Clifford Chance

On 11 July 2023, the UK's Investment Security Unit ("ISU") released its annual report on the operation of the UK National Security and Investment ("NSIA") regime for the period covering 1 April 2022 – 31 March 2023 (here). The Annual Report provides aggregated data on the operation of the regime, including insights into the sectors that are potentially subject to greater scrutiny.

This Annual Report is the first full Annual Report that the ISU has issued (the last report only covered the first quarter of 2022). It is, however, notable that the ISU was subject to four different Secretaries of State over the reporting period, including a move from the (now defunct) Department for Business, Energy, and Industrial Strategy to the Cabinet Office. Since the Annual Report's data is aggregated over the full reporting period, any policy differences between those Secretaries of State and the Departments will not emerge from the Annual Report.

We have highlighted out below some of the key takeaways from the Annual Report. Please reach out to us for further information on the NSIA and on foreign investment / national security screening regimes globally.

866 notifications were submitted in the reporting period

• While the total number of notifications (866) appears to be high, it is lower than the government predicted when passing the bill (1,000-1,830 per year). This may partly reflect the general slowdown in M&A activity during the relevant period.
• However, a key contributor to the lower levels of total notifications is that only 180 voluntary filings were submitted. This is significantly lower than government predictions for voluntary notifications arising only from asset sales (290-860 per year). This trend is consistent with the last Annual Report and suggest that parties are not routinely submitting precautionary filings despite the government's ability to call in certain acquisitions for a full national security review.
• Of the 766 filings reviewed in the reporting period (not all of the 866 notifications submitted in the reporting period were reviewed in the reporting period), 43 notifications were rejected.
• Similar to the last Annual Report, the main reason why filings were rejected (23/43) was because a mandatory filing was submitted as a voluntary filing, or visa-versa. The need to use the appropriate form is something of a UK-quirk, and one that we have suggested is removed in due course. Indeed, only 3 filings were rejected due to insufficient information having been provided (withdrawal or duplication of filings led to a further 14 rejections).

The Secretary of State called in 65 acquisitions for a more detailed assessment, and made 15 final orders

• Of the 766 notified acquisitions reviewed in the reporting period, 711 were cleared – a 92.8% clearance rate. The ISU is keen to note that this shows that the large majority of acquisitions which are notified are able to proceed without being called in. However, it could equally show that, despite lower than predicted notification, the regime is still capturing a large volume of deals that have no national security concerns.
• As with the last Annual Report, while the total number of call-in notices (65) is at the lower end of government predictions (70-95 per year), the proportion of notified acquisitions that were called-in (7.2%) is broadly in line with those predictions (driven by the lower number of total notifications).
• Of the 65 acquisitions that were called in: 37 were made following a mandatory notification; 17 following a voluntary notification; one following a retrospective validation application; and 10 following call-in notices issued for acquisitions that had not been notified. The 10 call-ins for un-notified acquisitions provides a reminder of the need to appropriately assess whether to make a voluntary filing, and also demonstrates that the ISU is on the watch for un-notified transactions that may pose a risk to the UK's national security.
• 57 final notifications (i.e. no further action following a call in) and 15 final orders were made during the reporting period. Of the 57 final notifications, 11 were issued in relation to acquisitions that did not complete, meaning that scrutiny under the NSIA ceased. Once these 11 acquisitions are removed from the data (since we do not know what decision the Secretary of State would have made for those acquisitions), the data shows that 75% of transactions subject to call ins were cleared unconditionally.
• 5 acquisitions (8% of acquisitions subject to call ins) were blocked or subject to an order to unwind the acquisition.

Most affected sectors include Military & Dual Use, Defence, and Advanced Materials, and acquirers from China were subject to the greatest number of call ins

• The six most common mandatory notifications sectors were Defence, Critical Suppliers to government, Data Infrastructure, Military & Dual Use, and Artificial Intelligence, and Data Infrastructure. These were the same six sectors as for the last Annual Report, albeit that Data Infrastructure gained a few places. Defence accounted for 47% of mandatory filings.
• While Defence and Military & Dual Use were in the top five sectors for voluntary filings, the leading sector was Advanced Materials, and Energy and Academic Research and Development in Higher Education also featured in the top five.
• The top three sectors attracting call ins were Military & Dual Use, Defence, and Advanced Materials. These three sectors also featured within the six sectors for final orders, together with Communications, Energy, and Computing Hardware. While these sectors are not surprising, they illustrate that the ISU has identified, and wishes to examine, potential national security concerns across a variety of sectors.
• The origin of investment associated with the most call ins was China, with 42% of all call-ins. Investment from China also accounted for 53% of final orders. This is a trend that was notable from the last Annual Report, and is one that we expect will continue. The UK, the USA, and Canada accounted for the next three origins of investment associated with call ins, and the UK (27%) and the USA (20%) were number two and three for origins of investments subject to final orders. These latter data points are a reminder that the NSIA is at its core country neutral, and the fact that the country from which the investment originated is a "friendly" country may not matter to the final assessment.

Review timelines in line with statutory requirements

• All initial assessments have been completed within 30 working days. On average, the ISU took around 4 days to accept filings, and the Secretary of State took 27-28 working days to decide on whether to issue a call in notice or clear the acquisition. This is noticeably longer than with the last Annual Report (22-24 working days).
• Where the Secretary of State has called in a deal, the median time taken to issue a final notification was 25 working days, whereas the median time taken to issue a final order was 81 working days. Note, however, that these figures do not cover days during which information notices or attendance notices were in force. Accordingly, these figures mark a wide degree of variance, which makes it hard for investors to anticipate when they will be able to complete their acquisitions if subject to a call in notice (and to plan accordingly).