UK NSIA: Key takeaways from the Annual Report | Insights

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On 11 July 2023, the UK Government published the National Security and Investment Act (NSIA) Annual Report, covering the period from 1 April 2022, to 31 March 31, 2023.

The Annual Report has provided a useful insight into the procedural functioning of the NSIA, and the cases notified and reviewed by the Investment Security Unit (ISU) over the previous year. We highlight below the key statistics and takeaways.

1. The vast majority of deals (93%) are cleared unconditionally within 30 working days.

Of the 866 transactions notified, the ISU reviewed 766, called in 65 and ultimately intervened on just 15 occasions on the basis of national security.
In the vast majority of cases (711 transactions), the ISU informed the parties within the statutory time period that no further action was required. On average, the transaction was cleared within just 28 working days.

Takeaway: In line with the previous NSIA Annual Report, the ISU’s consistency in reviewing all transactions within the 30-day statutory period is encouraging. This should provide some deal certainty and allow parties to account for set timelines.

2. A reasonably high proportion of call-ins are attributable to UK investors. However, Chinese investors continue to attract the greatest scrutiny.

When it comes to exercising its call-in powers, the focus is on Chinese investment. In fact, 42% of all call-in notices were delivered to acquirers associated with China. This is consistent with statistics relating to the five deals that were blocked, as four of the five concerned an acquirer with a Chinese nexus.
Most notably, however, is that 60% of all transactions notified were from UK acquirers and just under a third of call-ins related to transactions with UK-based investors.
Further, of the deals that were then referred for an in-depth review, 32% concerned UK acquirers, 20% were from the US, followed by Canadian and French investors.

Takeaway: It is widely known that China associated investors are likely to face greater scrutiny, however, the statistics published in the NSIA Annual Report confirms that the regime continues to be acquirer agnostic, and UK, US and EU associated investors are not immune from scrutiny.

3. Voluntary filings represent a reasonably high proportion of cases that are ultimately called in for review and/or require commitments.

Of the overall 866 notifications received, 21% were voluntary notifications. This reasonably high figure suggests that companies are erring on the side of caution when it comes to NSIA compliance and deciding whether or not to file.
Of further significance is that 17 of the 65 transactions called-in for review related to transactions notified voluntarily.

Takeaway: Voluntary notifications do not necessarily pose a lower risk of scrutiny, and companies submitting voluntary filings should be prepared that their deal may be called-in.

4. Certain sectors are likely to be scrutinised most carefully.

The Annual Report shows that for mandatory notifications, there is a notable sectoral focus around five areas: Defence, Critical Suppliers to Government, Military and Dual Use, Data Infrastructure and Artificial Intelligence. In particular, 47% of transactions notified under the mandatory regime related to the Defence sector.
For voluntary notifications, the primary focus was on the broader sectors of Advanced Materials, Defence, Military and Dual Use, Energy, Academic Research and Development in Higher Education.
When it came to in-depth reviews, a similar pattern of sectoral concentration can be seen: 37% were for transactions in the Military and Dual Use sector, 29% for Defence and 29% for Advanced Materials.

Takeaway: The high proportion of Defence sector mandatory filings suggests that this section of the NSIA may be drafted more widely, catching a larger number of transactions, whereas other sectors may be more restrictive, imposing more specific criteria that excludes a greater number of deals. As such, transactions related to certain mandatory sectors such as Defence, Military and Dual Use, as well as other contracts with the UK Government should be carefully considered when it comes to NSIA filings.

5. The ISU’s rejections indicate that additional guidance on voluntary filings may be required.

The ISU rejected 43 notifications. The primary reason, present in over half of rejections, was that the transaction was incorrectly identified as a mandatory or voluntary notification, i.e., a deal was filed under the voluntary regime when it should have been subject to the mandatory regime, and visa-versa.

Takeaway: The high proportion of incorrect filings highlights a degree of uncertainty about the application of the NSIA, suggesting that more guidance on grey areas may be necessary and would certainly be appreciated.

6. The most common commitments relate to information safeguarding.

Final orders were only imposed on 15 transactions (with one revoked). Of the 15, five final orders blocked the transaction or required unwinding.
Of those cleared with conditions, the overwhelming majority of commitments involved behavioural remedies, as opposed to structural remedies.
Behavioural commitments included the requirement to maintain continuity of supply to the UK’s Ministry of Defence, to retain certain supply capabilities and/or activities within the UK and restrictions on board composition/ staff appointments.
The most common involved commitments around restricting the sharing of, or access to, certain information.

Takeaway: Whilst there is no specific UK guidance available on the formulation of remedies, with remedies being devised on a case-by-case basis, information sharing is clearly a key concern. In certain circumstances, such concerns may be mitigated by offering up robust commitments to ensure that sensitive information is protected from unauthorised access.

7. No penalties for failure to file have been imposed.

To date, the ISU has not imposed any fines for failing to: comply with an interim or final order, for completing without approval, for failure to comply with an information or attendance notice.

Takeaway: Whilst providing some comfort, the ISU retains the power to impose fines in the event of non-compliance with the NSIA. Failing to file is a very topical matter and can be a costly mistake. Therefore, diligent NSIA filing assessments must continue to be carried out.