FI Monitor Issue 6, 2023

The UK’s national security and investment regime – key developments as practice continues to evolve

Since our last update on the UK’s National Security & Investment (NSI) regime in November 2022, not only has the NSI regime celebrated its first birthday, but there have been several significant developments in relation to how the UK government is using its wide-ranging powers to intervene in deals on national security grounds, and how investors should approach the regime when planning and executing deals.

Five more deals blocked, unwound or subject to remedies

Over the last five months (December 2022 – April 2023):

• one more deal has been blocked (the proposed acquisition of HiLight Research by SiLight, a Shanghai semiconductor company) and another has been ordered to be unwound (LetterOne’s acquisition of Upp, a regional broadband provider), reinforcing a continuing trend of all prohibitions so far having Chinese or Russian links. The decision to force the sale of Upp is under appeal (see below); and
• three more deals have had remedies imposed to protect sensitive information and/or maintain continuity of supply. These span a range of acquirer nationalities (China, the US and Germany) and sensitive sectors (communications, energy and defense).

These deals take the total number of remedy cases in the first 16 months of the regime to 15, which is noticeably higher than the UK government’s original expectations. Back in November 2020, the government estimated 10 remedy cases and 1,000-1,830 notifications per year. In practice, 2022 saw the UK government impose remedies in 14 cases and review about 800 deals. Given the current geopolitical environment, this rate of intervention and mitigation is expected to continue. 

Notwithstanding these statistics, businesses should be aware that a decision by the UK government to “call in” a transaction for a full national security assessment is not necessarily a signal that remedies are required; call-in cases can (and do) get cleared without mitigation. This position contrasts with the previous regime under the Enterprise Act 2002 where, if the UK government had issued an intervention notice on national security grounds, it was highly likely that a review would end with remedies.

A new “decision maker” in government

In February 2023, the Investment Security Unit (ISU) moved from the now-slimmed-down Department for Business to the Cabinet Office. The “decision maker” is now the Secretary of State in the Cabinet Office (Oliver Dowden MP), rather than the Secretary of State for Business. Although some critics suggested this move would politicize the ISU and its work, other stakeholders viewed it as a natural move back to where the unit was originally incubated. Being at the heart of government, the ISU may be better placed to corral other government departments for the sector expertise which is essential for NSI reviews, while benefiting from governmental national security and intelligence expertise which is concentrated in the Cabinet Office. The move also allows for greater oversight from the Prime Minister’s office as national security is known to be one of Rishi Sunak’s key priorities. 

One of Mr. Dowden’s first steps in his new role was to respond to business concerns about the lack of transparency over the regime by publishing new guidance and engaging in roundtable discussions with companies to provide more information about what to expect during reviews (see further below). There has not yet been any indication of the move impacting the outcome of reviews, although this is clearly a rapidly developing and politically charged area.

Developments in the UK government’s national security policy

The Integrated Review Refresh (published in March 2023) gives further indications of the types of deals which will attract scrutiny. Priorities include strengthening the UK’s domestic resilience in response to the “epoch defining challenge” that is China, while also protecting national security from the increased threats posed by Russia and Iran and growing cooperation between those states. As the head of the UK’s National Cyber Security Centre said recently, the UK and its allies cannot afford to be complacent over the “dramatic rise of China as a technology superpower.” 

Businesses should therefore expect a continued focus on frontier technologies such as quantum computing, semiconductors and artificial intelligence, as well as defense and critical infrastructure. And despite the clear focus on China and Russia, investments from traditional allies will continue to be scrutinized if there is a need to protect sensitive information, assets and/or activities in the UK irrespective of the acquirer’s nationality.

Pressure on the ISU to improve its processes and increase transparency

The ISU has come under substantial pressure to improve communication with parties during reviews and increase transparency for the market. Concerns have come from all quarters including evidence given to the Business, Energy and Industrial Strategy (BEIS) Select Committee during its inquiry into information sharing by the ISU (February/March 2023), parties and their advisors, and thinktanks including the Tony Blair Institute for Global Change. 

Already we have seen the ISU take some steps to improve communication with parties (e.g. more regular calls during reviews) and, in late April 2023, the UK government updated the NSI Guidance (previously updated in July 2022), building on stakeholder feedback on the NSI process to date. This new guidance provides more clarity on some important procedural aspects of the regime, including:

• When to notify: the ISU generally considers that it is appropriate to notify when there is a “good faith intention to proceed,” which might be demonstrated by heads of terms, financing arrangements, board level consideration or a public announcement of a public bid. Parties may be able to notify earlier if there are “good reasons” for doing so, but caution should be exercised before notifying too early given the risks of notifications being rejected, further information requests or changes to the transaction which may count as separate trigger events.
• Whether to notify: the ISU has said that parties may seek a view on whether an acquisition is notifiable if there is “significant uncertainty” about whether or not a target’s activities fall within one of the 17 mandatory notification sectors. Views are only likely if parties can provide sufficient details about the transaction and why there is uncertainty over whether it falls within scope of the regime. This is nevertheless a very welcome move given the technical nature of many of the sector definitions and calls for the ISU to provide more informal guidance to parties, as they did before the regime came into force.
• Dealing with financial distress: the new guidance sets out the evidence parties are expected to provide to demonstrate that an entity is in material financial distress and that the ISU should therefore expedite its review process.

The updated guidance also provides more detail on interim orders (which may be issued to prevent or reverse actions by the parties during the assessment period), information and attendance notices (and their impact on review timelines) and how the ISU engages with parties if mitigation (remedies or prohibition) is being considered. 

On-going reviews and updates to the ISU’s procedures are expected as the UK government continues to balance the need to show that the UK is open for business and investment whilst protecting its national security. Further scrutiny is also expected following the memorandum of understanding agreed in March 2023 which gives the BEIS Select Committee (and specifically the National Security and Investment Sub-Committee) access to the information required to scrutinize the ISU. This is likely to result in more on-going oversight and opportunities for stakeholders to give oral and written evidence to improve the regime’s workability.

Watch this space

Looking ahead, several developments over the coming months will be key in shaping the UK’s NSI regime and users’ experience of it:

• The first judicial reviews of (prohibition) final orders. The High Court is set to hear judicial reviews for Nexperia/Newport Wafer Fab (prohibited 16 November 2022) and L1T/Upp Corporation (prohibited 19 December 2022). Although limited details of the UK government’s decision-making are expected to be made public, key issues are likely to include: (i) the UK government’s level of discretion when determining whether a transaction poses a risk to national security; (ii) the reasonableness and proportionality of the prohibitions (e.g. whether less restrictive remedies would have been more appropriate to mitigate the risks); and (iii) whether due process was followed (e.g. whether the UK government complied with its obligations to consider representations on possible remedies and to allow parties sufficient opportunity to make such representations).
• The ISU’s first full annual report due in June 2023. As the first annual report covered only the first three months of the regime’s existence, this year’s edition (1 April 2022-31 March 2023) should provide more insights on overall trends in terms of notifications and timings of reviews and the sectors of the economy which are generating the most interest. 
• Policy developments. In the next few months, the UK government is expected to publish plans to support and grow capabilities and technologies that are of strategic importance to the UK, including the UK’s semiconductor sector, and a UK Supply Chains and Import Strategy to strengthen resilience in critical sectors. Businesses looking to buy or sell in the affected sectors should pay close attention to what these strategies, combined with the NSI regime, will mean for any pipeline sales/acquisitions, including their likelihood of success.
• General Election run-up. As we edge closer to the next UK general election (rumored to be planned for late 2024), there will be an increasing focus on any policy shifts or statements from either of the major political parties in relation to foreign ownership of strategic assets or how to protect the UK’s national and economic security whilst encouraging vital foreign investment. Longer term, such policies will shape the future direction of the regime. 

We will report further on these developments in future updates to the Foreign investment monitor, so please watch this space. 

With thanks to Freshfields’ Michele Davis, Sarah Jensen and Iona Crawford for contributing this update.