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The National Security & Investment Act 2021 (NSI) gives the UK government the power to block or unwind or impose behavioural remedies on transactions that pose a threat to national security. As part of this the NSI imposes mandatory notification and standstill requirements in relation to a wide range of transactions across 17 defined industry sectors and provides a means for making voluntary notifications for transactions falling outside these that may raise national security concerns. We have covered these in a previous article – National Security & Investment Act 2021: What you need to know.
We have also analysed the latest statistics which show which types of transaction (in terms of sectors and the nationalities of acquirers) have tended to raise national security concerns – UK National Security risks for UK and international acquirers.
A recent case (LetterOne v Chancellor of the Ducy of Lancaster in the Cabinet Office), the first judicial review of the application of the NSI provisions, has shone a light on the previously opaque process by which the government goes about analysing national security risks and potential remedies. This is helpful for parties to the small number of transactions not cleared within the initial 30 working day period (or otherwise subject to a ‘call in’ notice) as it provides a clear focus for their ongoing interactions with government regarding the assessment of national security risks and potential remedies.
Three assessments
The Investment Security Unit (ISU) which sits within the Cabinet Office manages NSI assessments. There are three elements leading to a final decision imposing remedies:
- Investment Security Risk Assessment (ISRA), which includes a Diplomatic Assessment and an Economic Assessment
- Remedies Assessment
- Representations Assessment
The ISRA
The ISRA sets out the ISU’s assessment of national security risks arising from the trigger event. It is authorised by a member of the Senior Civil Service within the ISU. This contains reasons for recommending to the Secretary of State (the decision maker) that a final order be made (or presumably not made).
The ISRA includes information provided by other relevant government departments with relevant knowledge and expertise. It also contains a Diplomatic Assessment by the Foreign, Commonwealth and Development Office and an Economic Assessment by the lead department for the relevant sector of the UK economy.
Remedies assessment
The ISU also prepares the Remedies Assessment which sets out the actions which may prevent or effectively meet the risks described in the ISRA, including a recommendation to the Secretary of State.
The Remedies Assessment analyses each potential remedy according to effectiveness; likely level of compliance; enforceability; cost or burden to the Government; and cost or burden to the parties to the final order.
Individual remedies may be grouped into packages for their cumulative effect.
The ultimate remedy is prohibition (or divestment to an approved new owner for a completed transaction). Other remedies imposed to date, which relate to different categories of concerns in different sectors, include:
- requirements to continue to provide specified services to government;
- retaining operations and decision-making within the UK;
- meeting certain requirements relating to board composition, board committee membership and board committee functions, including:
- the establishment of a committee or group within the relevant entity to oversee strategic work which has an impact on or is in respect of national security;
- obtaining UK security vetting clearance for certain members of the Executive and Board of Directors;
- appointing a government approved board observer with access to all information and meetings; and
- appointing a security officer with relevant security clearances to have oversight of security requirements;
- requiring the carrying out of a security audit by a government approved auditor and producing a report setting out new security measures;
- imposing requirements in relation to IT equipment, data storage, access and handling;
- implementing protocols concerning site visits and business travel (physical information security requirements);
- requiring government approval for particular operations;
- placing limits on the information provided from the business to its owners;
- imposing notification requirements relating to future ownership changes (beyond the standard National Security & Investment Act requirements); and
- reporting to government on all new customers of particular assets and carrying out specified due diligence checks on customers.
Representations assessment
This summarises all representations received for or on behalf of those who will be affected by a final order, including any representations relating to national security risks and potential remedies.
Final decision
The final decision is made by the relevant Secretary of State (currently the Chancellor of the Duchy of Lancaster in the Cabinet Office) on the basis of these assessments.
Conclusion
Parties to transactions which have been ‘called in’ for detailed scrutiny will need to focus their representations to government with these three assessments in mind.
Parties will also need to understand from the ISU and relevant other government department(s) as far as possible the actual national security concerns to be able to seek to provide comfort in relation to these or propose targeted remedies as appropriate. In some cases this may be obvious, however, in others this may be challenging given the secret nature of national security issues but is important in making headway in these cases and enabling the transaction to proceed.
If you would like to discuss any of the issues raised in this article, please contact Noel Beale or your usual Michelmores contact.
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