The NSIA turns one – Part 3: top marks on process?
On 4 January 2023, the National Security and Investment Act 2021 (NSIA) celebrated its first birthday.
To mark this occasion, we have published a mini-series report card on our ForeignInvestmentLinks blog. In our first instalment, we considered the substantive assessment of transactions undertaken by the Investment Security Unit (ISU). We then shone a spotlight on the remedies and prohibitions imposed so far. To conclude our mini-series, we now reflect on how the NSIA has fared from a process perspective in its first year of operation and consider what to expect going forward: not least given the ISU’s move with the recent Prime Ministerial reshuffle out of the (re-named) Department for Business and Trade (DBT) into the Cabinet Office.
Let’s start with some stats – notification numbers
In its November 2020 impact assessment, the Department for Business, Energy and Industrial Strategy (BEIS, the predecessor to DBT) anticipated receiving 1,000 – 1,830 notified cases per annum. Following the start of the regime’s operation, BEIS noted in its 2022 Annual Report that it had received 209 notifications in the first three months of the NSIA coming into force (which is the only official data published at the time of this blog post). A simple extrapolation of this over a 12-month period suggests around 840 notifications per year, which is below the number anticipated in the 2020 impact assessment. This could be due in part to the increase in the threshold for a mandatory notification from 15% (at the time of the impact assessment) to 25% or a decline in M&A activity against the price base year (2019) used in BEIS’ Impact Assessment. The next annual report is expected to be published in June 2023.
Has done well: some process successes
For straightforward cases considered unlikely to give rise to any plausible national security concerns, the operation of the NSIA regime appears to be working relatively well, and investors have generally taken it in their stride. So far, the UK Government’s promise in November 2020 of a regime “slicker and quicker for investors” (compared to the public interest intervention regime under the Enterprise Act 2002) is broadly in line with practice.
Typically, the ISU accepts (non-problematic) notifications promptly once received (generally within 3-5 working days), without onerous additional information requests. As for timelines, the ISU clears most transactions within the initial 30 working day review period, taking an average of 24 working days to either clear or call in a mandatory transaction - the quickest clearance being issued in just 11 days. In comparison, the US’s CFIUS tends to closely follow the set statutory time limits (30 calendar days for a short-form Declaration or 45 calendar days for a full Notice cleared during the initial review phase). In addition and true to its word, the ISU has only “called in” a small proportion of deals notified.
However, more complex, potentially problematic cases have faced increased procedural hurdles, such as numerous deadline extensions in the Newport Wafer Fab case.
The ISU has also been proactive in seeking feedback from notifying parties and practitioners about the operation of the regime and has shown it is willing to address such feedback. For example, it has made changes to the online portal (which, when it first became operational, was criticised by many for being difficult to navigate and inflexible) and also issued Market Guidance Notes to clarify commonly raised scenarios.
This success has been noted across the pond, with the US recently announcing that the UK will retain its “excepted foreign state” status under the CFIUS regime. This indicates approval by CFIUS of the enactment and subsequent implementation of the NSIA. Given the degree of investment flows between the two countries, this will be welcome news for UK investors, reducing the burden as regards certain US investment filing obligations.
Must do better: communication and transparency
The lack of transparency and communication by the ISU during the NSIA review process has been an ongoing area of concern for companies and advisers. A key frustration relates to the absence of a dedicated case handler whom parties can contact directly in relation to updates on the ISU’s review. This approach deviates from other countries’ investment screening regimes, including the US and in Germany (and indeed most merger control regimes), where parties can contact specifically allocated individuals. This has resulted in the ISU’s process being perceived as something of a “black box”, undermining its accountability.
A similar complaint is the limited level of engagement by the ISU with parties and advisers during the review period. The ISU reveals little detail about the substantive appraisal of the case or the anticipated timetable for the Secretary of State’s clearance - and indeed the remedies process, far from being a “dialogue”, has more often taken the form of an order, involving little discussion with the parties. This can be a real challenge for deal planning.
In response, the ISU has said it is keen to increase transparency and encourage communication with all stakeholders regarding the operation of the regime and specific transactions. This includes seeking views on what additional guidance companies would find useful as well as informing the Government of important transaction-specific factors during review periods. However, the ISU has confirmed that there are no plans to introduce transaction-specific case handlers, and that its group inbox is a deliberate system design choice.
Public transparency around the ISU’s final orders is also likely to remain limited. It has opted to take a risk-averse approach by not including much information in the terms of the final orders it publishes, omitting analysis of substantive national security concerns and why particular conditions were appropriate and proportionate to impose. This clearly limits the ability of transacting parties and their advisers to accurately predict where issues may arise and what commitments may be sufficient to remedy them. In future, the ISU may consider whether to trade off this cautious approach in the interests of greater market certainty, enabling parties to prepare for engagement with the ISU more effectively.
Must do better: ongoing uncertainty around jurisdiction and interpretation…
Another major area of criticism is the ambiguity around certain jurisdictional issues and questions of interpretation - including the scope of some of the mandatory sector definitions - and issues arising from more complicated transaction structures. Understandably, given the risk of criminal sanctions, this lack of clarity has resulted in many parties making precautionary notifications, a situation exacerbated by an apparent change in policy following the NSIA’s entry into force that informal guidance to parties to a live transaction would no longer be provided.
The ISU’s first Market Guidance Note, issued in July 2022 (as discussed in a previous blog post), helpfully addresses some specific jurisdictional and practical issues, but the examples provided remain limited and plenty of grey areas remain. While it is encouraging that the ISU has indicated a willingness for parties to reach out with specific questions, our experience regarding the level of interaction has been mixed in practice. The ISU has engaged in some cases with general questions on the legal interpretation of the NSIA, but has often resisted providing advice on questions relating to a specific transaction, on the basis that it is ultimately for the legal advisers or parties to make a judgement call on making a filing. Therefore, whilst companies should make the most of the ISU’s “open communication” invitation, they may wish to temper expectations of receiving definitive or fulsome responses.
…but more guidance expected
The ISU has signalled that it will publish further guidance on a regular basis. So far this year it has updated its guidance for higher education and other research organisations on the application of the NSIA (see here) and we understand it intends to publish guidance on the ISU’s approach to communications and undertakings in distress. However, we understand there is no intention to publish guidance on when parties should make voluntary notifications, as the ISU views this as something for parties and their advisers to take a view on. Instead, it will continue to refer parties to its Section 3 Statement, which sets out how the UK Government expects to exercise its call-in power. There is also no plan for the ISU to publish a list of companies or entities that it considers to be inherently “high risk” from a national security perspective.
A new home for the ISU
As a final procedural point, following the UK Government reshuffle announced on 7 February 2023 the ISU has been moved to sit under the Chancellor of the Duchy of Lancaster in the Cabinet Office. The rehousing of the ISU follows the dissolution of BEIS and the redistribution of its previous responsibilities between four “new” or remodelled UK Government departments, namely: (i) the DBT; (ii) the Department for Energy Security and Net Zero; (iii) the Department for Science, Innovation and Technology; and (iv) the Department for Culture, Media and Sport.
The Cabinet Office may be a more natural home from the perspective of inter-departmental liaison given the Cabinet Office’s experience in national security and intelligence, and the obvious tension for the BEIS Secretary of State and Department, which had to navigate an institutional tension between encouraging business (and inward investment as part of that) in the UK while simultaneously administering the investment screening process under the NSIA. Bringing the responsibilities of the now also dissolved Department for International Trade (which promoted “Global Britain” as open for business on the world stage and managed the re-negotiation of trade deals between the UK and foreign trading partners post-Brexit) under the same roof as those of BEIS would likely have exacerbated this difficult balancing act.
However, the move may also raise new tensions. Whilst the BEIS Secretary of State and Department were accustomed to communicating regularly with senior business individuals, this is not necessarily the case for the Cabinet Office, which is closer to the Prime Minister and must also deal with the significant weight of senior intelligence and security officials within the department (and with the hawkishness on security policy that comes with this). Parties will therefore be watching closely to see whether this move of the ISU towards the UK political centre changes the approach to the substantive nature of NSIA concerns identified to date.
Taking it all in
In summary, several aspects of the NSIA have worked well, providing relatively rapid review (by global standards) for most transactions. However, there are material concerns around the opacity of the regime for “call-in” cases and those put into the second period of review by the ISU. Additionally, some important areas of interpretation remain open (albeit we are encouraged by the continued publication of market guidance). In the year to come, we hope that the ISU continues to listen to market feedback and make improvements to address important procedural issues, which any regime in its infancy is bound to experience. Greater engagement with parties at the case-specific level when combined with market wide guidance will help to ensure the NSIA doesn’t transition into a “terrible twos” phase in its second year of operation.