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Last month, in response to last year’s consultation on how to “narrow and refine” the scope of the National Security and Investment Act (NSIA) (Consultation), the Government announced upcoming changes to “fine-tune” the operation of the NSIA. Ticking off the first step in its to-do-list, the Government’s updated Market Guidance and revised National Security and Investment ‘Section 3 Statement’ have now been released.
Many of the clarifications provided reaffirm the previously understood legal position and/or are incremental improvements on previous guidance. However, there are a few key points investors will want to be aware of – notably, more detailed guidance on the risk factors that will be considered for a call-in (now supported by additional case studies) and explicit guidance on the treatment of joint ventures and greenfield investments, and how the NSIA will apply to outbound investment.
The new Section 3 Statement explains how decisions are made and what the Secretary of State is seeking to protect by using the call-in power. It also sets out what factors are taken into account when calling in an investment that is not subject to a mandatory filing. The Statement adopts a similar framework for analysis to the previous iteration (i.e. focusing on target risk, acquirer risk and control risk), but provides a greater level of detail on the risk factors relevant to a decision to call in an investment (supported by a number of case studies). In further detail:
The Statement also explicitly confirms the pre-existing position under the NSIA that the formation of new entities (i.e. joint ventures and greenfield investments) can also be called in where this involves the transfer of intellectual property (IP) or a change of control in certain assets.
There are several points where stakeholders had called for further clarity, which are not reflected in the response:
As foreshadowed, the updated Market Guidance provides direction on a range of issues relevant to the operation of the NSIA (including timelines for NSIA assessments, outward direct investment and the NSIA’s application to higher education / research-intensive sectors). Some of the key points are discussed below.
The Market Guidance clarifies that the NSIA can apply to Outward Direct Investment where an entity being acquired carries on activities in the UK (or supplies goods or services to the UK) or where an asset being acquired from outside the UK is used in connection with carrying on activities in the UK (or supplying goods and services to the UK).
What this means in practice is that UK-based investors seeking to purchase foreign entities or assets could find their transactions being called in – for example, where sensitive IP is shared from a UK company with another entity as part of a merger or JV, or where the foreign target has a subsidiary providing services to UK-based defence companies, or where the foreign target provides products and support services in relation to sensitive sectors in the UK.
The Market Guidance reaffirms the previously understood legal position with respect to outbound investment under the NSIA, but perhaps foreshadows greater scrutiny in this area (which is already subject to a consultation run by the Department of Business and Trade, to better understand potential risks of outward direct investment). This clarification is also reflective of a global move to provide for outbound investment screening, echoing proposals currently being considered in both the EU and the US.
The Guidance clarifies what will qualify as an acquisition, and what sort of academic collaborations will need to be notified. In particular, collaborations related to activities in mandatory sectors are likely to be of interest to the Government, especially where an acquirer gains greater control over an asset (i.e. through licensing or rights over IP). The focus on academia has also been reflected in prior enforcement action, with the first deal blocked under the NSIA involving a licence agreement for vision sensing technology between Beijing Infinite Vision Technology Company and the University of Manchester.
The Guidance explains how timelines are calculated and provides clarification that timelines for screening can only be expedited in exceptional circumstances (i.e. material financial distress) and usually only at the stage when the Secretary of State is deciding whether or not to call in an acquisition. The Guidance also provides updated top tips when completing a notification form.
In its response to the call for evidence, the Government referenced plans to launch a consultation on updating the mandatory sectors this summer, including proposals for a standalone Semiconductor sector and Critical Minerals sector, as well as potential proposals to add water to the list of areas subject to mandatory notification. However, as noted in our previous post, more substantive reforms (such as exemptions for internal restructurings, or substantial changes to improve transparency with the ISU) are not in the immediate pipeline (and inherently uncertain given the upcoming general election).
This is an area we will be watching closely in the coming months, so stay tuned for further developments.
30 May 2024
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