The UK Government published last month its annual report on the application of the National Security and Investment Act 2021 (NSIA). The NSIA came into force on 4 January 2022. The report covers the period commencing from that date to 31 March 2022, though future annual reports will cover a full calendar year.

The NSIA is already having a significant effect. As an example, the UK Government call in of the proposed acquisition of Newport Wafer Fab by Nexperia, a Netherlands company ultimately owned by a Chinese company, has attracted a lot of attention.

A recap on the NSIA

The NSIA established a stronger and wider-ranging regime for screening foreign investment. The scope of the regime is broad and the consequences of non-compliance are significant.

The mandatory notification regime applies to certain transactions involving targets in any of the 17 sensitive sectors. These transactions require to be notified and approved by the Secretary of State before they can proceed. Relevant transactions that are not notified and cleared will be void. Failure to notify could also give rise to financial penalties of up to 5% of group annual turnover or £10 million (whichever is greater) and criminal penalties including up to five years’ imprisonment for the acquirer’s directors.

The voluntary notification regime is for transactions that do not fall within the scope of the mandatory regime but where parties require confirmation that a transaction will not be called in for review. The parties require to assess whether the proposed transaction may give rise to national security issues and might therefore be at risk of being “called-in” for review.

The government has extensive “call-in” powers to review qualifying transactions that have not been notified up to five years after the transaction had been completed. When the government becomes aware of the transaction, this period is reduced to six months.

Key findings of the report

• The report notes that 222 notifications were made in the first three months of the NSIA being in operation.
• Of the 222 notifications received, 196 were mandatory notifications.
•  Of the 196 mandatory notifications made, 178 were accepted, 7 were rejected, and 11 were still being evaluated at the end of the reporting period. Reasons for rejection included various procedural points, e.g. that: the application should have been submitted as a voluntary notification, insufficient information was provided, and the notification covered multiple qualifying acquisitions that should have instead been submitted separately. The report does, however, suggest that in rare cases, the government has pragmatically accepted a single notification to cover multiple qualifying acquisitions. For example, “where multiple qualifying acquisitions contribute to a single effect, for example as happens in some internal group reorganisations”.
• Most of the mandatory notifications were made in five of the 17 sensitive sectors. Those were defence, military and dual use, critical suppliers to government, artificial intelligence, and data infrastructure. Notably, the report confirms that mandatory notifications have been received for acquisitions taking place in each of the 17 sensitive sectors.
• In the three months reported, there were 25 voluntary notifications. These were mostly made in areas of professional, scientific and technical activities, data infrastructure, other service activities (detailed in the report), energy, and computing hardware.
• Of the 222 notifications, 17 were called in by the government. Of the 17, three were cleared during the first three month period and none were subject to a final order. The others were still subject to investigation at the end of the reporting period.
• The transactions called in were mostly in areas of military and dual use, defence, and critical supplier areas.
• Notably, five of the call-ins related to voluntary notifications i.e. transactions which did not fall within mandatory sectors.
• The Secretary of State did not issue any penalties for breaches of offences under the NSIA within the first three months. There were additionally no criminal prosecutions or judicial reviews of decisions under the NSIA.

MoU and looking ahead

A Memorandum of Understanding (MoU) was published on the same day as the report, setting out parameters for cooperation, coordination and information sharing between Department for Business, Energy and Industrial Strategy (BEIS) and the Competition and Markets Authority (CMA). The MoU covers the informal engagement between the bodies in relation to transactions which are notified to each of them.

Whilst the report sheds light on the first three months of the NSIA, it is clear that additional market guidance from the Investment Security Unit (ISU) would provide some welcome clarity. The broad scope of the NSIA has doubtless driven a significant number of precautionary notifications, particularly in respect of the 17 sensitive sectors which are broadly defined and somewhat difficult to interpret.

In the meantime, where there is a UK nexus, the NSIA regime will require to be factored into many deals, contracts, and transactions at an early stage.