On 13 November, the Deputy Prime Minister published a call for evidence on the National Security and Investment Act (NSIA), which aims – according to Oliver Dowden (the legal decision maker under the NSIA) – to “narrow and refine” the scope of the require (particularly with regards to the mandatory notification requirements), improve the notification and assessment process, and develop the Government’s public guidance and communications.
While the call for evidence considers that the NSIA has generally functioned well, it recognises that the NSIA needs to be proportionate and well-targeted with the overarching aim of making it “even more business friendly”. We pick out below some of the key points in the call for evidence.
Too many notifications?
The call for evidence noted that 93% of transactions notified in the financial year 2022-2023 had been cleared within 30 working days. But with 866 notifications received in the last financial year alone (a number which is significantly higher than comparator regimes such as Germany (306 national notifications) and the US (320 notifications)), the Government is looking at whether the mandatory notification requirements could be better targeted, and whether certain types of transactions could be excluded from the regime’s scope.
The latest NSIA Annual Report also noted that almost four times as many mandatory notifications were received as voluntary notifications – perhaps a sign that the NSIA is capturing more targets than intended.
An exemption for internal reorganisations?
An internal restructuring can trigger a mandatory filing under the NSIA even where there is no change in the ultimate controlling shareholder. While this is not an unusual requirement considered through an international lens (several other major jurisdictions including Australia, China and Germany also include this in their regimes), other jurisdictions are also reconsidering the necessity for this requirement – in Germany, for example, the notifiability of internal restructurings is expected to be revisited as part of the envisaged full overhaul of the regime (currently tabled for Q2/Q3 next year), and will likely be reduced to instances in which the relationship involves a new jurisdiction that was not previously included in the holding chain.
The Government has received feedback from a range of stakeholders that the requirement to notify internal reorganisations is disproportionate. While the call for evidence notes that there may be “rare cases” where the acquisition of control by another “link” in the corporate structure could enable a hostile actor to pursue malign actions over the entity, it equally recognises that internal restructurings may result in no, or very little, change to the level of control that is held over the target.
Narrowing the circumstances in which internal restructurings may be notifiable under the NSIA is likely to be welcomed by businesses and practitioners, given that the need to make a mandatory notification can cause complexities and delays for ordinary course corporate activities and also lead to multiple filings for preparatory structuring steps in the M&A context.
More breathing space for distressed companies?
The Government is considering an exemption for the appointment of liquidators, official receivers, and special administrators from the mandatory notification requirements. This brings it more into line with the treatment given to the appointment of administrators, which are already exempt from mandatory notification. Instead, any onward sale of shares or voting rights in sensitive entities would be the trigger event of potential interest.
The alignment and clarity of this proposal is to be welcomed, and the Government appears to be rightly focussing on any subsequent disposal of shares or voting rights as being the change of control to be concerned about (or not, as the case may be). Further, aligning the position for special administration appointments makes sense too, given that appointments will (typically) be high profile and potentially urgent.
While notifications for the appointment of a liquidator, official receiver or special administrator have not caused issues in practice, with insolvencies rising – corporate insolvencies in Q3 2023 were up 10% from a year ago – changes along the lines indicated would come at the right time and ensure a consistent approach across insolvency appointments.
On the other hand, the Government does not currently expect to exempt transfers of control from a borrower to a lender in the event of a loan default or similar situation (i.e. Automatic Enforcement Provisions), and notes – consistently with our experience – that loan markets have generally taken this requirement in their stride, but welcomes further views on this.
A much-needed narrowing of scope?
The Government is interested to hear whether there are aspects of the 17 mandatory sectors which are very unlikely to create national security risks, and where more clarity could be provided through guidance. A major criticism of the NSIA has been the ambiguity around certain questions of interpretation, including the scope of some of the mandatory sector definitions, which has resulted in many parties making precautionary notifications.
The Government appears to recognise that many areas are too complex, or unclear as to what they include or whether a transaction falls within its scope. Of note is Artificial Intelligence – the Government notes feedback has been that the regulation captures activities which do not present a national security risk. The Government therefore asks whether there are activities within the current AI area that should be removed, but also asks whether there are new areas that should be added, such as ‘generative AI’ which is currently not in scope.
Other areas that may get welcome clarification include Advanced Materials, Critical Suppliers to Government, Defence, and Synthetic Biology (some of which are deliberately broad). Academia should also be getting a revamp to its guidance, although the Government is not considering a standalone area in Academia. These potential clarifications could reduce the number of precautionary notifications that are made, but only time will tell whether these clarifications will materialise and if they will be helpful to businesses trying to navigate the NSIA.
There are also areas that the Government is considering expanding. This could create additional hurdles for some transactions to overcome, such as those involving Communications (with a lowering of the £50 million UK turnover threshold), Data Infrastructure (by adding entities that own, operate, manage, or provide services to colocation data centres), Energy (by including multi-purpose interconnectors within its scope), and Suppliers to the Emergency Services (by capturing sub-contractors to the emergency services). In addition, a number of these sectors are already too broad and vague such that in practice investors have opted to make precautionary filings – these proposed expansions could add to the number of unnecessary notifications.
And then there were 19…
Of note is the Government’s proposal to include a standalone area for Semiconductors, as well as Critical Minerals, which could result in 19 mandatory sectors under the NSIA. Semiconductors have become a focus area for many authorities, so it is perhaps unsurprising that they may now become their own standalone category. The Secretary of State blocked Nexperia’s acquisition of Newport Wafer Fab, the UK’s largest semiconductor manufacturer. Two years later, it has been sold to US-owned Vishay Intertechnology instead.
Removing both Semiconductors and Critical Minerals from Advanced Materials will also allow for greater clarification. The Government is considering updating the Semiconductors area to reflect the Semiconductors Strategy by further focussing on compound semiconductors, design, and intellectual property. Critical Minerals may soon align with the British Geological Survey due for publication early next year.
Top marks on process?
The call for evidence noted a number of areas where the Investment Security Unit (ISU) has made improvements to increase the transparency of its processes. Providing named senior contacts for engagement post call-in or offering calls at key stages of the process are listed among other improvements. In practice, however, the process continues to remain relatively opaque, and these improvements only concern a limited number of cases that are called in for further review. Contacts to dedicated case handlers whom parties can speak to directly in relation to updates on the ISU’s review are not made available – instead, a group inbox is all that is provided.
A key frustration of the UK’s regime is the absence of a direct contact who is close to the detail and can provide insight on day-to-day progress and issues that may arise. This deviates from the approach taken in other countries – such as the US and Germany – and indeed, differs from the approach taken under most merger control regimes (including the UK’s). This has resulted in the ISU’s process being perceived as something of a “black box”. This is an area that might improve following the call for evidence.
Reeling back or stepping forward?
With such a ream of changes proposed, are these two-year regrets, or considered learnings? Either way, greater clarity and transparency for business, and the public alike, can only be welcome changes.
Responses to the call for evidence can be submitted until Monday 15 January 2024.
For further information, please contact:
Nicole Kar, Partner, Linklaters
nicole.kar@linklaters.com
