Investment Screening in the UK under the 2021 National Security and Investment Act
By Agata Daszko, University of Göttingen
In recent years the United Kingdom (UK) has joined many States in updating its legislation concerning scrutiny of national security issues when it comes to investments made in key or sensitive sectors. Indeed, the UK’s approach to investment screening underwent a significant transformation with the introduction of the National Security and Investment Act 2021. This landmark legislation marked a pivotal shift, broadening the government’s powers to investigate and potentially intervene in acquisitions and investments that could pose risks to national security. It gives the Secretary of State the power to “call in” certain acquisitions to assess their impact on national security and potentially impose conditions on or block the transactions.
History and Rationale for the Legislation
The predecessor of the NSI Act is the Enterprise Act 2002. Previously, the Enterprise Act, primarily a competition legislation, allowed the government to intervene in mergers and acquisitions based on public interest considerations such as financial system stability, public health emergencies, and media plurality. However, national security concerns under this act were perceived as somewhat nebulous and inadequately defined.
The new regime under the NSI Act, is the culmination of several years of discussion on the UK’s approach to national security matters, including a White Paper in 2018. The Act, which received Royal Assent on 29 April 2021 and commenced fully on 4 January 2022, has a notable feature of retrospective effect, covering acquisitions backdated to 12 November 2020, the date it was introduced to Parliament. This retrospective application underscores the urgency and significance attributed to national security considerations in the face of evolving global investment landscapes.
In addition, a new team – the Investment Security Unit (ISU) – was established to implement and operate the NSI Act. It was first set up within the Department for Business, Energy and Industrial Strategy and is now under the Cabinet Office.
The Government has taken a proactive stance on the implementation of the new regime. It continues to issue Market Guidance Notes, Annual Reports and detailed secondary regulations, for example, on the key sectors of the economy affected by investment screening. Furthermore, in November 2023, it published a Call for Evidence on the functioning, scope and performance of the NSI regime so far – the deadline for the evidence was 15 January 2024.
A crucial aspect of the NSI Act’s narrative is the government’s insistence on the UK’s openness to investment – the Act is to give businesses the “confidence and consistency to thrive”. By emphasizing that the act is solely focused on national security and not amenable to other public interest or economic grounds, the UK aims to mitigate any potential apprehension among international investors regarding the investment climate. This message, reinforced through various government communications, seeks to strike a delicate balance between securing national interests and maintaining the UK’s attractiveness as a destination for global investment.
Scope and Substantive Provisions
Unlike many of its counterparts elsewhere, the NSI Act introduces distinctive features that broaden its scope and enhance its substantive provisions to safeguard national security effectively. It applies retrospectively, is “country agnostic” (applies equally to domestic and foreign actors); does not contain the word “investor” (rather, acquirer), does not distinguish between private and state-controlled entities, and does not set any minimal thresholds for the screening to apply. Instead, it focuses on whether the target operates within one of 17 specific sectors.
The government learns of transactions through its own market monitoring or two notification routes contained within the Act: a mandatory and voluntary. The mandatory route concerns acquisition of control and it is principally about the certain sizes of shareholding or voting rights (sections 6, 8 and 14 NSI Act). As such, acquisition of assets is not covered by the mandatory notification. However, the government may “call in” such acquisition for assessment if it reasonably suspects the acquisition may give rise to a risk to national security (section 1 NSI Act). In such cases, the government can issue interim orders, such as mandating that the target remains separate from the acquirer, to prevent any actions that could impede its investigation. Besides property and such, assets also include “ideas, information or techniques which have industrial, commercial or other economic value” – e.g. trade secrets or software (section 7 NSI Act). Notably, a foreign-based asset will also be a qualifying asset if it is used in connection with activities carried on in the UK, or the supply of goods or services to those in the UK (section 7 NSI Act).
Following this review, the government may either approve the transaction, impose conditions to mitigate national security risks, or in cases where national security concerns are identified, block or reverse the transaction (section 26 NSI Act).
If the acquirer does not seek clearance when necessary, the transaction is void in law (section 13 NSI Act), with potential civil and criminal penalties. The maximum penalty for completing a notifiable acquisition without approval is five years in prison (section 39 NSI Act) and corporate fines up to the higher of £10m or 5% global turnover (section 41 NSI Act).
The NSI Act in Practise
The impact assessment for the NSI Act has estimated that the government would receive between 1,000 and 1,8000 notifications annually with 70-95 being called in. The Act has been in effect for three years and the Cabinet Office has thus far published two Annual Reports. One for the initial implementation period between January and March 2022 and the second one on the period between April 2022 and March 2023. According to the 2022-2023 Annual Report, in the NSIA’s first full year of operation, the government received 671 mandatory and 180 voluntary notifications, 65 acquisitions were ‘called in’ for more detailed review. One call-in notice was made following a retrospective validation application and 10 call-in notices were issued for acquisitions that had not been notified.
- Most Affected Sectors
Of the 17 sectors, the most oft-cited are military and dual use, defence, communications, energy, advanced materials and computing hardware.
However, the Act has far-reaching effects on multiple areas. Indeed, for example, “academic research” is the fourth biggest source of voluntary notifications (15%). To help higher education institutions to decide whether to notify the government of the transactions and to provide advice on the national security risks linked to international research, the government has even created a dedicated Research Collaboration Advice Team (RCAT).
2. Final Orders
Thus far the government has issued 18 final orders (one was later revoked), comprising five prohibitions and 13 conditional clearance decisions.1
The conditions imposed by the Secretary of State in his final orders vary. They may require further information sharing (e.g., US’s Siliconix & Vishay has been allowed to acquire Neptune 6, subject to the condition that the acquirer must inform the Secretary of State before completing any further sale or lease agreement with any third party regarding one of the sites owned by Neptune 6 (a semiconductor producer). Furthermore, the UK may require that certain capabilities of companies being acquired remain in the UK (e.g., UK allowed for the acquisition of Iceman Holdco and its subsidiaries by a US acquirer subject to the condition that one of the subsidiaries (CPI TMD) would continue its research, development and manufacturing capabilities in relation to atomic clocks in the UK). Further security remedies may also require the acquirer to place a government-appointed persons on the board of the companies (as e.g., following acquisition of GE Oil & Gas Marine & Industrial and GE Steam Power by EDF Energy Holdings).
To date all prohibition decisions have involved Chinese (four) and Russian (the remaining one) parties. Three out of five of the prohibited transactions concerned semiconductor industry: Super Orange/Pulsic; SiLight/HiLight and Newport Wafer Fab/Nexperia. Notably the Newport Wafer Fab/Nexperia final order represents the NSI Act’s retrospective capabilities. On 16 November 2022, the UK government mandated that Nexperia BV and Nexperia Newport Ltd sell off the collective 86% stake they had obtained in Newport Wafer Fab in 2021. Originally, these subsidiaries of Nexperia, a Netherlands-based entity ultimately under the ownership of Wingtech Technology—a partially state-owned Chinese company—possessed only a 14% share in the British semiconductor manufacturing facility. The divestment order is pending judicial review, however, Nexperia has since entered into agreement with Vishay on the acquisition of the Newport Wafer Fab.
Outlook
As pointed out by Oliver Dowden (responsible Cabinet Office minister) when commenting on the 2022-2023 Annual Report – the NSI Act seems to be working well. 93% of notifications are cleared without the need for a detailed assessment, with decisions issued within the time limits imposed by the Act.
Some, however, have voiced criticism of the Act. Most recently, on 9 February 2024, the Business and Trade Sub-Committee on National Security and Investment has expressed concerns that the UK’s investment screening, as dictated by the NSI Act, is not adequately addressing the pace of economic threats. The Committee’s criticisms pointed to: The lack of definition of “national security”; Volume of cases (for the Sub-Committee there were too many cases, the number was, however, lower than the government’s previous estimates); Lack of parliamentary oversight; Inconsistent with allies’ strategy, namely the European Commission and the US whose legislations include broader definitions of security and further ranging sectors including on: media freedom, critical supply chains and critical materials.
Looking ahead, the UK’s commitment to continually assessing and evolving the NSI Act will be crucial in ensuring that it remains effective in the face of technological advancements, shifting geopolitical dynamics, and the global pursuit of economic resilience. Indeed, these considerations have informed the government’s decision to open the above-mentioned Call for Evidence. Through collaborative efforts with stakeholders and allies, the UK should aim to refine its investment screening processes, fostering a secure yet inviting investment environment that bolsters both national security and economic prosperity.
