Recent Guidance Fails to Quell Concerns Surrounding the NSIA's Clarity and Transparency
1. National Security and Investment Act 2021
The National Security and Investment Act 2021 (NSIA) came into force on 4 January 2022, with the aim of alleviating the risk of hostile investors controlling critical businesses and infrastructure in the UK. Under the Act, when an investor acquires 25% of shares or voting rights in a company within a sensitive sector a mandatory notification must be made. However, when investments are outside the scope of a mandatory filing, voluntary notifications can still be made. All notifications are assessed by the Investment Security Unit (ISU), which decides whether a full national security assessment is necessary. Additionally, when an investment is outside the scope of a mandatory notification and no voluntary filing is made, the Government has the power to call in the investment if they believe there is a reasonable risk to national security. Investments which are called in are subject to a full national security assessment. The government has extensive powers to block or place onerous conditions on investments which create national security concerns. With this in mind, it is advisable for companies to consider if their investments in the UK are likely to be flagged under the NSIA and how this may affect transaction timelines.
With the Act being in force for over a year, data has also been made available regarding its enforcement. Additionally, concerns have arisen about the NSIA’s clarity and transparency. Therefore, companies expecting to make a notification under the Act should ensure that where possible they minimise the potential for such issues to affect their investment.
2. Enforcement
Of the 766 notified acquisitions reviewed under the NSIA in the last financial year, 92.8% were cleared at the initial screening phase. Many of the remaining 7.2% of acquisitions secured conditional approval after an in-depth assessment. However, five acquisitions were blocked in their entirety. Reviews at the initial screening phase take up to 30 working days. However, conditional approval following in-depth scrutiny can take several months.
In total, 10 deals received approval subject to conditions. These conditions include:
- The appointment of Government approved security officers and auditors
- The requirement for a UK Government official to attend board meetings
- Commitments to continue supplying critical entities such as the Ministry of Defence
- A requirement to notify the Government where certain assets are disposed of
- Restrictions on information sharing between the target and acquirer
The nature of the acquisitions that were subject to conditional approval demonstrates that acquisitions from companies originating from states perceived as hostile to UK interests are more likely to face scrutiny under the NSIA. However, acquisitions involving companies emanating from allies of the UK have also been subject to conditional approval.
Of the five acquisitions blocked under the NSIA, four involved Chinese companies and one involved Russian Oligarchs. There has been particular scrutiny of investors with links to China, with eight out of the 15 final orders in the last financial year relating to acquirers with Chinese connections. This is unsurprising given that Government minister Oliver Dowden has described China as the “the number one state-based threat to economic security” when recently discussing the NSIA1. However, more surprising is that three final orders related to investment from the United States.
Two of the blocked transactions under the NSIA, Newport Wafer Fab/Nexperia and Upp/LetterOne, are currently being judicially reviewed. Nexperia argues that blocking its investment in Newport Water Fab is disproportionate and thus illegal. Its claim centers on the Government allegedly ignoring other, more suitable remedies, putting hundreds of jobs at risk. LetterOne’s investment in Upp was blocked due to part-ownership by two sanctioned Russian Oligarchs. However, ties with the two oligarchs have been cut, with their shares effectively frozen. Virgin Media O2 has now struck a deal to acquire Upp. Proceeds from the sale of the business will not go to any individual under sanctions2.
It is also significant that four of the five blocked transactions related to semiconductor or computer chip technology. This is perhaps unsurprising given that production in these areas was heavily impacted by the Covid-19 pandemic. Therefore, these technologies could potentially remain on the Government’s radar moving forward. More widely, the ‘communications’ and ‘military and dual use’ sectors were the most targeted sectors under the NSIA in the last financial year, accounting for four final orders each.
3. Clarity
The NSIA by its nature is a complex piece of legislation. Its flexibility is key to ensuring its functionality. However, this flexibility has arguably been at the expense of clarity. Despite the guidance that has accompanied the Act, there remains uncertainty in several areas, including the precise scope of the 17 sectors which require mandatory notification.
For instance, the scope of the data infrastructure sector is far-reaching. It captures companies which store, process or transmit data in a digital form which is then used in connection with the operation and administration of certain public sector authorities. The broad nature of this definition has led to unexpected mandatory notifications, including the acquisition of a small telecoms company with a contract to provide data services and mobile phones to a police force.
The former BEIS Secretary Kwasi Kwarteng acknowledged that the regime was capturing too many transactions that do not raise substantive concerns. However, the subject of excessive notifications may soon be addressed. Market Guidance notes published in July 2022 indicate that the Government is analysing whether exemptions to the mandatory notification requirement are necessary3.
Additionally, where it is uncertain whether the target company falls into one of the 17 sensitive sectors, it is encouraged by the ISU to notify “just in case”. However, there are separate forms for voluntary and mandatory notifications. Failing to use the correct form resulted in 23 notifications being rejected in the last financial year. However, as discussed later in this update, recent guidance appears to have addressed this issue.
4. Transparency
Another by-product of the flexibility of the NSIA is a lack transparency. Minister Oliver Dowden has accepted the need for greater transparency in the NSIA’s application4.
The failure to provide a definition for ‘national security’ has caused particular concern, giving the Government wide discretion to decide where to intervene under the NSIA. This ambiguity raises the potential for broader political considerations to sway decisions. For instance, it appeared that economic factors were key in the conditional approval of the Viasat/Inmarsat deal. The transaction received approval subject to a 30% increase in research and development spending and an increase in the number of highly skilled jobs available. Moreover, a statement by a Government minister regarding the Nexperia BV/Newport Wafer acquisition emphasised the need to preserve jobs but made no direct reference to national security.
The ISU has also chosen not to publish decisions unless a final order is issued. There have been some exceptions to this, such as in the minority acquisition of BT by Altice. However, such exceptions have been very rare. Greater transparency regarding deals that receive approval would also be a welcome development, providing more insight into the type of acquisitions unlikely to be scrutinised under the NSIA.
5. April 2023 guidance
On 27 April 2023, the Government published updated guidance on the NSIA. The guidance establishes that parties can now ask the Government whether a mandatory or voluntary filing is suitable in cases of uncertainty, providing relief to businesses concerned about submitting the incorrect form5. Moreover, the guidance sets out that the Government is willing to expedite acquisitions in certain circumstances when the parties demonstrate serious financial distress. The guidance also clarifies that notifications should be made once there is ‘good faith intention’ to proceed with investment. This can be evidenced by ‘the existence of heads of terms; board level consideration of the acquisition; or if it is a public bid, a public announcement of a firm intention to make an offer or the announcement of a possible offer’6. However, notably the updated guidance fails to set out exemptions to the mandatory notification requirement or address the issues surrounding transparency.
6. Conclusion
The NSIA remains very much in its infancy with scope for greater clarity concerning the meaning of, for instance, certain sectoral definitions to emerge. Whilst recent guidance partially addresses these concerns, it is only through the continuing application of the Act and its practical enforcement that meaningful direction to industry for the purposes of risk assessment can take shape.
[1] See https://www.ft.com/content/a00281bc-0f8e-48c6-b6d8-dec66b2a12d0
[2] See https://www.ft.com/content/e9c46724-680b-49c1-b225-112b9775c28f
[3] See https://www.ft.com/content/a00281bc-0f8e-48c6-b6d8-dec66b2a12d0
[5] See https://www.gov.uk/guidance/national-security-and-investment-act-guidance-on-acquisitions
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