National security and investment regime spurring fewer UK notifications than anticipated

Under the Act, which came fully into force on 4 January 2022, businesses and investors must notify the government of certain ‘notifiable acquisitions’ that relate to 17 sensitive areas of the economy. 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.

Voluntary notifications can be made by businesses that have concerns about national security issues arising or to anticipate powers the secretary of state has to ‘call-in’ deals for assessment that are not subject to mandatory notification under the Act.

The legislation is designed to provide for greater oversight of foreign direct investment (FDI) in the UK in the interests of national security.

When the NSI Bill was proposed in November 2020, the government said (47-page / 821KB PDF) it expected between 1,000 and 1,830 notifications to be made under the new framework each year. However, in its newly published annual report 2022-23 for the NSI Act (57-page / 633KB PDF), the Cabinet Office disclosed that only 866 notifications were made during the period of 1 April 2022 to 31 March 2023. It is the first full-year annual report issued under the NSI regime.

According to the report, there were 671 mandatory notifications – almost half of which were in the defence sector – and 180 further voluntary notifications made during the 12-month reporting period. A further 15 retrospective validation applications were made – forms that can be submitted where an acquisition subject to mandatory notification was completed without seeking the approval of the secretary of state.

Paul Williams of Pinsent Masons, a specialist in competition law and merger control, said data disclosed in the annual report highlighted that the NSI regime is working well for straightforward notifications.

The report flagged how the screening process provided for under the NSI Act only impacts a minority of UK businesses and that even where notifications were made, 93% of cases were cleared within 30 days.

The report also highlighted that both mandatory and voluntary notifications were accepted on average within four working days. The main reason for applications being rejected was that businesses used the form for mandatory notification when the deal was only subject to voluntary notification, or vice versa.

The Cabinet Office said it called-in 65 deals for further assessment – 37% of those deals were associated with the military and dual use area of the economy, 29% with defence, and 29% with advanced materials.

Williams said it was notable that more than half of call-in cases involved UK or US acquirers. He said this showed that national security assessment is based on both the target’s activities as well as the acquirer’s identity. In a foreword to the annual report, deputy prime minister Oliver Dowden stressed, however, that the Act “remains country agnostic” and that the UK government has “judged and will continue to judge each case on its own merits and the individual national security risks it poses...”

In 15 cases, the secretary of state issued a final order requiring organisations to either block or unwind deals or where it imposed conditions on an acquisition. Of those 15 final orders, eight involved acquirers associated with China, four with the UK, and three with the US. The Cabinet Office said deals in the defence, communications, energy, advanced materials, and computing hardware sectors were “subject to the most final orders”.

According to the Cabinet Office, between 1 April 2022 and 31 March 2023, the median number of working days between an acquisition being called in and the secretary of state making a final order was 81 – beyond the default statutory timescale of 75 working days for the call-in process. The timeframe can be extended with the agreement of the acquirer.

Williams said that this showed that notifications subject to a final order should expect a lengthy review process of six months or more.