UK Government considering pro-business amendments to investment screening rules

On 13 November 2023 the UK Government issued an interesting Call for Evidence on the scope and implementation of the UK's National Security and Investment (NSI) regime, which governs screening of transactions on national security grounds for both foreign and UK investors.

This is a very welcome review: since entering into force just under two years ago, the UK regime has seen significantly more filings being made than under many other foreign direct investment (FDI) regimes - 866 filings in the year ending March 2023, which is almost double that of CFIUS in the United States (around 440) and two of the most active FDI regimes in Europe, France and Germany (running at around 300 each). Concerns have been raised by investors and advisors that the NSI regime places disproportionate burdens on companies and investors and operates without sufficient transparency.

The Government appears to have taken this feedback on board and is now inviting further comments on the operation of the regime to date, with the stated aim of making it "as pro-business and pro-investment as possible". The foreword to the Call for Evidence expressly advocates following a "small garden, high fence" approach i.e. safeguarding against the small number of deals which genuinely threaten UK national security whilst leaving the vast majority of transactions unaffected.

Overview

The Call for Evidence makes clear that the Government is not currently considering any changes to primary legislation, such as changing the shareholding thresholds for mandatory notification (passing through the 25% / 50% / 75% shareholding levels).

However, it sets out various possible changes to the regime which would involve secondary legislation, including targeted exemptions from the mandatory notification obligation and amendments to the definitions of specified activities, which are key to determining when the mandatory notification obligation will be triggered. It also proposes providing additional guidance to investors and making changes to the operation of the NSI review process to improve transparency of decision-making.

Potential targeted exemptions from the mandatory notification obligation

Mandatory notification requirements currently apply to all acquisitions of control over entities carrying on specified activities in 17 sensitive sectors, which are set out in the NSI Notifiable Acquisition Regulations. The Government recognises that this approach has resulted in a large number of transactions being caught by the regime that clearly present no national security risk. It is therefore considering whether the use of targeted exemptions could help reduce the compliance burden for businesses and investors whilst still protecting UK national security.

In particular, the Call for Evidence invites feedback on the possible introduction of exemption from mandatory notification for:

• certain internal corporate reorganisations, where the level of control held by a person over the target entity does not significantly change;
• the appointment of liquidators, official receivers and special liquidators, recognising that any onward sale of shares or voting rights transferred in the context of a liquidation or administration would be a separate trigger event and potentially require notification at that stage;
• the transfer of shares to a lender under certain lending requirements common under Scottish law in circumstances where there is no substantive change in control; and
• acquisitions by public bodies, recognising that such acquisitions are less likely to present acquirer risks.

The Call for Evidence indicates that the Government has also considered introducing an exemption from mandatory notification for automatic enforcement provisions in secured lending agreements (under which voting rights are automatically transferred from a borrower to a lender in the event of a loan default or similar situation). It is not currently minded to do so, in light of very few such notifications being submitted to date and stakeholder feedback that the loan markets have largely already adjusted to the mandatory notification requirements. However, further feedback on this issue is also invited as part of the Call for Evidence.

Potential amendments to definitions of specified activities within mandatory notification sectors

As noted above, the NSI Notifiable Acquisition Regulations set out the specified activities in 17 sensitive sectors which will bring a target entity within the scope of mandatory notification if a relevant level of control is being acquired. These regulations include very detailed and often quite complex definitions, and in practice it can be difficult for investors to determine whether the activities of a target entity fall within scope. In some cases it may be possible to seek informal guidance from the Investment Security Unit (ISU) on this question, but to date it has often proven difficult to obtain clear and meaningful answers.

It is therefore encouraging to see that the Government is considering amendments to clarify and/or refine the definitions of specified activities in a number of the sensitive sectors, including:

• clarifying the scope of the Advanced Materials, Critical Suppliers to Government, Data Infrastructure, Suppliers to the Emergency Services and Synthetic Biology sectors, removing duplication and simplifying definitions to make it easier for businesses to determine whether their activities fall within scope;
• refining the scope of the Artificial Intelligence (AI) and Defence sectors to reduce the likelihood of capturing acquisitions that do not present national security risks; and
• updating the definition of specified activities in the Energy Sector to reflect the new asset definition and licensable activity in the Energy Bill 2022/23 for multi-purpose interconnectors (MPIs) (which is effectively a combination of interconnectors and transmission).

However, it is also important to note that the Government is also considering expanding the scope of specified activities in certain sectors, and creating and updating certain new areas including:

• carving out Semiconductors and Critical Minerals from the Advanced Materials sector so as to create two new areas within the Notifiable Acquisition Regulations to improve clarity, and potentially updating the specified activities to reflect the Government's Semiconductors Strategy and the British Geological Survey's latest assessment of critical minerals;
• expanding the AI sector to reflect recent developments in this field and include new areas not currently in scope, such as generative AI;
• expanding the Data Infrastructure sector to include entities that own, operate, manage or provide services to colocation data centres (i.e. data centres in which multiple customers rent space to locate their own network(s), servers and storage equipment);
• expanding the Communications sector, by reducing a turnover requirement that currently applies to public electronic communications networks/services and submarine cable systems; and
• expanding the Suppliers to the Emergency Services sector to include sub-contractors.

Expanding and updating guidance for investors

The Government is keen to expand and update its guidance for investors to make it as helpful as possible and to improve understanding of both the NSI Act and the national security risks it seeks to address.

In particular, the Call for Evidence invites comments in relation to updating the statement on how the Secretary of State expects to exercise the power to issue a call-in notice, guidance on the application of the NSI regime to Outward Direct Investment (for example, where this involves asset transfers alongside the investment), and further guidance for the higher education sector including in relation to research spin-outs seeking additional funding.

Improving transparency of the decision-making process

The Call for Evidence highlights that a number of improvements have already been made to the operation of the NSI review system since the regime was introduced, with a focus on improving transparency of decision-making. However, acknowledging that a perceived lack of transparency remains an area of concern for businesses and advisors, the Government is inviting suggestions on additional ways to improve the operation of the regime, including how the ISU communicates with parties considering or involved in affected acquisitions.

The Government is also considering asking for additional information in the mandatory and voluntary notification forms and retrospective validation application form, in the interests of reducing the number of subsequent requests for further information and helping the ISU to accept notifications more quickly. The Call for Evidence asks for comments on whether this would be a preferable approach, although does not provide any further details as to what additional information the Government is considering including.

Next steps

Responses to the Call for Evidence can be made online, subject to a deadline of 15 January 2024. The Government has indicated that it may subsequently undertake more detailed consultation on specific measures or proposed legislative changes, depending on the responses received.

Contacts