- The UK government (“Government”) has published its latest annual report (“Report”) on the National Security and Investment Act 2021 (“NSIA” or “NSI Act”). The Report covers the period from 1 April 2023 to 31 March 2024 (“Reporting Period”).
- The Government ‘called in’ fewer transactions for substantive review than in the previous reporting periods despite an increase in the number of notifications. This could indicate that the Government is growing more confident in its ability to determine whether a transaction raises national security concerns.
- Unsurprisingly, the defence sector saw the highest number of notifications and the highest number of call-in notices and subsequent remedy decisions (“Final Orders”).1
- Acquirers associated with China continued to receive significant scrutiny, accounting for the largest number of call-ins despite a relatively small number of China-related notifications being made. A quarter of transactions called-in were withdrawn by the investor before the Government issued its final decision. While the Report does not state the reasons behind such withdrawals, it is not uncommon for transactions to be withdrawn when the investor faces a remedy being required or a prohibition decision. Transactions withdrawn related mainly to Chinese investments in the professional and research and development sectors.
Overview
The Report provides useful insights into enforcement and procedural issues related to the NSI Act. It features statistics on notifications filed, call-ins and clearances, the time taken to assess notifications, the sectors associated with the acquisitions, and the countries of origin of investment. The Report also includes data on withdrawals from transactions, which has not been included in previous reports. The Report, as with previous reports, lacks commentary. In the absence of publicly available decisions, the Government should consider describing the context behind key decisions in the next report.
Notifications and Call-ins
Over the course of the Reporting Period, the Government received 906 notifications, up from 865 notifications received last year.2 Of these, 753 were mandatory and 120 were voluntary. There were also 33 retrospective validation applications in respect of notifiable transactions which had closed prior to receiving NSIA approval. Only 3% of notifications were rejected, compared to 5% last year. Notifications were mainly rejected due to wrongful categorisation as mandatory instead of voluntary or vice versa. Incorrect categorisation causes delay and parties should ensure accurate classifications before submitting notifications.
Out of the notifications reviewed, only 41 (or 5%) were called in for further scrutiny. By comparison, 9% of reviewed notifications were called in last year.3 This supports the trend since the NSIA entered into force that only a small proportion of transactions raises potential national security concerns.
A disproportionately large number of voluntary notifications were called in, at 13% of the total number reviewed. By comparison, only 3% of mandatory notifications reviewed were called in. This can be explained by the fact that voluntary notifications are often made where there is some risk that a transaction might raise national security concerns.
Investors should also note that four call-in notices were issued for acquisitions which had not been notified under the NSIA by the parties. This shows that the Government’s Investment Security Unit (“ISU”) monitors the M&A industry, rather than solely relying on investors to notify transactions.
Timing
The Government has a statutory time period of 30 working days to clear or call in a notified transaction. It took the Government a median of 29 working days to make such decisions. Following a call in, the Government has 30 working days to conduct its substantive review of the transaction, which can be extended by 45 working days (known as the ‘additional period’). The Report shows that the Government used the additional period in only 12 of the 41 investigations into called in acquisitions, which is down from 29 out of 65 investigations last year. This could suggest greater confidence on the Government’s part to review transactions to its satisfaction within the ‘initial’ 30 working day period.
Statutory timelines do not necessarily give the full picture, as the ISU can ‘stop the clock’ when parties respond to information or attendance notices post call-in. The days when the clock is stopped are not counted in the statutory timelines. As such, actual timelines could be longer than the statutory timelines suggest.
Sectors
The defence sector accounted for the largest share of all notifications received (48%), the vast majority of which were mandatory. Defence was followed by critical suppliers to Government sector (19%); and the military and dual-use sector (17%). Figures 2 and 3 show the split of call-in notices and Final Orders across sectors.
Origin of Investments
In the Reporting Period, the Government again focused on Chinese investments. Although only 3% of notifications related to investors associated with China, 41% of called in acquisitions were associated with China (42% last year).
However, of the five Final Orders issued in the Reporting Period, none related to acquisitions by investors associated with China (compared to eight last year). This absence of any Final Orders or prohibitions may be impacted by the large number of withdrawals by Chinese investors, as discussed next.
Withdrawals
Parties withdrew a significant number of transactions called in by the Government in the Reporting Period. Out of 41 called in, 10 were withdrawn (compared with 11 last year), of which three followed mandatory notifications, five followed voluntary notifications, and two followed non-notified acquisitions.
The largest number of withdrawals related to the Professional, scientific and technical activities, and Academic research and development in higher education sectors (five withdrawals each), followed by Information and communication (four withdrawals).
The origin of investment associated with the most withdrawals was China, with eight withdrawals, which represents 47% of the total number of transactions with Chinese investors investigated after being called in. Seven transactions with UK investors were withdrawn, representing 44% of called in transactions with UK investors.
Final Notifications and Final Orders
Excluding the 10 withdrawn transactions, 23 of the remaining called in acquisitions were cleared by the Government without remedies (“Final Notifications”). Five transactions were issued Final Orders,4 but all five were cleared subject to remedies and the Government did not block or unwind any transaction on national security grounds. This marks a decrease from last year, where five transactions were blocked or unwound out of a total of 15 Final Orders. This decline could be due to the specific transactions reviewed and does not necessarily indicate a more lenient approach by the Government.
Conclusions
The Government continues to scrutinise a large number of transactions for national security concerns, but the proportion of transactions which actually raised any concerns in the Reporting Period was again very small. Transactions are reviewed within the statutory time limits and the additional period for called in transactions is rarely used, which should provide comfort to dealmakers. Furthermore, there were fewer call-in notices and fewer Final Orders than issued previously.
The Reporting Period concluded before the UK General Election and the resulting change in Government. The next report will be the first to cover a year under the current left-wing Labour Government and it is unclear what impact this might have on the Government’s use of NSIA powers. The Labour Party’s manifesto for the 2024 election pledged to establish a pro-business environment in the UK, while also committing to ensuring national security.5 There remains uncertainty as to what concrete steps the Government intends to take to achieve this, though the Government is set to unveil an ‘industrial strategy’ in the coming weeks, aimed at making the UK a more attractive investment destination.6 The details of this strategy may be an indicator of how the Government will strike the balance between encouraging foreign investment and strengthening the UK’s national security controls.
The authors would like to thank Nik Sharma for his contributions to this OnPoint.
1 Final orders can have a range of effects, including blocking or unwinding the acquisition, or providing conditional clearance subject to remedies.
2 For commentary on the report covering the previous reporting period, please see: https://www.dechert.com/knowledge/onpoint/2023/8/insights-from-the-uk-government-s-annual-report-on-the-national-.html.
The Report is available at: https://assets.publishing.service.gov.uk/media/65c21672688c39000d334c12/National_Security_and_Investment_Act_2021_annual_report_2022-23__PDF_.pdf. Figures 1-6 in this article are copied from the Report.
3 Of the 906 notifications received, 847 were reviewed in the Reporting Period.
4 The numbers do not add up because the Government decided on 38 transactions during the Reporting Period.
5 The Labour Party’s manifesto is available here: https://labour.org.uk/change/my-plan-for-change/.
6 https://www.ft.com/content/a1048a20-1a70-49aa-acf4-67db0d7d9759.
