At a meeting of business leaders and global investors in London in mid-October, Prime Minister Sir Keir Starmer told the audience that his government would "rip up" Britain's bureaucracy in a bid to unlock the "shock and awe of investment." A month prior, Sir Keir's government published its National Security and Investment Act 2021 (NSI Act) Report for the period 1 April 2023 to 31 March 2024 (Report) of scrutiny and intervention in proposed investments in or acquisitions of British companies or assets pursuant to its powers under the NSI Act, albeit containing data from a period entirely under the previous government.
In this article, we consider what conclusions can be drawn from the NSI Act Report and how the powers under the NSI Act fit into a government policy that plans to cut regulatory obstacles to investment in a bid to improve the economic standing of and job prospects in the UK, whilst maintaining a hard line on national security.
We have previously written about the NSI Act's operative provisions and about foreign direct investment (FDI) regimes across the United States and Europe. Please see Katten's previous publications (available here and here) for further information.
Overview of NSI Act Activity
In general, the statistics in the Report reflect a regulatory process that proceeds on a reasonably certain timeframe for the majority of investors and transactions, and ultimately clears the vast majority of deals under its jurisdiction.
In the relevant period, the UK government received 906 notifications of transactions falling within the NSI Act, split between 728 mandatory notifications, 116 voluntary notifications, 32 retrospective validation applications and 24 rejected notifications. The large number of mandatory notifications exemplifies the broad nature and scope of the NSI Act, which is designed specifically to capture a wide range of potential investments that may give rise to UK national security concerns. Of the total 906 notifications, 41 transactions were called in for further review and 841 transactions were notified that no action would be taken. All of the accepted notifications were either called in (and so made subject to further information requests from the UK government) or cleared within the statutory 30 working days' time limit.
On that basis, 95.6 percent of notified transactions were cleared to proceed within the statutory deadline, suggesting, in broad terms, that the NSI Act provides a predictable process designed to clear transactions that cause minimal actual concern. To meet its stated aims, the new government will need to continue to operate in this manner.
Called-In Transactions
Given the apparent focus from the UK government on easing the path of investment in the UK by removing regulatory hurdles, and as there is nothing to indicate a proposed softening or narrowing of the NSI Act powers or the scope of mandatory notifications (despite the extremely high clearance rate), the impact on investment activity of the government calling in transactions under the NSI Act is likely to be a key focus. The Invest 2035 green paper setting out a consultation on the government's industrial strategy (to be published in Spring 2025) is light on detail around the NSI Act, save for a note that the government's approach to attracting international investors will be "underpinned" by the NSI Act "which will continue to protect national security".
Of the 41 transactions called in for further review, 10 notifications were subsequently withdrawn, 23 were issued final notifications clearing them to proceed, and five were issued with a final order imposing conditions on the transaction (but ultimately allowing it to be completed). It appears that three more called-in transactions were still in the screening process as of 31 March 2024. Transactions involving UK acquirers made up 39 percent of the called-in transactions — a helpful reminder that the NSI Act is not solely focused on foreign investment.
The time taken to reach a conclusion in respect of a called in transaction varies but can have a significant impact on deal timelines. The average time taken from notification to the issue of a final order was 21 weeks (albeit this average is based on a small sample size of only five transactions), and the average time from notification to the issue of a final notification clearing a transaction to proceed was 17 weeks and two days. Clearly, therefore, a call-in notice will substantially affect a deal's timeline and parties who anticipate that a call-in notice is likely may need to think about the possible impact early in the transaction process. How the different risks for buyer and seller that are inherent in this process are balanced will be a matter of negotiation in every deal; what is clear, however, is that the parties may need to prepare for a significant period between signing and closing for regulatory clearances to be obtained.
Notably, the government has been more likely to impose conditions on a deal rather than block it completely. In the 2023-24 period, no transactions were blocked or unwound by the five final orders (and of the seven final orders published since 1 April 2024, none have involved blocking or unwinding the transaction). Conditions imposed included a duty to notify the government of any future proposed sale of the target, a requirement that certain development or manufacturing capabilities be maintained in the UK, and the establishment of a national security committee to oversee sensitive work. Again, to maintain its aim of promoting investment in the UK, the new government may need to continue this approach.
Withdrawn Transactions and Final Orders
The main points of concern for the UK government in considering use of the NSI Act powers going forward are likely to be (i) the 10 withdrawn transactions; and (ii) the impact on investor appetite raised by the timing implications of a call-in and/or the imposition of conditions on transactions by a final order.
Although the Report provides insufficient context or commentary to allow readers to draw concrete conclusions, it appears that the 10 withdrawn transactions likely constitute transactions that failed to complete as a result (wholly or in part) of the NSI Act review process. Five of the 10 withdrawals were following voluntary notifications, which tend to relate to deals that the parties expect to receive a higher level of scrutiny, and a further two were deals that were called in despite no notification having been made. Without any context on the nature of those transactions, it is difficult to ascertain whether they constitute good investment opportunities lost to overly burdensome regulation or potential national security risks avoided through appropriate scrutiny.
Additionally, the data does not consider the cost to the UK economy of deals that do not get to the stage of making a notification due to the administrative burden involved or the risk of the UK government imposing supervisory conditions on the target following completion. However, investors, especially those making investments in the 17 mandatory sectors, should be alive to the risk of a drawn-out regulatory process culminating in unpalatable conditions being imposed.
Chinese Investors
The Report evidences a focus on deals involving Chinese acquirers and hints at a tendency among Chinese acquirers to withdraw from deals rather than have them proceed to a final order, which may reflect the current geopolitical focus on China.
Chinese acquirers were party to 3 percent of the notified deals but 41 percent of the called-in deals, and of the 10 withdrawn notifications, eight involved Chinese acquirers. The figures show that these withdrawn deals involving Chinese acquirers were mainly in the higher education, research and development and communications sectors, with a minority in defence.
These figures suggest that the previous government adopted a hawkish attitude regarding national security concerns raised by proposed investments involving Chinese acquirers. Given the Labour Party's commitment to national security in its manifesto and the general need for left-of-centre parties to 'prove' their national security credentials, this position seems unlikely to be softened in the short- to medium-term.
On that basis, Chinese investors should continue to expect a high level of scrutiny of their proposed UK investments and should factor that into any expectations regarding timing. Preparing to make submissions as early as possible in the process, contingency planning for a call-in process, and preparing detailed undertakings for submissions to provide comfort to the UK government is likely to be crucial in bringing deals to a timely, successful conclusion.
The Outlook Going Forward
Ultimately, figures from the previous administration and a series of somewhat vague announcements by the Prime Minister do not give investors much insight into how (if at all) the regulatory environment may change going forward. In addition, the Invest 2035 green paper provides limited information on national security, save for a restatement of the government's commitment to maintaining protective tools to facilitate safe investments.
The 30 October 2024 budget should provide some clarity on economic policy more generally, and the full Invest 2035 industrial strategy (expected in Spring 2025) will hopefully include details on how the regulatory burden (from the Competition and Markets Authority as well as under the NSI Act) can be mitigated or reduced to support investment from both domestic and foreign sources.
Prior to that detail being made available, investors considering deals in the UK should be alive to the possibility of regulatory scrutiny but the majority can take some comfort from the relative predictability of the NSI Act regime's timeframes and the significant majority of deals that are cleared without further review.
