Key takeaways from the first year of the national security regime

The UK's new national security screening regime has now been in operation for over a year. This blog discusses the key takeaways from the first decisions to be made under the UK's new national security screening regime.

In January 2022, the UK introduced a new foreign investment regime under the National Security and Investment Act 2021 (Act).  This allows the government to call in qualifying acquisitions for review and either block, impose conditions on, or unwind the transaction if necessary and proportionate to manage national security risks.

There has been uncertainty as to how the government will exercise its new powers under the regime.  However, the cases from the past year provide an early indication of the frequency and extent to which the government intends to exercise its powers.

Transactions that have been blocked / unwound

To date, three transactions have been prohibited under the Act, and two have been unwound.  One early trend is as follows:

• Acquirer risk: In all cases, the acquirer / owner of the sensitive assets was connected to a politically sensitive state (four connected to China and one connected to Russia).

Other points to note are:

• Military or dual use technology: Two cases involved the acquisition or use of "military or dual-use technology" (i.e. technology which could be used for both civil and military purposes).In these cases, the Secretary of State considered there was a risk that technology could be exploited to build "defence or technological capabilities" for a politically sensitive state.
  
  
• Broadband:The Government ordered a Russian investment company to sell its entire shareholding in a UK broadband provider business, again citing national security concerns.
  
  
• Unwinding transactions:The government is willing to use its powers to "call in" and unwind transactions that have already completed.Twice since the start of the regime, existing overseas owners have been required to sell their stake in a UK business (in each case, within a certain timeframe and in a prescribed manner).

Use of conditions to manage risks

The Government has also been willing to impose conditions on (rather than block or unwind) a transaction where it considers this is sufficient to manage any potential national security risks. To date, two thirds of the final orders issued under the regime have been conditional clearances.

Typical conditions relate to:

• Protection of information:Early decisions show that the government is willing to allow transactions to proceed provided the relevant overseas entities agree to implementing security measures to protect sensitive information, technology, and IP from unauthorised use.This includes requiring the acquirer to carry out security audits by a government approved auditor or implementing processes to restrict the sharing of information.

   

• Government oversight:In several cases, transactions have been allowed to proceed on the basis that there is continued government involvement or oversight in relation to the operation of the target UK business.For example, one case required the acquirer to appoint a Chief Information Security Officer approved by the Secretary of State, and another required the appointment of an HM Government Observer to the board of the subsidiary of the UK target.

Further information

See RPC's blog post for a brief summary of the new national security regime.