Clifford Chance

On 10 September 2024, the UK Cabinet Office released its annual report on the operation of the UK National Security and Investment ("NSIA") regime for the period covering 1 April 2023 – 31 March 2024 (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 second full Annual Report that the UK government has issued, making a cross-year comparison possible for the first time. We have highlighted below some of the key takeaways. Please reach out to us for further information on the NSIA and on foreign investment / national security screening regimes globally.

906 notifications were submitted in the reporting period

• The total number of notification (906) is only marginally higher than the previous year (866), and remains lower than the lower bound estimate the government predicted when passing the bill (1,000-1,830).
• Only 120 of these were voluntary filings, which is lower than the previous year (180), and remains significantly lower than government predictions for voluntary notifications arising only from asset sales (290-860 per year). This continues the trend of parties not routinely submitting precautionary filings despite the government's ability to call in certain acquisitions for a full national security review. This is likely a reflection of businesses and advisors becoming more accustomed to the ISU's practice, and the type of deals the ISU is likely to be more interested in. However, it is likely also a reflection of the very wide scope of the mandatory regime.
• 33 of these were retrospective notifications, i.e., where a party notifies an acquisition to be recognised retrospectively as being valid after it has been completed without approval. This is more than double the previous year. Notably, completing an acquisition that is subject to the mandatory regime without approval is a criminal offence. However, the Annual Report states that the ISU has, so far, not brought such action against the parties who failed to file. This likely reflects the ISU allowing parties some latitude given the nascency of the regime – we do not expect the ISU's leniency will continue indefinitely.
• Of the 900 filings submitted in the reporting period, 24 notifications were rejected (which is materially down from the previous year (42)). Similar to the last Annual Report, the main reason why filings were rejected (10/24) 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 2 filings were rejected due to insufficient information having been provided (duplication of filings and "other" led to a further 12 rejections). However, the total number of rejections (24) is lower than last year (42).

The Chancellor of the Duchy of Lancaster ("CDL") called in 41 acquisitions for a more detailed assessment, and made 5 final orders

• Of the 847 notified acquisitions that were fully reviewed in the reporting period, 810 were cleared unconditionally at phase I – a 95.6% phase I clearance rate. This is a slightly higher clearance rate than the previous rate. This suggests that the large majority of acquisitions which are notified are able to proceed without being called in. However, it continues to show that, despite lower than predicted notifications, the regime is still capturing a large volume of deals that have no national security concerns. The government is continuing to consider changes to the scope of the regime (see our blog on this here), and this statistic may indicate that a narrowing remains necessary.
• Of the 41 acquisitions that were called in: 22 were made following a mandatory notification; 15 following a voluntary notification; and 4 following call in notices issued for acquisitions that had not been notified. The proportion of voluntary filings being called in is higher than last year, but this is likely driven by the lower number of total voluntary notifications.
• 33 final notifications (i.e. no further action following a call in) and 5 final orders were made during the reporting period. 2 final orders were also varied. One of the five final orders was issued for a non-notified acquisition.
• Of the 33 final notifications, 10 were issued in relation to acquisitions that were subsequently abandoned during the call-in review period. If these transactions are not treated as unconditional clearances (since their abandonment may well have been due to an expectation of an adverse decision of the CDL), the data shows that 60% of transactions subject to call ins were cleared unconditionally (down from 64% last year).
• 5 acquisitions were subject to a final order imposing conditions.
• No deals were blocked during the period covered by the Annual Report.

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

• 48% of notifications related to defence (47% in the previous year), 34% of calls ins related to defence, and four of five final orders related to defence. The high proportion of call ins and final orders in the defence sector is not surprising; however, the significant number of defence notifications suggests this sector is defined too widely. The government appears, in its consultation, to recognise this, and this sector may in due course be narrowed.
• Following defence, 19% of notification related to critical suppliers to the government, with military & dual use, data infrastructure, and advanced materials also featuring heavily. In terms of call ins, 29% related to military & dual use, and 24% related to academic research and development in higher education, advanced materials, and communications (a call in can relate to more than one sector).
• The significant number of call ins in academic research and development in higher education shows that this remains a key area of focus for the ISU. Indeed, of the 10 withdrawn filings, 5 related to this sector. The reasons why these filings were withdrawn are not public, but it is likely that at least some of the withdrawals were caused by ISU scrutiny.
• In terms of final notifications and orders, 30% related to defence, and 24% to each of academic research and development in higher education, advanced materials, and military & dual use. Of the five final orders, four related defence, two to military & dual use, and two to communications (a final order can relate to more than one sector). As a comparison, military & dual use caused the most final orders in the period covered by the last Annual Report, which suggest defence and military & dual use remains a focus (consistent with the points noted above).
• China-linked transactions remain a focus of the regime, which may explain why most China-linked filings were made voluntarily (almost all filings made by investors from other countries were mandatory). However, while precise numbers cannot be calculated due to possible differences in reporting periods for the relevant transactions, the numbers suggest that a higher proportion of notified China-linked deals were cleared unconditionally without a call-in (30-40%) than in the previous annual period (10-20%). For comparison, around 95% of deals with US linked investors were cleared without a call in. Of the total number of deals that were called-in, China-linked deals accounted for broadly the same percentage as in the previous period (42% vs. 41%) and two-thirds of the China-linked deals that were called in were cleared unconditionally, with the rest abandoned (China-linked deals accounted for 8 out of the 10 deals that were abandoned after a call-in).
• The UK and the USA accounted for the next two origins of investment associated with call ins (same as last year, with the proportion being 39% and 22%, respectively), and the UK and the USA were also the jurisdictions associated with the highest number of final orders (two each). This data is consistent with previous years. It is also an important 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 six working days to accept mandatory notifications and eight working days to accept voluntary notifications (up from four for both), and the CDL took on average 29 working days to decide on whether to issue a call in notice or clear the acquisition. This is again higher than previous Annual Reports (22-24 working days two years ago, and 27-28 last year).
• Where the CDL called in a deal, the median time taken to issue a final notification was 26 working days (same as last year), whereas the median time taken to issue a final order was 34 working days. Note, however, that these figures do not cover days during which information notices or attendance notices were in force. Accordingly, while the time taken to issue a final order is down significantly from the last year (81 working days), these figures mask a wide degree of variance, which makes it hard for investors.