In November 2023, less than two years since the National Security and Investment Act 2021 (NSI Act) was enacted, the deputy prime minister announced a call for evidence to give stakeholders an opportunity to share their views on how the government’s investment screening powers under this act can be made more business friendly. The NSI Act came into force on 4 January 2022 and gives government powers to investigate investments into UK companies which they believe may have ‘national security’ implications.
The introduction of the NSI Act has resulted in an increased regulatory burden for investors, companies and their advisers and has received a significant degree of scrutiny, with some blaming the NSI Act for a reduction in the number of deal completions since early 2022. This is due not only to the administrative burden, but also the additional timeframe that must be factored into a deal. This is to allow the Investment Security Unit (ISU), the designated governmental body that sits within the Cabinet Office, time to process the notifications received and either provide clearance, or call in the transaction for further scrutiny before it makes a final decision.
In the 2022/2023 financial year, the government took on average 27 working days to decide whether to call in an acquisition based on a voluntary notification, and 28 working days for mandatory notifications. This made up over 75% of the notifications received during this time. All parties involved in a transaction that is notified must therefore factor in at least a couple of extra months to their deal timelines, to ensure compliance with the NSI Act’s notification requirements.
The principal aim of the government’s proposal to review its investment screening powers, is to aid business efficacy and ensure both the notification requirements and process are ‘more business friendly’.
The deputy prime minister’s suggestions include removing internal restructures from falling within the notification requirements and narrowing the scope of certain key sectors that are subject to the NSI Act regime such as artificial intelligence. The suggestions also include providing further clarity as to acquisitions that fall within the seventeen key sectors i.e. current sensitive areas of the economy, and which require notification as a result, known as ‘notifiable acquisitions’.
The Call For Evidence recognises that a balance needs to be achieved between the regulatory burden placed on parties, protecting the UK against investments that would result in a threat to national security and ensuring that the UK is still seen as a dynamic and attractive area for investment.
The Call for Evidence seeks input from a wide-ranging audience both in the UK and overseas, such as investors, companies and legal and financial advisers, to aid the government in improving the NSI Act notification and assessment process. The questions seek input across a range of corporate, banking and insolvency transactions, with particular regard to the control of shares in companies and will require details of how many applications those providing input have been involved with.
There are also questions covering the NSI Act more generally, such as whether there are areas where the government could provide additional guidance, and if there are certain acquisitions that are currently subject to mandatory notification requirements that should be excluded from the mandatory notification regime.
Ashfords will be submitting responses to the Call for Evidence based on our corporate team’s experience in assisting clients with the notification process and liaising with the ISU. The Call for Evidence closes on 15 January 2024, so we expect to see a response from the government in the Spring of 2024.
The Call for Evidence follows a request for responses earlier this year regarding information sharing by the ISU. The request for responses, to which Ashfords also submitted a response, centred around the efficacy of the ISU’s communications and how to improve them, and what metrics and information should be used to assess the impact and effectiveness of the investment screening systems, and over what time frame. As yet, we have not seen a significant impact on the notification process as a result of the request for responses earlier this year.
Investors, companies and their advisers are likely generally to look forward to the outcome of the Call for Evidence in 2024. This is because many will support the proposals to ensure the NSI Act regime doesn’t place an unnecessary barrier to securing investment in UK companies, and to provide greater clarity regarding the scope of the NSI Act across all economic areas. A more streamlined notification and/or clearance process or exclusions for well-known UK institutional investment funds, or other well-known repeat acquirors that are familiar to the ISU, would be one helpful measure that could be introduced.
Ashfords’ NSI Act team have been involved with several notification processes over the last two years since the NSI Act came into force. We have experience liaising with companies, investors and the ISU, from due diligence stage through to making an application to the ISU and receiving clearance that a transaction can proceed to completion.
For further information on the NSI Act, including flowcharts to help establish whether a notification is required and an example timeline for a notification, please take a look at our guide.
If you would like to discuss this call for evidence or need advice on a transaction that may be impacted by the NSI Act, or for any further assistance, please contact Jocelyn Ormond, Scott Preece or Charles Davies.