Emerging trends from the latest Annual Report on the UK National Security and Investment regime

On 10 September 2024, the UK Cabinet Office published the third Annual Report on the National Security and Investment Act 2021 (NSIA) (the Report), setting out summary information and statistics relating to the review of transactions and investments on national security grounds in the UK during the period 1 April 2023 to 31 March 2024. Given that only very limited information is published about individual cases reviewed under the NSIA regime, the publication of this report (as mandated by the NSIA) is particularly useful for investors seeking to understand current trends in the application of the regime.

Since it entered into force on 4 January 2022 the NSIA regime has quickly become one of the most active foreign investment screening regimes in the world (see our previous briefing for a detailed overview of the regime). This trend has continued to be borne out in the period covered by the latest Report, with 906 notifications received by the Investment Security Unit (ISU) – a slight increase compared to the 2022-23 reporting period (865 notifications). However, the latest data suggests that the Government may be becoming more comfortable with clearing transactions during the initial 30-day review period, with only around 4% of reviewed transactions being called-in for in-depth investigation in 2023-24, compared to around 7% in 2022-23.

This is the second annual report to cover a full 12-month period of the NSI regime (the first report only provided a limited overview of the first three months of operation). In line with the 2022-23 report, the latest Report goes beyond the minimum statutory requirements of the NSIA and indeed goes further in terms of including additional data not previously published – such as the number of withdrawals from a called-in acquisition by area of the economy, and the average number of calendar working days it took to issue a final order. For the first time the Report also includes year-on-year comparisons with the previous reporting period and an accompanying spreadsheet containing all data published since the commencement of the Act.

We summarise below the most important emerging trends for investors, drawing out some highlights from the latest data and reflecting on our experiences of regularly advising investors navigating this non-transparent regime.

UK Government remains committed to ensuring that the NSIA regime is as frictionless as possible for investors

The new Labour Government elected in July 2024 has swiftly echoed the previous Government in emphasising that the UK remains open to foreign investment, and expressed a commitment to ensuring that the NSI regime is as frictionless as possible for the vast majority of transactions that do not pose any concern.

The foreword to the Report reiterates that "[t]he Government is committed to ensuring the Act protects our national security, and does so as effectively, efficiently, and transparently as possible - giving investors the certainty they need to kickstart growth across the UK".

Total number of notifications increased but lower proportion of call-ins and final orders

As noted above, the total number of notifications received by the ISU over the 12-month period covered by the Report was slightly higher than the previous reporting period: 906 notifications in 2023-24 compared to 865 in 2022-23.

Most of these were mandatory notifications (753), but the ISU also received a significant number of voluntary notifications (120) and retrospective notifications (33). It is interesting that the proportion of notifications made on a voluntary basis was lower than the previous reporting period (around 13% of notifications compared to around 20% of notifications in 2022-23). However, in our view it is too early to draw conclusions from this and investors should continue to consider carefully whether to submit a voluntary notification if it is anticipated that a deal could potentially give rise to national security concerns (broadly defined), particularly given the risk of non-notified transactions being reviewed by the ISU on its own initiative at a later date (see further below).

Whilst the number of notifications remained high, it is encouraging that only around 4% of notified transactions were called-in for in-depth investigation (compared to 7% in 2022-23). Moreover, only 5 final orders were imposed in 2023-24, all of which were conditional clearances (compared to 15 final orders in 2022-23, of which 5 were prohibition decisions or divestment orders). However, it should be noted that there have already been 6 final orders (all conditional clearances) issued this year since the end of the period covered by the Report, so investors should not read too much into the significant drop in the number of final orders.

Overall, the data suggests that the Government may be becoming more comfortable with clearing transactions within the initial 30-working day review period and/or that the coordination between the ISU and relevant Government departments (such as the Ministry of Defence) is becoming smoother and more efficient so as to enable quicker decision-making.

Heightened scrutiny of transactions involving acquirers associated with China has continued – but not the only focus

In line with wider global trends in foreign direct investment (FDI) screening reflecting ongoing geopolitical tensions, transactions involving acquirers associated with China have continued to be subject to greater scrutiny under the NSI regime: 41% of call-in notices were issued in respect of such transactions. Perhaps surprisingly, none of the final orders issued during this reporting period involved an acquirer associated with China (compared to 8 out of 15 in 2022-23), but 8 of 10 transactions abandoned following the issue of a call-in notice in 2023-24 involved Chinese investment and it seems likely that in at least some of these cases the anticipation of an adverse NSIA final order will have been an important factor.  

However, the data included in the Report also highlights that clearance for transactions involving Chinese investment is possible – indeed, acquirers associated with China accounted for almost half of all final notifications (i.e. clearance following an in-depth investigation).

It is also interesting to note that 39% of call-in notices were issued in respect of transactions involving acquirers associated with the UK. Although it is important to recognise that many of these transactions may have involved both UK and non-UK acquirers, and any potential national security concerns may not have been related to the UK acquirer, it is nonetheless a good reminder that the NSI regime applies equally (at least in principle) to both non-UK and UK investors.

Defence, military and dual-use, communications, advanced materials and academic R&D sectors most at risk of call-in

Transactions in the defence sector continued to be most likely to be called-in, accounting for 39% of all call-in notices issued in 2023-24. The other sectors making up the top 5 sectors for call-in notices were military and dual-use (29%), communications (24%), advanced materials (24%) and academic R&D (24%) (broadly similar to 2022-23), with a similar picture emerging for final orders.

It is important to note when reviewing the sector-specific statistics included in the Report that a transaction may be allocated to more than one sector for reporting purposes.

Review timeframes can be significantly longer than suggested by statutory deadlines but speed of decision-making appears to be improving

The vast majority of transactions reviewed during the reporting period (almost 96%) were cleared within the initial 30-working day period.

However, it remains the case that review timeframes under the NSI regime can be significantly longer than suggested by the statutory deadlines where a transaction is called-in for in-depth investigation. This is because the issue of a request for information or an attendance notice by the ISU during the in-depth assessment period will "stop the clock". This is clearly illustrated by the data included in the latest Report which allows a comparison of the average number of "statutory working days" taken to reach a decision (i.e. not including time the review clock is stopped) with the average number of "calendar working days" (i.e. including time the review clock is stopped).

For example, on average it took 26 statutory working days - but 48 calendar working days - to issue a final notification (unconditional clearance) from the point an acquisition was called in, and on average 34 statutory working days - but 53 calendar days - to issue a final order.

Nonetheless, it appears that the speed of decision-making may be improving. The Report cautions against drawing conclusions about trends in the time taken to issue a final order following call-in due to the small number of final orders issued during the reporting period (5 final orders, with an average of 34 statutory working days to issue a final order vs 81 statutory working days during the previous reporting period). However, it is notable that there was also a significant reduction in the number of cases in which the 45-day "additional period" was used to extend the in-depth assessment period following call-in (12 times, compared to 29 times in the previous period), as well as the number of cases in which the further "voluntary extension period" was used (4 times, compared to 10 times in the previous period).

ISU remains vigilant in its review of non-notified transactions

The ISU pro-actively monitors market intelligence and may initiate a review into a non-notified transaction on its own initiative. Of the 41 transactions called in for review during the period covered by the Report, 4 related to non-notified transactions, and one of those resulted in a final order imposing conditions on clearance.

Whilst the number of non-notified transactions called-in remains small in absolute terms, it is important not to under-estimate the risk and to consider making a voluntary notification if there is uncertainty as to whether a transaction may be perceived to give rise to a potential risk to UK national security

Scope and timeframe for possible pro-investment amendments to the NSI regime remains unclear

In April 2024 the previous Government confirmed its commitment to a number of pro-investment amendments to "fine-tune" the NSI regime in light of feedback received from stakeholders in response to a Call For Evidence on the operation of the NSI regime issued in November 2023 (see our previous blog post here). The first steps to implement these changes were taken in May 2024 with the publication of updated guidance (see our previous blog post here). However, following the election of a new Government in July 2024 there has been uncertainty as to both the scope and timing of further reforms.

It is clear from the latest Report that the current Government remains committed to ensuring that the NSI regime is "effective but light-touch, helping businesses and investors to continue with certainty". However, it unfortunately does not provide any further detail on the scope and timeframe for possible further pro-investment amendments to the NSI regime, including the possibility of a public consultation on amendments to the definitions of the 17 sensitive sectors in which mandatory notification obligations can apply (as envisaged in the previous Government's response to the Call for Evidence). We hope that more detail will be set out separately in the near future.