Updated guidance is now available for businesses on the practical application of the National Security and Investment Act 2021 (NSIA), including guidance on the exercise by the Secretary of State (SoS) (currently the Deputy Prime Minister) of his power to "call in" certain acquisitions for scrutiny. Businesses and their advisers should make sure they are familiar with the updated guidance published on 21 May 2024, so they understand how the latest changes may impact their transactions. The NSIA allows the SoS to block transactions and requires some transactions to be notified to and approved by the SoS before they can be completed. If such transactions are not notified and approved, they will be void and individuals risk imprisonment and/or fines.

Updated Section 3 Statement: exercising the "call-in" power

The Section 3 Statement (the Statement) sets out how the SoS expects to exercise his power to "call in" transactions for review and has been updated for the first time since 2022. It now includes improved examples of the government's risk assessment. Specific updates include:

Entities

• If the target holds a sensitive supply relationship to government in one or more of the 17 sensitive areas, or related areas, which may be important to maintaining the UK's national security, the acquisition is more likely to be called in than transactions in other areas.

• Cumulative acquisitions across different or related sectors, or within the same sector or supply chains, may give rise to national security risks.

• The SoS may also consider acquisitions involving the incorporation of a new entity, if the incorporation includes a change of control over an existing asset or entity, such as the transfer of intellectual property in certain joint ventures or a green field investment, or control over certain assets in new-build energy infrastructure. The SoS is more likely to call in such acquisitions if they are closely linked to activities in one or more sensitive areas.

Assets – technology transfer risks

The SoS will consider:

• whether an asset acquisition would allow the transfer of technology, intellectual property or expertise to an acquirer, or parties linked to an acquirer, which could undermine or threaten national security now or in the future; and

• whether the asset is subject to export controls, including any controls and licences issued by the Export Control Joint Unit.

Acquirers

• The SoS can consider the past behaviour of the acquirer and the intent of the acquisition, the sector in which the acquirer is active, its existing capabilities (e.g. technological and security capabilities), whether it has cumulative acquisitions across a sector or linked sectors, and any ties or allegiance to a state or organisation which may seek to undermine or threaten the national security of the UK.

• In some cases, the target is so sensitive it will need to be investigated regardless of the acquirer risk. In other cases, risks may arise through a target company's structures or security processes, regardless of the acquirer. For example, the acquisition of a sensitive part of a business by a UK company with poor information security may result in risks to national security. For these reasons, the SoS considers each acquisition on a case-by-case basis, even if the acquirer has previously notified the government of an acquisition and that acquisition has been cleared under the NSIA.

• Relevant considerations include the intent and past behaviour of any linked parties. For example, the SoS may consider the source of the funds (including individual members of investment consortiums, the fund managers and the ultimate beneficial owner) and whether actors with hostile intentions are seeking to obfuscate their identity by funnelling investment through other companies or corporate structures.

• While the SoS will not make judgments based solely on an acquirer's country of origin, he will look at requirements placed on the acquirer by other parties (such as other entities or foreign governments), so the SoS can consider any political, military or state-backed influence or obligations. For example, in some jurisdictions, intelligence agencies can compel organisations and individuals to carry out work on their behalf, and share data and provide support, assistance and cooperation.

• The SoS will consider whether an acquirer is, or has been, subject to UK or foreign sanctions in connection with an activity that may indicate a risk to national security.

Control risk

The SoS may consider:

• whether there is a control risk from cumulative investments across a sector or supply chain;

• whether the amount of control gives the acquirer the ability to influence the policy of the target, such as through access to board seats or other decision-making arrangements; and

• the amount of control an acquirer could gain through exercising financial instruments such as loans, conditional acquisitions, futures and options that affect the control of an entity, such as the use of a debt-to-equity swap.

Extra-territorial use of the call-in power

• The Statement no longer indicates that entities and assets outside the UK are less likely to be called in. Instead, cases are to be considered on a case-by-case basis in light of how strongly the entity or asset is connected to the UK.

• Outward direct investment may constitute an acquisition under the NSIA, including, for example, the transfer of technology, intellectual property and expertise as part of the investment, or when forming joint ventures abroad (see below).

Updated Market Guidance

The May 2024 edition of "Market Guidance" provides new or amended guidance on the following topics:

• How long assessments under the NSIA will take: The total NSIA screening process comprises three periods:
  • period for accepting/rejecting a notification – 5 working days or longer;
  • review period – 30 working days; and
  • assessment period (i.e. after a transaction has been "called-in") – "initial" 30 working days plus possible "additional" 45 working day extension (and further extension agreed with the acquirer).

The updated guidance explains the start and end dates in each period and clarifies that "working days" excludes weekends and public holidays in any of England, Wales, Scotland or Northern Ireland.

Issuing information and attendance notices stops the statutory clock in the assessment period (but not in the review period), so the initial/additional assessment period may therefore be longer than 30/45 working days.

• If you acquire voting rights that allow you to pass or block resolutions "governing the affairs of the entity": "Governing the affairs of the entity" must be interpreted widely in this context and includes various types of voting rights. No particular rights should be excluded.

• Acquisitions involving parties who are suffering material financial distress: Timelines for screening can only be expedited in exceptional circumstances, and usually only at the stage when the SoS is deciding whether or not to call in an acquisition. Even in a situation where an expedited timeline may be appropriate, any notifiable acquisition that proceeds without the government's approval is void. A party that completes an acquisition without government approval may face criminal or civil penalties under the NSIA.

• How the NSIA can apply to outward direct investment (with example scenarios): As mentioned above, the NSIA may apply to outward direct investment where an acquisition leads to a party gaining control over a qualifying entity or asset that is outside the UK and:
  • the qualifying entity outside the UK which is being acquired carries on activities in the UK or supplies goods or services to the UK; or
  • the asset outside the UK which is being acquired is used in connection with carrying on activities in the UK or the supply of goods or services to the UK.

In certain circumstances, the acquisition of a foreign qualifying entity (but not a foreign asset) may be subject to mandatory notification and clearance, if the transaction concerns relevant activities in a sensitive area.

• Top tips for completing a notification form: Notifiers should ensure, for example, that they:
  • select every sensitive area that applies to the acquisition (for example, a company that supplies telecommunication services to the police should select both "Communications" and "Suppliers to the Emergency Services"); and
  • do not include or provide any sensitive information that may be classified as "Secret" or "Top Secret". If not sure of the classification of material, they should check with the relevant party to the acquisition in the first instance and contact the Investment Security Unit (the ISU) at investment.screening@cabinetoffice.gov.uk if they are still uncertain, making sure not to disclose any classified information. If notifiers need to submit classified information, they should work with their usual contact in HM Government or contact the ISU.

• Comprehensive changes to guidance for the higher education and research-intensive sectors: Entities in this sector are advised to revisit all of the amended guidance. There is now further guidance to help higher education institutions decide whether to notify certain academic collaborations, as well as new and adapted examples of collaborations, and contact details for the Government Research Collaboration Advice Team. There are no automatic NSIA exemptions for:
  • research collaborations and activities receiving funding from a UK government entity, or via a body affiliated to the government (such as a specific funding agency); or
  • acquisitions where the parties have secured a licence through the Export Control Joint Unit.

Next steps

The government is expected to take the following additional steps in the short term (although this will depend on a number of factors, including the UK's General Election on 4 July):

• Consult on updating the sensitive areas requiring mandatory notification by summer 2024: The government proposes to launch a formal public consultation on updating the sensitive area definitions, which will include proposals for a standalone "Semiconductor" area and a "Critical Minerals" area. The government is also considering adding water to the list of sensitive areas subject to mandatory notification.
• Consider technical exemptions to the mandatory notification requirement – for inclusion in proposed legislation to be laid in autumn 2024: The ISU has said it will assess whether it would be possible to make targeted exemptions for:
  • certain internal reorganisations;
  • Scots law share pledges; and
  • public bodies.
• Improving the operation of the NSIA system: The ISU is aware of the issues users have encountered with the NSIA online system and is looking to make improvements to the notification portal, including the firewalls.

Please contact a member of the Dentons Competition team if you have any questions.