In November last year, the UK Government published a call for evidence on the National Security and Investment Act (NSIA), with the overarching aim of making the NSIA more business-friendly. We discussed some of the key aspects of the call for evidence in our earlier blog post.
Notably, the call for evidence focuses on some of the key areas of concern for businesses and market participants since the NSIA came into force a little over 2 years ago – particularly in relation to streamlining the scope of the mandatory notification regime, improving clarity on when a filing is required, and providing better communication and increased certainty for businesses throughout the screening process.
Linklaters has now submitted its response to the call for evidence. We welcome the objective of the call for evidence, and we have suggested that the regime could benefit from certain modifications to have the desired effect of streamlining investment screening in the UK and lessening the burden on the Investment Security Unit (ISU) and businesses.
Some of our key observations and suggestions are set out below.
Has the net been cast too wide? Refining the scope of the NSIA.
Of the numerous notifications (866) made under the NSIA in 2022-2023, only a small number (less than 2%) resulted in final orders being issued (see our blog post on the NSIA’s Annual Report for 2022-2023). In fact, most (93%) mandatory filings in 2022-2023 were cleared within 30 working days. While the ISU may consider this to be a reflection of the efficiency of the investment screening regime, it also suggests that a significant proportion of reviews give rise to no national security concerns.
Some of our suggested changes to help address this issue and refine the scope of the NSIA included:
- Internal reorganisations dealt with under the voluntary regime. Internal restructurings, where there is “no change in control” of the ultimate parent entity, should be exempt from the mandatory notification requirement. Requiring mandatory notification for these transactions places a significant burden on businesses and is disproportionate given that, in the overwhelming majority of cases, internal reorganisations do not give rise to any plausible national security concerns.
- Exemption needed for enforcement of security. Mandatory notification is required for financing arrangements where companies default on loan agreements and the lender, its nominee, or a security trustee directly enforce security over shares. However, often the lender enforcing security does not intend to retain ownership of the shares, and instead sells them to a third-party acquirer to recover their investment. We suggest that, to mitigate potential delays in enforcement of security, where a lender acquires shares in these circumstances for very brief periods, with the intention of swiftly selling the shares onto a third party, this should be exempted from mandatory notification.
- Clarifying and narrowing the scope of mandatory sectors. One concern encountered by practitioners and businesses is that the scope of certain of the 17 mandatory sectors can be ambiguous, resulting in many precautionary notifications (given the severity of sanctions associated with the failure to file a transaction that should have been mandatorily notified). We would recommend that a number of the 17 mandatory sectors could benefit from either better guidance (for example, Advanced Materials, Data Infrastructure, Defence and Synthetic Biology) or narrowing of scope (for example, Artificial Intelligence, Communications, Computing Hardware, Data Infrastructure, Defence and Energy) to alleviate some of the burdens for both businesses and the ISU.
Is the ISU a “black box”? Improving transparency and accountability in the review process.
A key concern expressed by many stakeholders and political commentators with the NSIA regime has been the lack of transparency inherent in the ISU process, even with parliamentary oversight holding the ISU to account. We highlighted concerns about the lack of transparency and accountability in the review process when the first Market Guidance Note on the NSIA was published. The ISU has taken welcome administrative steps to reduce the opacity of the regime, however, we believe it should go further to:
- Provide better pre-notification guidance. Providing better guidance on jurisdictional questions could help reduce the number of precautionary notifications where there is genuine uncertainty as to the scope of the NSIA and/or the mandatory sectors.
- Creation of dedicated case teams. While we’re cognisant that the ISU does not want to become a contact centre, we believe that the level of engagement and transparency could be improved by having a dedicated case team member assigned to all cases.
- Greater transparency and engagement on substantive national security concerns during course of review. Minimal engagement on the nature of any substantive concerns means that transacting parties are often left in the dark and are unable to address the ISU’s concerns early and effectively. To address this, parties could be given more transparency during the review regarding the nature of any potential national security concerns - which should be possible while respecting and safeguarding the confidentiality of information that is sensitive from a national security perspective. Having state-of-play meetings when deals get “called-in”, and more substantive engagement during the remedies process, would also enhance transparency and engagement.
- Greater justification in final orders. Further justification of the UK Government’s reasoning (to the extent it would not jeopardise national security) for individual decisions, at the very least vis-à-vis the impacted parties, would be helpful for parties and practitioners. A clear decision rationale would allow parties to meaningfully challenge final orders, whilst also making the NSIA more predictable for practitioners and businesses transacting in the future.
A potential fast-track filing option for frequent fliers?
While the significant majority of notified cases are cleared within the initial 30 working day review period, the suspensory nature of the regime can nevertheless create delays for deal timelines. One suggestion to mitigate the impact of this for certain acquirers would be to introduce a fast-track review option for a more rapid review of filings where there are repeat or reputable acquirers, or for non-problematic UK acquirers (for example, UK pension funds). While the NSIA legislation provides the UK Government with the ability to introduce such a triaged approach, we understand based on prior public statements that this is not something the ISU has favoured to date.
What comes next?
Responses to the call for evidence closed on 15 January 2024. Linklaters submitted its views and suggestions in response to the call. The call for evidence encouraged responses from stakeholders across the economy, based both in the UK and overseas.
The UK Government is not currently considering any changes that would require primary legislation, but it has left it open as to whether a more detailed consultation on specific measures or legislative changes will follow once all submissions have been reviewed.