Clifford Chance

The Government has announced that it is exploring how to mitigate national security risks that may arise from a "very small proportion" of outbound investments, including use of its powers under the National Security and Investment Act (NSIA). Separately, it has set out a series of intended reforms of the NSIA regime.

Oliver Dowden, the UK Government Minister with responsibility for the UK's national security screening regime, stated in a speech on 18 April 2024 that a "very small proportion" of outbound investments – i.e. investments in other countries made by UK-based investors – could present national security issues, by "fuelling technological advances that enhance the military and intelligence capabilities of countries of concern". Consequently, the UK government will engage with G7 allies and businesses to better understand this risk and how it can be mitigated and will issue public guidance on how the Government's existing powers under the National Security and Investment Act (NSIA) allow the Government to intervene in such transactions.

The Government has also published a response to a consultation that it launched in November 2023 on the operation of the NSIA regime. Its key conclusions are as follows:

• The Government will issue an updated statement regarding the exercise of its "call-in" powers, further clarifying which types of transaction it is most likely to call in on national security grounds, if not voluntarily notified. However, in a separate response to the Parliamentary Business and Trade Subcommittee, the Government rejected calls for an explicit definition of "national security".
• The Government also rejected calls by some consultation respondents for a fast-track process for certain types of acquirers (e.g. those that had already had a deal cleared in the past). It noted that some targets are considered so sensitive they will always warrant screening, irrespective of the acquirer.
• Updated "market guidance" on the NSIA regime will be issued in May 2024, covering various topics, including the application of the NSIA to academia and (as noted above) outbound investment.
• The Government has decided against exemptions for automatic enforcement provisions in secured lending agreements. Such provisions automatically transfer share voting rights to a lender in the event of a default, and therefore risk giving rise to a breach of the NSIA if the borrower has sensitive activities in the UK. This conclusion was based on the "very small number of notifications" the Government has received in respect of such transactions, as well as feedback from the consultation that some lenders have already modified their lending agreements to take NSIA filing requirements into account and that some respondents had not experienced any problems in accessing loans, or enforcing such provisions, as a result of the NSIA. However, the Government will consider where it can provide further guidance in this area.
• The Government will bring forward secondary legislation (in the autumn, subject to parliamentary time) to exempt the appointment of liquidators, official receivers and special administrators from the mandatory filing regime. Existing exemptions already apply to the appointment of administrators.
• As regards exemptions for certain internal company reorganisations, transactions involving Scots law share pledges (in which legal title to shares is taken as security) and transactions involving public bodies, the Government's Investment Security Unit (ISU) will undertake a risk assessment to understand whether such exemptions are feasible. It is not clear whether this assessment will be finalised by Autumn so that any such exemptions can be included in the secondary legislation mentioned above.
• There will be a further consultation by summer on updating the sector definitions that dictate which transactions are subject to mandatory filing. This will include proposals for new, standalone definitions for the semiconductor and critical minerals sectors, and may also bring certain water sector activities within the scope of the mandatory regime.

Investors will be watching carefully for details of how these reforms will be implemented. In particular, active screening of outbound investments could have a significant impact on UK-based investors, given that they hold £14 trillion of assets overseas, generating hundreds of billions of pounds annually. They will also be disappointed that the Government has still not committed to exemptions for certain internal company reorganisations and share security transactions, despite the various submissions to the consultation which explained why such transactions are not susceptible to national security risks.