The National Security and Investment Act 2021 Annual Report 2022-2023, published yesterday, is the second report on the UK’s investment screening regime since the NSIA first came into force on 4 January 2022, and the first which covers a full year, from 1 April 2022 up to 31 March 2023. For the previous report, covering just 4 January 2022 – 31 March 2022, please see our blog post.
The report shines a welcome spotlight on what the Government has been handling under the NSIA over the past year, at least from a procedural perspective. We have distilled the key stats and takeaways below.
Notifications and procedure
The Government received 866 deal notifications in the period covered by the latest report. This appears broadly on par with the number of notifications reported in the first annual report (222 in just 3 months, which when extrapolated to cover the full year would be 888). That said, the number of notifications is certainly lower compared with the Government’s original Impact Assessment, which estimated that there would be between 1,000 and 1,830 notifications per year.
Of the 866 notifications, the majority (671 or 77%) were mandatory, with 180 (or c.21%) voluntary notifications. The proportion of voluntary notifications has increased compared to last year’s report, where they represented only 11% of notifications. Whether this relatively high proportion of voluntary notifications reflects a trend of making precautionary notifications where there is uncertainty about the application of the NSIA or borderline cases remains to be seen when there are future years’ data to compare against. There were also 15 retrospective validation applications for acquisitions which had completed without approval and would otherwise be legally void.
Consistent with the previous report, only a small number of notifications were rejected (43 in total, representing less than 5%, split almost equally between mandatory and voluntary filings). In line with last year’s findings, the most common reason for rejection was that the parties used the wrong notification form (i.e. a voluntary notification should have been mandatory or vice versa).
The Government appears to generally be achieving its aim to provide a quick and streamlined process, at least in the initial review stage. All notifications reviewed were either called-in or cleared within the 30 working day statutory time limit after being accepted and the average (median) time for the ISU to accept both mandatory and voluntary notifications was 4 working days, although it took longer for them to reject notifications (on average 10 working days for mandatory notifications).
Sectors
Most of the mandatory notifications related to 5 key sectors – defence, critical suppliers to government, data infrastructure, military and dual use, and artificial intelligence. The defence sector was the most common, representing 47% of mandatory notifications (twice the proportion of notifications compared to the next largest area of the economy).
Regarding voluntary notifications, most of these related to advanced materials, defence, military and dual use, energy, and academic research and development in higher education. The report shows that voluntary notifications often relate to targets whose activity may fall within the same broad sector as the 17 mandatory sectors, but where the transaction does not meet the specific criteria for a mandatory notification. However, there were also voluntary notifications in relation to a broader range of sectors such as professional, scientific and technical activities, arts, entertainment and recreation, and human health and social work.
Call-in notices
As with the last report, this report also provides some statistics relating to “call-in” notices (both for pro-active notifications and non-notified transactions). Of the 766 notified notifications which were reviewed in this reporting period, only 55 (7.2%) were called-in by the Government for further assessment, while an additional 10 call-in notices were issued for non-notified transactions. The figure is slightly below the Government’s expectation in the Impact Assessment (of 70-95 call-in notices per year) but shows the willingness of the Government to dive deeper into certain transactions including, notably, deals not notified and those falling in the voluntary regime (17 of the call-ins related to voluntary notifications). The majority of call-ins related to military and dual use (37%), defence (29%) and advanced materials (29%).
In terms of procedure, in 29 of the 65 acquisitions called-in, the Government used the additional 45 working day period to conduct its review (following the initial 30 working day period after call-in) and in 10 of these it extended the review period further, utilising its power to voluntarily agree an extension with the acquirer.
Final notifications and final orders
The total number of final notifications following a call-in (i.e. clearances) was 57, mostly relating to the same sectors as call-in notices, namely military and dual use (42%), advanced materials (32%), and defence (26%). Final orders were imposed in 15 cases (with one revoked), including 5 prohibitions. The main sectors affected were military and dual-use and communications (with 4 final orders each), as well as energy, defence, computing hardware, and advanced materials. Regarding timelines, the average (median) number of working days between call-in and making a final order was 81, with 8 final orders issued during an extended voluntary period.
The report confirms that no penalties were issued or criminal prosecutions concluded, suggesting that the Government has so far chosen not to pursue these enforcement powers in cases of non-compliance with NSIA.
Origins of investors
The majority of notifications (58% of the total) related to UK investors, with the next largest source of notified transactions being the US and France. China, on the other hand, represented less than 5% of notifications, but more than 40% of call-in notices, 40% of final notifications and the majority of final orders (8). Notably, of the acquisitions called-in, 32% involved acquirers associated with the UK and 20% with the USA, confirming the Government’s acquirer agnostic approach to exercising its call-in powers under the NSIA.
Key takeaways
While not revealing useful insights into the Government’s approach or reasoning from a substantive perspective, the NSIA’s first full annual report does shed some helpful light on case load, timelines, types of notifications, focus sectors and origins of investors, which should provide a practical steer for parties to transactions and practitioners when assessing the impact of the NSIA on transactions. Directionally, this latest report is broadly consistent with the first report published last June in terms of process, volume of notification and sectors in focus, demonstrating that the compliance with and enforcement of the NSIA is unfolding generally as expected. In an attempt at more transparency, the report makes it clear that the Government has included additional information going beyond that strictly required under the statute. However, unsurprisingly, the report does not touch on points of interpretation, reasoning for decisions or its approach in remedies or blocked transactions, leaving plenty within the NSIA “black box”.
| NSIA Second Annual Report – Key statistics from Annex A | ||
| Section one: Notifications | ||
| The total number of notifications received | 866 | |
| The total number of mandatory notifications received | 671 | |
| The total number of voluntary notifications received | 180 | |
| The total number of retrospective validation applications received | 15 | |
| Total number of notifications accepted/rejected | 849 | |
| Average number of working days from receipt of a mandatory or voluntary notification to the Secretary of State notifying parties of a decision to accept that notification | Median: 4 | Mean: 5 |
| Section two: Call-ins | ||
| The total number of call-in notices issued | 65 | |
| The number of times the additional period was used for called-in mandatory or voluntary/retrospective notifications | Mandatory notifications: 15 | Voluntary/retrospective notifications: 10 |
| The number of times the additional period was used for called-in non-notified cases | 4 | |
| Section three: Final notifications | ||
| Number of final notifications given | 57 | |
| Section four: Final orders | ||
| The number of final orders made | 15 | |
| The number of acquisitions blocked or subject to an order to divest by final orders (included in the total number of final orders) | 5 | |
| Average number of working days between calling in an acquisition and issuing a final order | Median: 81 | Mean: 77 |
For further information, please contact:
Nicole Kar, Partner, Linklaters
nicole.kar@linklaters.com
