had also called for a fast-track process for certain types of acquirers—for example those who have already had a prior transaction cleared through the NSIA system and in urgent no-issues financial restructurings—the UK government will unfortunately not be taking this idea forward at this point in time. The updated Section 3 Statement is expected to be published in May 2024.
2. Publishing updated market guidance. The UK government will also be publishing further guidance on the factors the UK government expects to take into account when assessing risk, how the NSIA applies to transactions in the academia and research areas and how statutory time limits are calculated. More guidance will also be published regarding (i) how the NSIA can apply to outward direct investment (as opposed to its current focus on inward investment) and (ii) automatic enforcement provisions in secured lending agreements (i.e., where lenders still need to be wary of the NSIA implications and how lenders and their advisors might limit NSIA risk in lending structures). These updates are expected to be published in May 2024.
3. Consulting on changes to the mandatory notification areas. By the summer of 2024, the UK government will launch a formal public consultation on updating the definitions for the 17 sensitive areas of the economy that are subject to the NSIA’s mandatory notification requirements. As part of the public consultation, interested third parties will also have the opportunity to comment on potentially adding more areas of the economy, for instance by adding stand-alone regulations for semiconductors (currently part of Advanced Materials) and Critical Minerals (currently not discussed in detail by the regulations), as well as further clarity being provided with respect to certain existing definitions (e.g., the nature of the Artificial Intelligence (AI)-related activities deemed to be sensitive, which is important given the rapid growth in the use of AI by consumers and businesses).
4. Considering certain technical exemptions to the mandatory notification requirement. There has been a lot of discussion around exempting, for example, certain internal reorganisations, Scots law share pledges and public bodies, and the UK government will now undertake a “thorough national security risk assessment to understand whether exemptions for these transactions are feasible and whether they can be designed in such a way that they do not compromise the integrity of the NSI Act”.
5. Making further improvements to the operation of the NSIA system, including the NSIA Notification Service. While the online portal for making NSIA submissions generally works smoothly, there are some areas where functional improvements to the portal would be welcome. The UK government has acknowledged that it is aware of the issues that were raised during the Call for Evidence and will now be trialling potential solutions to address these.

Overall, the UK government considers that the NSIA has become a successful investment screening regime. The UK government has reviewed over 1,700 notifications and made 20 final orders⁴  under the NSIA to protect national security in the UK. The Call for Evidence and the subsequent steps the UK government is proposing to take show a continued commitment on the part of the UK government to ensuring that the NSIA regime remains proportionate and as pro-investment and business-friendly as possible, while at the same time providing the UK government with the tools it needs to closely scrutinise transactions that may give rise to potential national security concerns.

Please contact us if you would like to discuss the above UK government’s proposals in further detail or if we can otherwise be of assistance when it comes to seeking to navigate the UK NSIA regime or any other investment screening rules.

^{1 National Security and Investment Act 2021: Call for Evidence Response - GOV.UK (www.gov.uk).}

^{2 See https://www.gov.uk/government/calls-for-evidence/call-for-evidence-national-security-and-investment-act/outcome/national-security-and-investment-act-2021-call-for-evidence-response.}

^{3 Of these responses, 41% were from legal firms, 15% from trade bodies and business representative organisations, 15% from banks or investors, 11% from businesses operating in one or more of the 17 sensitive sectors identified in the NSIA and 7% from academic and research institutions.}

^{4 Notices of final orders under the National Security and Investment Act 2021 - GOV.UK (www.gov.uk).}