National Security and Investment Act: Government publishes updated Section 3 Statement and Market Guidance

Background

The NSI Act came into force on 4 January 2022, and created a new standalone regime allowing the Investment Security Unit to scrutinise different types of transactions with a UK nexus in the interest of protecting national security. Read our briefing note summarising the key provisions of the NSI Act here.

In November 2023 the government published a Call for Evidence seeking views from stakeholders on the impact of the NSI regime on businesses and investors, which was followed in March 2024 by its Response, setting out its key areas of focus for 2024. Read our summary on the Call for Evidence and Response here and here.

Following this, on 21 May 2024, the government published an updated Section 3 Statement, which sets out how the government will exercise its call-in powers; and refreshed guidance. 

Below we focus on the key changes set out in the updated section 3 statement and guidance.

Section 3 statement

The updated section 3 statement is intended to explain how the government expects to exercise its call-in power under the NSI regime and to provide greater clarity on the factors that the government will consider.

Notably, the updated section 3 statement does not define “national security” or set out a list of circumstances in which national security is or could be at risk. This is an intentional approach and leaves the government considerable flexibility to intervene in transactions where it deems it necessary to do so.

Updated market guidance

The updated market guidance aims to improve comprehension of and compliance with the NSI regime. The updated guidance includes several tips on how to complete notifications under the regime and other amendments address a number of areas highlighted by respondents to the Call of Evidence and includes:

• Guidance on higher education and research-intensive sectors: including examples which aim to assist them in determining whether their transactions and collaborations fall within the NSI regime and details of how to contact the Research Collaboration Advice Team.
• New guidance on outward direct investment: new guidance on, and examples of how the NSI regime can apply to cases of outward direct investment. The guidance explains that the NSI regime may apply when the acquisition leads to a party gaining control over a qualifying asset or entity that is outside the UK and the tests set out in the NSI regime are met. To meet the requirements for a qualifying asset, the asset or entity being acquired must be used in connection with carrying on activities in the UK or the supply of goods or services in the UK. To meet the requirements for a qualifying entity, the entity being acquired must carry out activities or supply goods or services in the UK. The addition of this guidance appears to follow the general trend towards considering proactive screening of outbound investment for sensitive sectors elsewhere, including the US and Europe.
• Further guidance on timing: including how statutory timelines are calculated, how long the review process will take in practice, and the limited circumstances in which decisions may be expediated.

It remains to be seen whether these updates provide sufficient clarification on the operation of the NSI regime for stakeholders.

What next?

We expect the government to launch a formal public consultation on updating the 17 sensitive areas subject to the mandatory notification requirements this summer. However, this may be affected by the upcoming general election on 4 July 2024 and the potential of a new governing party, for whom priorities may differ.  We will continue to monitor these changes and provide updates on them.