Fewer remedies despite more notifications under UK’s national security and investment regime

The latest annual report on the operation of the National Security and Investment Act 2021 (NSIA), which came into force on 4 January 2022, showed that the notification regime continues to catch a lot of transactions that are subject to government review for national security risks.

Under the regime, businesses and investors must notify the government of certain ‘notifiable acquisitions’ that relate to 17 sensitive areas of the economy. In addition, where a transaction is not required to be notified, it can be 'called in' for a national security review by the secretary of state. Voluntary notifications can be made by businesses where potential national security concerns arise. Notified transactions can be subject to in-depth review, following a ‘call-in’ notice.

Where the mandatory notification regime applies, the transaction requires approval from the UK secretary of state in the Cabinet Office. Transactions closed without clearance will be void. Failure to notify is a criminal offence and can result in fines of up to 5% of global revenues or £10 million, whichever is greater.

In the year ending 31 March 2024, the number of notifications went up by 4.7% to 906, from 865 notifications in 2022-23. While the number of notifications went up, the number of transactions subject to in-depth review, or ‘call in’, was lower with 41 cases, compared to 65 in the previous year. The number of final orders – a binding order issued by the secretary of state imposing conditions on an acquisition to mitigate national security risks – also dropped, to 5 from 15 in 2022-23.

Paul Williams of Pinsent Masons, a specialist in competition law and merger control, said that the regime is now “settling in and applying to a consistent number of transactions each year”, and the fact that only five final orders were issued during the reporting period shows “the government is only imposing remedies or prohibitions on cases which raise clear national security concerns.”

According to the annual report, the majority of transactions subject to call-in notice and final orders are in the ‘defence’ and ‘military and dual use’ sectors. This is consistent with previous years.

“The government continues to monitor transactions that fall outside the mandatory notification regime, with four called in for assessment during 2023-24. Of these four reviews, one was subject to a final order. The national security review also continues to focus on the target’s activities as well as the acquirer’s identity,” said Williams.

Of the 41 transactions called in, 41% involved Chinese acquirers, while 39% were by UK acquirers and 22% involved acquirers from the US. This is similar to the previous reporting period.

In terms of the time taken to assess acquisitions, the data for 2023-24 showed a notable improvement in the average length of the in-depth review process. On average, the period from a ‘call-in’ notice to final order was 34 working days, compared with 81 working days in 2022-23.

“While the Cabinet Office notes that no conclusions on timeline trends should be drawn given the low number of final orders in 23-24, this nonetheless suggests that the Cabinet Office is gaining experience of the detailed assessment period leading to potentially more efficient decision making,” said Williams.

The annual report also highlighted the fact that no penalties or criminal prosecutions have been issued for breaches of the NSI Act. However, it said that 34 offences of completing a notifiable acquisition without approval under the Act were identified last year, but penalties were not imposed in these cases. Instead, the offending parties were required to provide reassurance that recurrence would not occur.

So far, only one NSIA decision is under appeal. It was brought on by Russian investment firm LetterOne in July 2024, to challenge an order forcing it to sell a broadband provider.

In light of recent geopolitical developments and following a recent consultation outcome, the government has recently announced that it will “fine-tune” the national security investment screening regime. One of the updates is a new ‘section 3 statement’ that better explains how the UK government plans to exercise powers under the NSI Act to ‘call-in’ certain acquisitions for scrutiny. Amendments to the mandatory notification sectors are expected to be consulted upon later in 2024.