National Security And Investment Act 2021
14 November 2022
The National Security and Investment Act 2021 (“NSI Act”) provides the UK government with new powers to scrutinise investments on national security grounds. The regime set out in the NSI Act came into force on 4 January 2022.
In this briefing we provide a brief overview of the NSI Act and some high level commentary on its implementation to date.
What is the National Security and Investment Act 2021?
The NSI Act establishes a new standalone regime for the scrutiny of, and intervention in, acquisitions and investments in the UK for the purposes of protecting national security. Key features include:
- mandatory notification of some transactions in 17 specified sectors (see below);
- voluntary notification for certain transactions that may give rise to national security concerns; and
- call-in powers under which the government’s powers to “call-in” transactions across all sectors of the economy on national security grounds are significantly extended.
Which transactions does the regime in the NSI Act apply to?
The regime applies to specified categories of transaction or investment that involve the acquisition or control over certain “qualifying entities” or “qualifying assets”.
Both domestic UK and foreign entities are caught by the NSI Act. A “qualifying entity” is widely defined as an entity (including a company, LLP, any other body corporate, partnership, unincorporated association or trust) other than an individual. A foreign entity will be a “qualifying entity” if it carries on activities in the UK or supplies goods or services to the UK.
Notably, there are no financial thresholds, nor de minimis exemptions under the NSI Act.
What is the mandatory notification regime?
The test for the mandatory notification regime is broadly in two parts, there must be: (i) a trigger event; and (ii) the transaction must involve a qualifying entity in one of the 17 high risk sectors identified (see below).
From 4 January 2022, buyers of shares or voting rights (exceeding certain thresholds) in one or more of the 17 high risk sectors identified will need to seek prior authorisation from the Secretary of State for Business, Energy and Industrial Strategy (“BEIS”), via the newly created Investment Security Unity (“ISU”), before completing the transaction.
As mentioned above, there is no de-minimis: a transaction that is subject to the mandatory notification regime will need to be notified irrespective of the parties’ combined share of supply or the target’s turnover.
Which transactions are caught by the mandatory notification Regime?
The mandatory notification regime (and an associated stand-still) applies to the direct or indirect acquisition of more than 25%, more than 50% or 75% or more of the shares or voting rights in qualifying entities (this includes increases in existing shareholdings), or the acquisition of voting rights that enable or prevent the passing of a company resolution. The target entity must fall within one of the 17 high risk sectors listed below. Whether a target entity will be a qualifying entity will be very fact dependant based on what the target entity does, but it will not involve any subjective assessment about whether there is or is not a threat to national security.
This aspect of the regime only applies to acquisitions of qualifying entities (and not asset acquisitions which are in scope for the voluntary element of the regime).
It is unlawful to complete a notifiable acquisition that falls within the mandatory notification regime unless and until it is approved. Failure to notify a transaction renders the transaction void, and civil and criminal penalties may be imposed. This means that transactions which may fall within the mandatory notification regime must be structured so that completion cannot occur until the requisite clearance is obtained.
What are the 17 key sectors?
What is the voluntary notification regime?
In addition to the mandatory notification regime, parties may notify transactions to the Secretary of State on a voluntary basis. This regime is broad and covers acquisitions of shares, voting rights or qualifying assets where there is a perceived risk that the transaction may be ‘called in’ for review.
In particular, acquisitions of bare assets (such as the transfer of IP) can be caught. A qualifying asset includes: (i) land; (ii) tangible moveable property or (iii) ideas, information or techniques with value (such as trade secrets, source code, algorithms, formulae, designs, plans, drawings and software). Foreign assets may also be qualifying assets if they are used in connection with activities carried on in the UK, or the supply of goods or services to persons in the UK.
In addition, acquisitions of 25% of the shares or votes in an entity, or passing through 25%, 50% or 75% of the shares or votes as well as the acquisition of “material influence” (usually regarded as 15% or more of the shares or votes; but sometimes less) are also within the scope of the voluntary notification regime.
Parties to transactions falling outside the mandatory regime should carefully consider the risks of not notifying – the main risk is that the transaction may be “called-in” for detailed scrutiny, and if found to raise national security concerns, could be unwound.
What are the “call-in” powers?
The Secretary of State has the power to “call-in” any transaction that is within the scope of the regime – irrespective of whether it has been notified; this is only to assess its risk to national security. The “call-in” power can be exercised for up to six months after the Secretary of State becomes aware of the transaction, provided that it is within five years after completion. However, for the mandatory notification regime the five year long-stop period does not apply.
The right to call-in also has retrospective effect, so any relevant transactions entered into from 12 November 2020 may potentially be called-in.
When exercising the “call-in” power, the Secretary of State must have regard to the ‘Section 3 statement’2 consider:
- target risk – the nature and activities of the target;
- control (trigger event) risk – the type and level of control being acquired and how it could be used; and
- acquirer risk – the extent to which the acquirer raises national security concerns.
Notably, the Section 3 statement does not give any indication of the substantive factors that the government will take into account in assessing whether the target, transaction or acquirer give rise to national security concerns, nor does it define what is meant by ‘national security’. This is intentional and provides the government with maximum flexibility to protect the UK from national security concerns.
Does the regime apply only to overseas investors?
As noted above, the NSI Act does not include the concept of a foreign investor. The focus of the regime in the NSI Act is on the activities of the target relevant to national security, meaning that transactions involving UK investors are as likely to be caught as acquisitions by overseas investors from countries considered to be hostile towards the UK.
This country-agnostic approach has been borne out in the “final orders” published to date, and the legislation has so far been applied to investors from China, Hong Kong, UAE, the UK and the US.3
What is the notification process?
Notification under the NSI Act is dealt with by the ISU. The information to be included in the notification is set out in secondary legislation and detailed guidance on the notification process has been published together with the forms to complete the notification4 5. The ISU can be contacted now (by emailing email@example.com) for informal advice on the new regime.
Broadly, the timetable for processing notifications is: (i) 30 working days to review the notification; and (ii) 30 working days, which may be extended by 45 working days and potentially a further voluntary period, to undertake the national security assessment. This means that the total time for review is up to 105 days (or even longer if a voluntary period is agreed). If an ‘information notice’ or ‘attendance notice’ is issued at any point, the clock stops, and starts running either after compliance with the notice or the deadline given to comply has passed – this is to ensure that the government is not timed out of an investigation by the parties deliberately delaying proceedings.
Are there penalties for non-compliance?
As noted above, notifiable acquisitions which complete without approval will be legally void. In addition, there are civil and criminal penalties for completing a notifiable acquisition without approval. The penalties include imprisonment for up to five years, fines of up to £10 million (or, if higher, 5% of worldwide turnover) and disqualification as a director for up to 15 years.
What has happened since the NSI Act came into force in January 2022?
At the time of writing, there is limited data on the number of interventions and investigations under the NSI Act. However, since the summer, the UK government has issued a total of nine “final orders”6 on whether to prohibit or permit a transaction subject to remedies; out of these, the government has prohibited two transactions and cleared seven subject to remedies.
These “final orders” have largely been the “traditional” sectors of military, dual-use and defence; however, it is clear that that the government has recognised the significance of emerging and advanced technologies (including artificial intelligence, advanced materials, data infrastructure and energy) and is willing to intervene in these transactions to protect UK national security. As noted above, it is also clear that the regime is not limited in scope to perceived ‘hostile’ states, as investors from the UK and US as well as China, Hong Kong, and UAE have been caught by the legislation.
The first prohibition decision was issued in July 2022 in respect of the proposed licensing of intellectual property of vision-sensing technology by the University of Manchester to Beijing Infinite Vision Technology Company7. The government’s view was that the licence agreement would create UK national security risks due to the dual-use application of the underlying technology, and the potential of the technology being used to build defence or technological capabilities. This transaction itself was not subject to mandatory notification requirements under the NSI Act; instead, the parties voluntarily notified the transaction, which was then blocked.
The second prohibition decision was published in August 2022, blocking a Hong Kong investor from acquiring the entire share capital of UK-based Pulsic Limited, an electronic design automation company8. Again, the concern was that Pulsic’s technology could be used to facilitate the building of integrated circuits for possible use in civilian or military applications.
For transactions that have been cleared, the government has not shied away from adopting measures to address its national security concerns, and in all but one of the decisions the government has ordered some form of control or restriction over access to information.
Insights on the process so far
The initial NSI Act annual report only covers a three-month period (4 January to 31 March 2022), so provides limited insights. However, for that quarter, there are a few interesting points to note:
- 222 notifications were received (slightly below the original estimate), of which 196 were mandatory (of which 7 rejected), 25 voluntary (of which 1 rejected) and 1 retrospective;
- Of the 222 notifications, 17 were called in (13 mandatory and 4 voluntary notifications), of those 3 were cleared and 14 were still under consideration at the end of the reporting period
- The number of notifications received was slightly less than the number of qualifying acquisitions notified, because in rare cases the Government pragmatically accepted a single notification to cover multiple qualifying acquisitions. This was done where multiple qualifying acquisitions contributed to a single effect, e.g. in some internal group reorganisations.
- Several mandatory notifications were rejected because they should have been voluntary notifications, one mandatory notification was rejected because it should have been a retrospective validation application
- Once a notification had been accepted, the typical time period for call in was 22 to 24 working days
- For mandatory notifications the five most common areas were: 1. Defence; 2. Military and Dual Use; 3. Critical suppliers to Government; 4. Artificial Intelligence; and 5. Data Infrastructure; whereas for voluntary notifications the five most common areas were: 1. Professional, scientific, and technical activities; 2. Data infrastructure; 3. Other service activities; 4. Energy; and 5. Computing hardware.
Overview of orders published so far...
|Date||Name||Trigger event (shares/asset)||Sector||Country||Prohibition/conditions|
|14.7.22||Acquisition of Sepura Ltd by Epiris LLP
||Shares and voting rights: from less than 75% to 75% or more
||Supplier to emergency services
||UK||Conditions: preventing unauthorised access to sensitive information and technology; facilitating audit of compliance with security measures
|20.7.22||Acquisition of know-how related to SCAMP-5 and SCAMP-7 vision sensing technology by Beijing Infinite Vision Technology Company Ltd
||Grant of licence of IP relating to vision sensing technology
||Military and dual-use
||China||Acquisition of IP prohibited.
|17.8.22||Acquisition of Pulsic Ltd by Super Orange HK Holding Ltd
||Entire share capital
||Military and dual-use||Hong Kong
|2.9.22||Acquisition of shares in Reaction Engines Limited by Tawazun Strategic Development Fund LLC
||Military and dual-use||UAE||Allowed subject to conditions
|14.9.22||Acquisition of the Stonehill project asset development rights by Stonehill Energy Storage Ltd
||Entirety of development rights for the Stonehill project
||UK||Approved subject to two conditions: HMG to approve power offtake operator (“POO”), restriction on POO sharing information with acquirer
|15.9.22||Acquisition of Connect Topco Limited by Viasat, Inc.
||Shares: from less than 75% to 75% or more
||Satellite and space technologies
||US||Approved subject to two conditions: controls preventing unauthorised access to information; continuation of provision of strategic capabilities to government
|29.9.22||Acquisition of Electricity North West Limited by Redrock Investment Limited
||Indirect acquisition of 35% interest in qualifying entity
||Approved subject to conditions: restrict sharing of information from target to acquirer; restrict acquirer influence over appointment of some staff members of target
|29.9.22||Acquisition of CPI Intermediate Holdings, Inc by Iceman Acquisition Corporation
||Entire share capital
||(Critical national infrastructure – atomic clocks)
||US||Approved subject to one condition: operations to remain UK-based
|10.10.22||Acquisition of Ligeance Aerospace Technology Co. Ltd by Sichuan Development Holding Co. Ltd
||Acquisition (detail unspecified)
||(Security of UK aerospace)
||China||Approved subject to five conditions concerning information sharing, security measures, board appointments, board appointment of HM Government observer, notification of asset transfers.
1 The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 contain detailed definitions of the businesses and activities that fall within scope of the mandatory notification regime.
2 For details, see: National Security and Investment Act 2021: Statement for the purposes of section 3 - GOV.UK (www.gov.uk)
3 For details of all the final orders to date, see https://www.gov.uk/government/collections/notice-of-final-orders-made-under-the-national-security-and-investment-act-2021
4 Guidance on completing and registering a notification form - GOV.UK (www.gov.uk) and
6 For details of all the decisions, see https://www.gov.uk/government/collections/notice-of-final-orders-made-under-the-national-security-and-investment-act-2021
7 For details of the final decision, see Acquisition of know-how related to SCAMP-5 and SCAMP-7 vision sensing technology notice of final order (publishing.service.gov.uk)
8 For details of the final decision, see https://www.gov.uk/government/publications/acquisition-of-pulsic-ltd-by-super-orange-hk-holding-ltd-notice-of-final-order/acquisition-of-pulsic-ltd-by-super-orange-hk-holding-ltd-notice-of-final-order