UK FDI: Strategic streamlining but sectoral spread - the UK Government confirms its plans for NSIA reform

In April 2024, the UK Government published its response to the Cabinet Office's 'call for evidence' on the National Security and Investment Act 2021. The call for evidence was an invitation to submit views on how the NSIA could "be even more business friendly while maintaining and honing the essential protections we need for our national security". The Government's response anticipates some changes, but there are some proposals that could broaden the regime even further.

Government response to the Cabinet Office’s call for evidence

The Cabinet Office's call for evidence was intended to provide the Secretary of State ("SoS") with feedback from practical experience on the way in which the National Security and Investment Act 2021("NSIA") has operated since it came into force in January 2022. Specifically, the SoS was seeking input on how the NSIA was operating in practice, with a view to potentially honing the scope of the mandatory notification requirements, improving the NSIA notification and assessment processes, minimising the burden on business, and helping to develop the Government's public guidance and communications. 

The call for evidence received 110 responses, the most significant of which was the submission received from the Business and Trade Subcommittee on National Security and Investment ("Subcommittee").¹ Indeed the Government published both a general response to the call for evidence and a direct response to the Subcommittee's submission. The Subcommittee had the benefit of reviewing reports by the Intelligence and Security Committee and the Foreign Affairs and Defence Select Committees, as well as a meeting with the Investment Security Unit ("ISU") on the confidential annex to the ISU's most recent Annual Report, so we can assume it will have had some traction with the Cabinet Office (as evidenced by the Government's separate response to its submission).

The Government does directly address the Subcommittee's recommendations. Some of these are rejected outright, but the Government is committing to certain actions, with the broader aim of keeping ahead of dynamic concepts of national security and the need to ensure the regime is not stifling investment into the UK. 

"The Government wants the NSI system to keep ahead of the national security risks facing the UK and adapt to the changing nature of our economy, whilst minimising the burden it places on businesses and encouraging investment to enable our economy to grow."

The Government has categorised its intentions into five discrete areas. 

1. Call-in clarity (but no fast-track) 

The Section 3 Statement the ("Statement") issued by the Government sets out how the SoS expects to exercise the call-in power under the NSIA. The call-in power is effectively a means of indicating that a transaction (whether notified or not) might raise national security concerns. 

The Statement provides a brief outline on when the SoS is likely to use the call-in power ("where there may be a potential for immediate or future harm to UK national security") and sets out an overview of the risk factors that the SoS takes into account when making that determination, namely the risks arising from the target, the acquirer, and the extent of 'control' being acquired. 

Given the exercise of that power relies so heavily on the concept of 'national security', the Subcommittee had recommended that the Cabinet Office explicitly define national security, noting that "[t]he lack of a clear definition undermines the predictability of the NSI screening regime at a time of rapidly changing legislation and policy." That proposal was considered in detail when the NSIA was enacted and rejected then as the Government wanted to ensure it had maximum flexibility under the NSIA, so it is not surprising that the Subcommittee's proposal was rejected out of hand in the Government's response. 

The Government has committed to updating the Statement, however. One area in which greater clarity would be welcome is an indication on which sectors might be considered the most sensitive from a national security perspective. The current Statement lists all 17 sensitive sectors which are subject to mandatory notification (if the relevant thresholds are met) in The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 ("NSIA Regulations")², as well as activities "closely linked" to those 17 sectors as the most likely to be called in. Given close links to the 17 sectors includes activities defined as broadly as activities "related to transport but [which] are not within the definition of transport in the [NSIA] regulations", further clarity would be timely and very welcome. 

2. New market guidance 

The Cabinet Office has been updating its various guidance notes regularly, but the Government response commits to further specific updates on the topics that stakeholders have raised. Those topics include: 

• factors the Government expects to take into account when assessing risk; 
• how the NSIA applies to transactions in the academia and research areas; 
• the calculation of statutory time limits; 
• the scope of the definitions of the 17 sensitive sectors that are covered by the mandatory notification regime; and 
• the application of the NSIA to outward direct investment. 

Some of these topics may be covered by the Statement update and the forthcoming consultation on sensitive sectors (see further below), but the Government has specifically committed to further guidance on the application of the NSIA to academia and outward direct investment. 

3. Consultation on the 17 sensitive sectors

The NSIA Regulations include activities in 17 sectors that are considered potentially sensitive. Certain acquisitions of entities performing specific activities in those sectors are subject to mandatory notification obligations. The call for evidence invited submissions on possible additions to this list, as well as changes on how some of the existing areas are defined. In view of the feedback received, the Government has committed to a consultation in summer 2024 on these sectors, which will include proposals for new standalone sectors for semiconductors and critical minerals. The Government is also exploring the possibility of adding water to the sensitive sectors. 

• Semiconductors

  Semiconductors are currently captured under the 'Advanced Materials' sector in Schedule 1 of the NSIA Regulations. The consultation can be expected to propose a standalone semiconductor sector, more closely aligned to the 2023 National Semiconductor Strategy, with an emphasis on protecting intellectual property.

• Critical Minerals 

  The consultation will also propose a standalone sector for 'Critical Minerals', currently incorporated under the Advanced Materials sector in the NSIA Regulations. This can be expected to expand on the existing definition. Indeed, the Subcommittee response identifies certain critical minerals (namely manganese, magnesium, nickel, phosphates, silicon, and tin) that appear in the Government's Critical Minerals Strategy but are not covered by the NSIA Regulations. A standalone Critical Minerals sector may also be expected to focus on processing activities to bring further alignment with the importance the Critical Minerals Strategy places on securing critical mineral supply chains.

• Water

  The Government is also exploring the possibility of adding water to the sensitive sectors. This is broadly in line with approaches taken in other jurisdictions. For example, water is identified as a form of critical infrastructure under the EU FDI Screening Regulation (for our latest update on current proposals to enhance EU FDI screening, please see here). 

The Subcommittee also identified other areas for potential inclusion within the scope of the NSIA, which seem to have garnered less enthusiasm with the Cabinet Office. These include media freedom and democratic integrity, access to citizens' sensitive data, cybersecurity, supply chains and critical inputs for important infrastructure and technologies, and the UK biosecurity industry including genomics. It remains to be seen, however, how far the Cabinet Office will cast the net in the forthcoming consultation. It should also be remembered that some of the existing categories within the 17 sectors are quite broad, and that the Government in any event has the power to review any deal under the NSIA whether or not it triggers a mandatory filing.

4. Technical exemptions to mandatory notification requirements

The Government has also addressed responses on whether targeted exemptions from the mandatory notification requirement may be appropriate, for example, in respect of transactions that do not entail a change in control or do not confer any additional control over the target (such as intra-group transactions). 

• Liquidators, official receivers, and special administrators

  Encouragingly, the Government has recognised the apparent misalignment between the treatment of administrators appointed over distressed companies (who are exempt from mandatory notification) and the position of liquidators, official receivers, and special administrators (who are not). Correspondingly, the Government has committed to bringing forward secondary legislation to remedy this.

• Internal reorganisations, Scots law pledges, and acquisitions by public bodies

  The NSIA does not contain any exemption for internal reorganisations, even though these do not typically involve any change of control and, therefore, one would assume, no change in risk profile. Likewise, whereas the creation of securities over shares in English law will not trigger a mandatory filing, the creation of Scots law share pledges (which transfer the share title to the security-holder) do trigger a mandatory filing (if the thresholds are met). The Cabinet Office has not committed to any changes relating to internal reorganisations of Scots law pledges but has committed to undertaking a risk assessment to see if exemptions for such arrangements, as well as acquisitions by public bodies, are "feasible".

• Automatic Enforcement Provisions

  The Government has also rejected any changes to the application of the NSIA to mandatory enforcement provisions in secured lending agreements. This is apparently on grounds that this trigger is only responsible for a "very small number of notifications".

5. Process and portal improvements

The NSIA requires filings to be submitted electronically through a dedicated 'notification portal' which has been somewhat beset by teething problems. In some cases, filings have had to be re-submitted when the portal has failed, and false positive firewalls have been a recurring headache. However, iterative improvements in the portal interface are starting to remedy this – and these will continue.

The more substantive concern has been around the perceived lack of transparency and engagement with the ISU. The Government has not made any commitments in this regard unfortunately, but will "consider further such improvements based on the feedback received". The Government has not committed to any timeline in respect of this exercise, however, so it remains possible that any material changes will only be made after the UK General Election, expected later this year.

_{1 The Business and Trade Subcommittee on National Security and Investment was established by the Business and Trade Commons Select Committee to examine the work of the Investment Security Unit; it has the same membership as the Business and Trade Select Committee.       
2 The sensitive sectors are: advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to government, cryptographic authentication, data infrastructure, defence, energy, military and dual-use, quantum technologies, satellite and space technology, suppliers to the emergency services, synthetic biology, and transport.}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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