A closer look - the NSI Act: one year on

The UK NSI Act is now one full year into its operation, having introduced a hybrid mandatory and voluntary regime to strengthen the UK government's powers to scrutinise and intervene in transactions on grounds of national security. Unlike foreign direct investment regimes in other jurisdictions, the UK regime does not include any requirement for the acquirer to be a foreign person and instead the mandatory regime focuses on the sector in which the target business operates.

Relevant transactions which fall within any of seventeen mandatory sectors, including data infrastructure, energy, and suppliers to the emergency services, need to be notified and cleared in advance of completion. A mandatory notification can be triggered both by a majority acquisition and by any other transaction (including any restructuring transaction) where a party increases its stake through any of the 25%, 50% and 75% ownership thresholds.

Acquisitions of entities active in any other sectors or acquisitions of qualifying assets, which give rise to UK national security concerns, may be called in for review by the Secretary of State (acting through the Investment Security Unit (ISU)) or voluntarily notified by the parties.

According to the UK government’s inaugural report on the operation of the NSI Act (covering the first three months of the regime), 222 notifications were received between January and March 2022, across the whole range of sectors. This number was proportionately not far off the government's expectation of between 1,000 and 1,830 notifications a year. The next report, covering a year-long period, is due in March 2023. In our experience, given in particular that failure to make a mandatory notification will result in a transaction being void, parties are aligned in taking a cautious approach to the question of notification and therefore notifications across the first full year of the regime are likely to have remained at a similar level.

Where UK national security concerns arise, the first year of the NSI Act demonstrates the government’s appetite to take strong action. To date there have been 14 deal interventions. At least in the case of acquirors linked to politically sensitive states and sectors that are key to the UK’s national security, as set out below, transactions are being prohibited and this can be expected to continue. However, the UK government has also demonstrated a pragmatic stance when considering the appropriateness of remedies packages, even where politically sensitive states are involved. By way of example, the acquisition by a Chinese buyer of development rights for a project aimed at improving UK Power Grid's ability to use renewable energy was approved subject to remedies aimed at preserving energy and infrastructure security. The government’s action also reflects the focus of the NSI Act on the activities of the target, rather than purely the nationality of the investor. UK-based investors and acquirors based in politically friendly nations have faced in-depth probes into their deals, in some cases resulting in remedies.

4 out of the 5 deal prohibitions to date have related to acquirors with Chinese links and transactions that either pose risks to the UK defence sector (in two cases) or to the UK's semiconductor industry (in two cases), each raising defence concerns of some kind. In the fifth case, the deal prohibition related to a Russian-backed fund acquisition in the UK broadband sector. It is only a matter of time before the scope of sectors in which action is taken broadens. Indeed, clearances subject to remedies have now been seen in the emergency services, energy, satellite communications, critical national infrastructure (specifically for quantum timing and atomic clocks), aerospace and mobile telecoms spheres. A broad range of remedies have been imposed, typically including restrictions on the sharing of information and maintenance of strategic capabilities in the UK.

At the other end of the spectrum, i.e. deals which do not raise material national security issues, the new system appears to be working efficiently. Filings are generally accepted by the government within a small number of days, with clearance received within the initial review period without significant requests for further information. As anticipated, on the basis of our discussions with the ISU leading up to the new regime, the NSI Act generally operates as a timing and process issue on the typical private equity transaction rather than a more substantive concern.