Clifford Chance

UK Government Launches a Review of the Scope of the National Security and Investment Regime

On 13 November 2023, the UK Government launched a "Call for Evidence" on whether there should be updates to the UK National Security and Investment Act ("NSIA") regime (the press release is here). For the most part, the Call for Evidence indicates a desire to reduce the scope of the regime, as well as to add clarity and certainty. However, it appears likely that the scope of certain sectors will widen, and the filing forms may be lengthened.

The NSIA regime has been in force since 4 January 2022. As the Government anticipated, this has required businesses to submit a large number of notifications to the Investment Security Unit ("ISU"). The ISU has tended to deal with these notifications expeditiously, and the filing forms are generally considered to be proportionate. However, businesses have reported that the scope of the NSIA regime is too wide, and that it is capturing obviously unproblematic deals. By way of illustration, in the last Annual Report, the Cabinet Office disclosed that it received 866 notifications in a single year (see our blog on this here), which is well over double the number of transactions that were reviewed under the German FDI regime in 2022. Under the UK regime, 93% of transactions were cleared unconditionally, with only 17 Final Orders (i.e., blocks, or conditional clearances) issued.

Against this background, on 13 November 2023, the Government launched a Call for Evidence on whether there should be updates to the regime. In an interview with the Financial Times (here), Oliver Dowden, the Deputy Prime Minister, stated that he expected the Call for Evidence to result in a "net smaller" regime, and that the intention is to impose "as little regulatory burden as necessary". The Call for Evidence will run until 15 January 2024.

We have set out below the key areas on which the Call for Evidence has requested feedback.

1. Changes to the scope of the 17 specified sectors

Mandatory NSIA notification is required where the target entity has activities in one or more of the 17 sectors specified in the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (the "Regulations") (provided sufficient control is acquired). The Government is examining whether the scope of these sectors can be further clarified. The proposed changes include:

• Advanced Materials: The definition of this sector is lengthy and complex; the Government is inviting feedback on how to improve this.
• Artificial intelligence: As drafted, the regime requires mandatory filings for non-AI businesses that nevertheless incorporate or develop some AI. The Deputy Prime Minister noted in his FT interview: "AI is becoming ubiquitous across the entire economy. An awful lot of that is going to have very little national security implications". Given this, the Government is asking for feedback on narrowing the scope of this sector.
• Defence: The Defence sector triggered nearly 50% of all mandatory notification in the period covered by the last Annual Report. While this sector is clearly of material importance to national security, this volume of notification suggests that the sector is defined too broadly. The Government is considering options to reduce the likelihood of capturing unproblematic transactions.
• Critical Suppliers to Government: Businesses have noted that it can be difficult to know if certain suppliers are captured by this sector, or whether they are within scope of other sectors such as Defence, Communications, or Critical Suppliers to the Emergency Services. The Government is therefore looking to clarify this area.
• Suppliers to the Emergency Services: Currently, only businesses that supply directly to certain emergency services are included within this sector. The Government is considering whether this sector should also include sub-contractors.

Moreover, the Government is considering introducing two new sectors.

• Semiconductors: Certain semiconductor activities are already captured by the Advanced Materials and Computing Hardware sectors. However, alongside the Semiconductor Strategy that the Government introduced earlier this year, the Government is considering whether moving these activities into a new, standalone sector could improve clarity. The Government is also considering whether to update the activities captured by the sector to reflect the Semiconductors Strategy, and it cites as examples further focusing on compound semiconductors, design, and intellectual property.
• Critical Minerals: These again tend to be captured by the Advanced Materials sector. However, the Government is considering whether a new sector that is brought in line with the British Geological Survey's latest assessment of critical minerals (due for publication early next year) would be better.

2. Limiting the applicability of the mandatory regime to intra-group transactions

As present, a mandatory NSIA filing can be triggered by internal restructurings. This could arise, for example, where a new entity is added to a group, and where a particular entity lower down in the corporate chain has activities in one or more of the 17 sectors specified in the Regulations. This requirement has been criticised. Given that the ultimate control over the entity remains the same, there is limited scope for national security concerns to arise from such internal reorganisations. In particular, no such concerns should arise if there is no change in the jurisdiction of incorporation of legal entities in the ownership chain, and therefore no new possibilities for a foreign government or regulator to gain influence over the entity. Moreover, a failure to submit a mandatory filing is a criminal offence, and it has the automatic consequence that the transaction is void (unless retrospectively validated). Businesses have therefore raised as a concern that the applicability of the mandatory regime to intra-group transaction is over-burdensome and has disproportionate potential penalties.

The Call for Evidence asks for feedback, and notes that the Government is exploring whether to introduce an exemption from the obligation to make a mandatory notification for some internal reorganisations. However, the Call for Evidence suggests that at least some intra-group transactions could in fact raise national security concerns, and that therefore some intra-group transaction will still require mandatory notifications.

In a similar vein, the Government is seeking feedback on whether there should be further exemptions from the mandatory regime where: (i) shares are transferred to a liquidator in cases of liquidation; (ii) Scots law share pledges are issued (those transfer legal title); and (iii) the acquirer is a public body.

3. Changes to the process and forms

While the ISU has sought to improve transparency throughout the review process, there remains a perception that NSIA notifications go into a "black box" post-submission. The Call for Evidence asks for feedback on the review process, including on how the ISU communicates with parties.

Moreover, the Government has suggested that certain information, without suggesting what type of information, that is not currently requested in the forms can sometimes be helpful to its assessment. The Government is therefore considering increasing the length of the notification forms, but without specifying in what manner.

Conclusion

The Call for Evidence will generally be welcomed by businesses, in particular when put alongside the Deputy Prime Minister's indication that the intention of the review is to reduce the volume of notifications triggered by the regime. The proposal for exemptions for intra-group transactions is particularly welcome, as is the suggestion that the scope of certain sectors should be reduced and made clearer.

However, beneath the headlines, the Call for Evidence reveals a desire to also expand aspects of the NSIA regime. The scope of the Communications, Data Infrastructure, Suppliers to the Emergency Services sectors may be expanded, and new Semiconductors and Critical Minerals sectors could be added. Added to this, businesses may face the prospect of being required to complete longer notification forms.