Background
On 10 September 2024, the Cabinet Office published the UK Government’s third Annual Report (the “Report”). The Report provides further detail on how the National Security and Investment Act (the “NSIA”) regime is functioning in practice. It examines the regime’s second full year in operation and covers the period from 1 April 2023 to 31 March 2024 (the “Reporting Period”) and so does not extend to the change of government in July 2024.
Our observations on the Government’s second Annual Report can be found here.
Hogan Lovells also hosted an event on geopolitical risk and national security on 9 September 2024, featuring speakers from the Cabinet Office and Foreign, Commonwealth & Development Office. Further details and takeaways from that event can be found here.
Key takeaways from the Report
The Report sets out a variety of statistics that signal how the NSIA regime has been functioning during the Reporting Period. The statistics include the number and type of notifications made, the key sectors engaged by the regime and details on the origin of investment.
Notifications
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In total, 906 notifications were made to the ISU during the Reporting Period, up from 865 notifications received in the previous reporting period.
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Over three quarters of notifications made were mandatory (753 out of 906), with the remainder being either voluntary (120) or retrospective validation applications where transactions had been completed without having obtained the necessary approval (33). These results show a small uptick in mandatory notifications from the previous reporting period (up 6 percentage points).
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Across all of the notifications submitted, the most common sector cited was defence (48% of notifications being associated with this area of the economy). By way of comparison, the second most prominent sector was critical suppliers to the government, relating to 19% of the notifications. For voluntary notifications, energy and defence were the most commonly cited sectors by relatively equal measure.
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The notification trends regarding the 'origin of investment' metric reflects the patterns recorded in the previous reporting period. The UK (61%) and the US (26%) were the ‘origin of investment’ in the vast majority of notifications made. China was in 7th place at 5%.
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Despite the slight increase in the total number of notifications, the report highlights a decrease in the number of rejected notifications (down to 24 rejected notifications from 43 in the previous reporting period). The most common reason for a notification being rejected by the ISU was that the acquisition should have been notified under a different notification type (i.e. submission of a mandatory notification when it should have been voluntary, and vice versa).
Transactions and investments subject to in-depth scrutiny
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The total number of call-ins fell to 41, down from 65 in the previous reporting period.
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This means less than 5% of all acquisitions reviewed by the ISU were ultimately called-in for in-depth assessment and that the vast majority of transactions were cleared to proceed within the initial 30 working day period.
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There are a couple of notable anomalies when comparing certain statistics of notifications made with the frequency of call ins occurring:
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In line with the pattern demonstrated by the previous annual report, there is a stark difference in the call-in rate between deals notified on a mandatory and voluntary basis: around 3% of acquisitions reviewed following a mandatory filing were called in, compared to just under 13% for voluntary filings.
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Similarly to the patterns demonstrated in the previous reporting period, there was an emphasis on Chinese investment being called-in. Of the call in notices issued, 41% of these involved acquirers associated with China. However, the focus is not all on China – the UK and US accounted for 39% and 22% respectively. These figures do not, however, read across to origin of investment where final orders were imposed (see below).
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In the previous annual report, the most prevalent sector for call-in notices was military and dual use. This year, the largest proportion of call-in notices was associated with defence (34%), closely followed by military and dual use.
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10 notifications were withdrawn having been called in (slightly down from 11 in the previous reporting period).
Interventions made to address national security concerns
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During the Reporting Period, five final orders were imposed (a significant reduction from the 15 handed down in the reporting year prior), all of which were conditional clearances. (In the calendar year 2023, only three final orders were imposed.)
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Overall intervention rates for the regime therefore stand at 12% for called in transactions and approximately only 0.6% for all transactions reviewed by the regime. This demonstrates a decrease from the previous reporting period, in which 20% of transactions called in were imposed with a final order and approximately 2% for all transactions reviewed.
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Of the five final orders imposed:
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There were acquirer links to the UK, US, Canada, France and United Arab Emirates. Interestingly (and in contrast to the previous reporting period), no final orders in the Reporting Period were obviously linked to China.
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The most prevalent sectors were defence (associated with four final orders), military and dual use, and communications (both associated with two final orders).
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A point of note is that the communications sector has a disproportionate rate of final orders compared to the number of notifications made citing this as a relevant area. Communications features in two out of five final orders, but was only cited as relevant for 8% of all notifications made.
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On average, the Government took 29 working days to decide to call in an acquisition once accepted, and 34 (median) and 51 (mean) working days from calling in an acquisition to issuing a final order. This is a sharp decrease from the previous reporting period, in which it took an average of 81 working days to issue a final order from the point an acquisition was called in.
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Since the previous reporting period, the use of the additional and voluntary period has decreased – the additional period having been used 12 times and the voluntary period being used 4 times during the Reporting Period (a decrease from 29 and 10 times respectively). This likely reflects the decrease in final orders made.
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With regards to enforcement and compliance, no penalties under the NSIA were issued and no criminal prosecutions were concluded during the Reporting Period. The Government did identify 34 offences of completing a notifiable acquisition without approval, however penalties were not imposed and parties were instead contacted to request that steps were taken to prevent any recurrence.
Observations
In 2022/2023, of the 15 final orders imposed, one third were prohibition decisions (i.e. a block or unwinding order). In contrast, in the current Reporting Period all five final orders were conditional clearances. This may indicate that the former Government was continuing to be creative with implementation of a variety of remedies/conditions as the regime evolves, although it is difficult to spot significant trends and draw firm conclusions given the small set of data. Also possible is that transactions in sectors more likely to be subject to prohibitions are not being pursued.
Any suggestion of a trend in the decrease of final orders appears premature – in the calendar year 2024 there have already been nine final orders to date. The impact of the new Labour Government on the functioning and intervention rate of the NSI regime remains to be seen.
Looking ahead
On 18 April 2024, the outcome of the Government’s NSIA Call to Evidence (launched in November 2023) was published, which set out its intention to implement changes to the NSIA regime over the course of 2024. Since then, there has been a change in Government in the UK. Some of the proposals have already happened and we understand that the new Government still plans to:
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launch a consultation on updating the mandatory notification sector definitions. This will include proposals for a standalone semiconductor and critical minerals sector. It will also consider possibility of adding water to the list of mandatory sectors;
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consider technical exemptions to the mandatory notification requirement including bringing forward secondary legislation (subject to parliamentary time) to exempt the appointment of liquidators, official receivers and special administrators; and
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make further improvements to the functionality of the NSI system, including the online submission portal, the ‘NSI Notification Service’.
The new Government’s underlying objective remains that the regime is “proportionate and well-targeted”. Indeed, the publication of further guidance and clarity on the ISU’s interpretation of relevant sectors in recent months is very welcome, and demonstrates that the Government is willing to listen and act upon stakeholder feedback; it will provide businesses with greater certainty and ensure that investment into the UK remains undeterred and efficient.
Please get in touch with us to discuss the impact that the NSIA regime could have on your business. Hogan Lovells practises law at the intersection between business and Government and is particularly well placed to help – having a deep understanding of the regulatory landscape, the detail of the NSIA regime, and the global foreign investment review environment. We also have extensive experience of working inside Government, and advising corporations on the machinery of Government and its policy priorities. Let us help you navigate the regime and, if necessary, engage with Government and relevant stakeholders.
Authored by Chris Hutton, Christopher Peacock, Karman Gordan, and Alicia Saffron Taulli.
