The second National Security & Investment Act (“NSI Act”) annual report to cover a full year (2023/24) has recently been published. While a large number of mandatory notifications are required each year (it being a criminal offence not to notify and the transaction being void), most are cleared without substantial delay (subject a notification being made correctly) and only a small number raise issues for investors.
The published statistics in the report are useful because, in the absence of substantive guidance, they give us a degree of insight into:
This note explores the key statistics further. A more detailed summary of the basic workings of the NSI Act is available here. The findings re-emphasise the points from last year’s annual report which we covered here.
The vast majority of acquisitions notified are cleared quickly, but even some non-notified acquisitions are being called in for investigation
Most transactions are cleared at the initial stage, but some not notified transactions have been ‘called-in’ for further investigation:
Roughly half of ‘called-in’ transactions were not subject to mandatory notifications (or were not initially notified):
This suggests that the government’s national security concerns are not limited to those sectors where notification is mandatory and that the government is keeping a close eye on transactions more broadly to catch non-notified transactions. The takeaway from this is that falling outside the mandatory notification requirements is no guarantee that the transaction will not be ‘called-in’ with the delays and additional complications that is likely to cause.
However, more than half of ‘called-in’ transactions were cleared in due course. Most of the other half were withdrawn – or particular parties withdrew from transactions – but five were subject to final orders (requiring behavioural remedies to prevent national security risks). It is probably reasonable to assume that some or all of the notifications that were withdrawn anticipated that they were unlikely to receive clearance (see below regarding the link between withdrawals and the nationalities of the acquirers).
It is notable that most withdrawals related to non-mandatory sectors: ‘Professional, scientific and technical activities’, ‘Academic research and development in higher education’ and ‘Information and communication’. Although unclear from the statistics provided in the report, it seems likely that these acquisitions were also linked with other areas of the economy that do fall within mandatory notification sectors such as: ‘Defence’, ‘Communications’, ‘Energy’ and ‘Advanced materials’.
Defence continues to predominate, but a wide range of other sectors have raised concerns
As might be expected, about half of all notifications related to defence (including the sectors covering: ‘Military and dual use’ items and ‘Critical suppliers to government’).
Similarly, roughly one third of acquisitions ‘called-in’ related to defence (particularly: ‘Military and dual use’). The remainder were spread across the other 16 mandatory notification sectors plus ‘Academic research and development in higher education’, ‘Information and communication’ and ‘Manufacturing’. So, although defence is a primary concern, there are also national security concerns across a broad sweep of other areas of the economy.
China continues to raise the most concerns, but UK acquirers and those from friendly powers can also raise issues
Just over 60% of notifications were from UK acquirers. Next came the US with 26%. This was followed by France, Germany and Luxembourg each with 4% of notifications.
Chinese acquirers accounted for 41% of notifications resulting in ‘call-ins’, and 8 out of 10 withdrawals. This suggests that Chinese acquirers are viewed as the most sensitive from a national security perspective.
Final orders, which impose behavioural remedies, were issued in relation to acquirers from the UK, the USA, Canada, France and the United Arab Emirates. This suggests that these countries are viewed as those that can be worked with in relation to potential national security issues.
The UK’s National Security and Investment regime continues to prove a notable burden to acquirers in relation to the sectors where mandatory notification is required, even though the vast majority of acquisitions are cleared at the initial stage. However, acquirers should also be aware that transactions can raise issues outside the mandatory sectors, particularly where these relate to cutting edge research and development. In these cases a voluntary notification may make sense to obtain certainty for the transaction.
Defence is the key area of the economy where significant scrutiny tends to be applied and acquisitions are ‘called-in’ for more detailed investigation. However, there is a broad range of other areas of concern, so no areas should be regarded as ‘safe’.
Investment from China remains the most sensitive, closely followed by the UK, with the USA a little way behind. This emphasises that while the origin of investment is a concern, the government is also considering a range of other issues when making its national security assessments.
We have been involved in a wide range of different transactions which fell within both mandatory and voluntary notifications, acting for buyers and sellers. It is normally possible to quickly identify whether a mandatory filing is advisable. What can be trickier is whether it is likely to lead to a substantial investigation. These statistics help acquirers assess that risk in the absence of clear guidance or detailed published reasons in previous cases.
If it would be helpful to discuss any of the issues raised in this article, please contact Noel Beale or your usual Michelmores contact.
