UK government updates NSIA market guidance and statement on call-in powers

Recent developments such as the removal of Huawei from the UK's 5G networks and President Biden's 2023 executive order on outbound investment in sensitive technologies have brought into focus potential national security risks arising from global trade and investment.

The introduction of the National Security and Investment Act 2021 (NSIA) was designed to bolster the UK government's powers of scrutiny and intervention over business transactions that may threaten national security, tightening the regime in line with other countries such as the US and Germany while maintaining the intention of being proportionate and business-friendly.

Call for Evidence

 At the end of last year, the government requested feedback on how to improve the operation of the NSIA regime to make it more targeted and business-friendly. On 18 April 2024, the government released its response to the feedback received, noting five proposed steps by the government to fine-tune the regime:

1. Section 3 Statement. To publish an updated statement (under section 3 of the NSIA) in May 2024 of what the Secretary of State expects to take into account when exercising its call-in power.

2. Market guidance. To publish updated market guidance in May 2024, including on the application of the NSIA in the field of academia and research and in respect of outward direct investment.

3. Consultation on mandatory notifications. To launch a public consultation by summer 2024 on updating the scope of the areas of industry to be subject to mandatory notification requirements.

4. Potential exemptions. To consider by autumn 2024 the possibility of introducing technical exemptions to the mandatory notification requirements, such as the appointment of liquidators, official receivers and special administrators (for which secondary legislation is being proposed) and the carrying out of internal business reorganisations (as to which feasibility is being assessed).

5. Improving operations. To make improvements to the operation of the National Security and Investment Notification Service (ongoing).
The first two items have now been published.

The first two items have now been published.

Updated Section 3 Statement

Under section 3 of the NSIA, the Secretary of State may publish a statement setting out how they expect to exercise their power to give a call-in notice, to include details such as the sectors in which "trigger events" (events where a person gaining control of certain entities or assets may give rise to national security risk) may be more likely, and what factors may be taken into account in deciding whether or not to exercise that power.

In response to requests for more clarity on the areas of the economy the government sees as most sensitive and how it assesses national security risk, the government has published a new Section 3 Statement, expanding its previous Section 3 statement and including further illustrative case studies. In particular, the government will consider the following three primary risk factors when exercising its call-in power:

- Target risk - risk arising from what the target does and what it is or could be used for. Entities undertaking activities closely linked to mandatory notification sectors are more likely to be called in. The government will also consider whether the target holds a sensitive supply relationship with the government or whether the incorporation of a new entity carries technology transfer risks. For target assets, the government will consider technology transfer risk, whether the asset is subject to export controls and whether land is near to a sensitive site.

- Acquirer risk - risk arising from an acquirer, for example because of its past behaviour and the intent of the acquisition, its existing capabilities or its ties or allegiance to a state or organisation hostile to the UK. The Secretary of State will not make judgements based solely on an acquirer's country of origin but will consider whether a jurisdiction's intelligence agencies can compel organisations and individuals to carry out work on their behalf and share data. 

- Control risk - risk arising from the level of control acquired. The statement notes the possibility of control risk arising from cumulative investments across a sector or supply chain and influence over a target entity's policy (such as through board seats), along with the exercise of financial instruments that affect control (debt-to-equity swaps are cited as an example). A history of passive or long-term investment is noted as indicating less risk but a case-by-case approach is emphasised.

Updated market guidance

 The updated market guidance published in May 2024 flags a number of changes to the government's online guidance pages on the NSIA, including:

- Outward direct investment. New guidance clarifies that the NSIA can apply to outward direct investment where the target entity or asset sits outside the UK but is involved with carrying on activities in the UK or the supply of goods or services to the UK.

- Higher education and research. Extensive updates have been made to the guidance on higher education and research-intensive sectors, including in respect of academic collaborations and the circumstances in which mandatory notifications will need to be made. Collaborations related to activities in mandatory notification sectors where an acquirer gains greater control over an asset (eg through licensing or IP rights) are likely to be of particular interest.

- Timelines: The guidance includes detailed information on how statutory timelines are calculated and clarifies that screening timelines will only be expedited in exceptional circumstances, such as certain acquisitions involving parties in material financial distress.

- Interpretation of "governing the affairs of the entity". The guidance explains that this is to be interpreted broadly, since control may arise through a variety of types of voting rights and no particular rights will be excluded from what may constitute a trigger event. 

What's next?

The changes so far reflect the government's aim to increase transparency about the operation of the NSIA regime, and the expanded pool of considerations and examples should serve as useful guides. However, unsurprisingly, the government has rejected calls for national security to be defined and has stated that it will continue to assess acquisitions on a case-by-case basis.

In line with the government's response to its Call for Evidence, we can expect further developments in the coming months, including a consultation on the scope of the mandatory notification requirements.