The Cabinet Office has published its response to the consultation on proposed updates to the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021, setting out the changes it intends to make to the mandatory notification regime.
This article outlines the government’s proposed changes to the National Security and Investment Act 2021 (NSIA) mandatory notification regime, focusing on how key sectors’ scope will change and whether the proposals meaningfully improve clarity and proportionality.
Implementing the changes will require secondary legislation, which the government intends to bring to parliament later this year, along with updated guidance and an updated impact assessment.
The proposed changes are helpful in some cases in reducing the impact of the NSIA, but in other respects they do not, in our view, go far enough, particularly in relation to internal reorganisations. There will be particular interest in the scope of any proposed new key sectors and updated guidance, and whether these serve to add clarity.
It has been confirmed that 'Water' will be included as a new sector covered by mandatory notification requirements. This key sector will cover incumbent water and sewerage undertakers, but only where a minimum size threshold is met.
The government is also refining the scope of several key sectors, qualifying those transactions which will be subject to the mandatory notification regime:
When updated, the sector will exclude routine business use of non consumer or licensed AI and routine testing as part of routine deployment and IT policies. The aim of the proposed amendments is to try to ensure that only developers/major modifiers of AI systems are in scope.
The scope of this sector will be narrowed by removing semiconductors and critical minerals so they are each a separate ‘key sector’. The key sector of Critical Minerals will cover all thirty-four minerals identified as critical by the UK Critical Minerals Intelligence Centre, with some revisions to ensure that low-risk activities are not caught.
The government also plans to make a number of changes to the Semiconductors key sector that are aimed at clarifying what is meant by 'packaging' and making it clear that the provision of all designs, materials, parts, or products that are qualified or certified are covered. The activities covered by the Computing Hardware key sector will be merged with the new Semiconductors key sector.
This sector will be refocused on twenty-four ministerial departments and five notifiable services. The government has recognised the wide nature of the current scope of this sector, and is proposing to amend the definition regarding the generation of 'OFFICIAL-SENSITIVE data' from “will or could result in” to ”will or is likely to result in” the handling of sensitive government data.
The shift from “could” to “is likely to” is intended to refine the scope of mandatory notification for acquisitions involving entities that handle sensitive government information. The change narrows the focus from situations that are merely possible to those where the handling of such information is genuinely likely to occur.
The government acknowledges concerns about the relevant turnover thresholds and will amend this key sector to avoid capturing low-risk small and medium-sized enterprises (SMEs), while still ensuring that all critical providers of repair and maintenance services remain within scope.
All third party data centres and certain cloud/managed services will continue to be included as the government believes to reduce the scope by adding a materiality threshold may inadvertently exclude small, mission-critical data centres.
The guidance will be updated to support stakeholders in assessing whether they fall into the scope of the updated regulations, and will continue to be reviewed in light of changes in emerging technologies. Public sector authorities will be removed from scope, though will be covered under 'Critical Suppliers to Government'.
The proposed reduction of the cumulative capacity threshold from 1GW to 500MW in respect of the definition of substantial generators or aggregators of electricity will be going ahead, with the addition of a mandatory notification at each 500MW of generation capacity acquired subsequently. Amendments will also be made to the guidance to add clarity, technical guidance and to mirror the key definitions used in other related legislation.
The government will enhance clarity on key definitions to reflect official standards, in line with the original policy intent.
The defence sector received more than twice the proportion of notifications compared with the next largest area of the economy, and feedback suggests that the scope of the sector is overly broad. However, the government has stated that it considers the current scope to be appropriate, as supply contracts granting access to defence‑related facilities may still pose potential national security risks.
As drafted, the defence sector seeks to capture participants at all tiers in the UK Ministry of Defence supply chain, including sub-contractors and those in the chain of sub-contractors, where the goods or service that they research, develop, design, produce, create or apply are provided or used for defence or national security purposes.
The sector definition is wide enough to capture some contractors or sub-contractors that are providing goods or services without clear defence applications, such as catering or cleaning services. The government has, however, recognised that the guidance could be clarified to better indicate who in practice would need to make a notification to avoid unnecessary notifications.
The 'Military and Dual-Use' and 'Transport' sectors are to remain unchanged and minor changes are expected in respect of the guidance surrounding the Synthetic Biology sector.
There was a request to the government that internal reorganisations where the beneficial owner remains the same be removed from the requirement for mandatory notification, which the government has rejected. It was hoped this would be reconsidered as part of the proposals but it was not and so the position remains that internal reorganisations can be qualifying acquisitions for the purpose of the NSIA.
If you would like any advice or guidance on the proposed changes, please contact Ashfords' corporate team.
Please note that this article is intended to be for general information purposes only, and it may not cover every aspect of the topic with which it deals, and should not be relied on as legal advice or as an alternative to taking legal advice.
We produce a range of insights and publications to help keep our clients up-to-date with legal and sector developments.
Sign up
