UK National Security Screening: NSIA Annual Report 2023-24

On 10 September 2024, the Government published its third Annual Report (Report) into the acquisition and investment screening regime established by the National Security and Investment Act 2021 (NSIA), covering the year from 1 April 2023 to 31 March 2024. With very limited information regarding cases reviewed under the NSIA regime being publicly available, the Report provides useful colour and insight around the current application of the regime by the Government's Investment Security Unit (ISU) (which administers the operation of the NSIA) and potential trends.

Overall activity

The Report notes a modest 5% year-on-year increase in the total number of NSIA notifications made (906, up from 865 in the prior period). Whilst the big picture has therefore remained broadly consistent, the slight uptick may be down to increasing awareness and compliance as the NSIA regime becomes more established. Of the notifications made, 753 were mandatory and 120 voluntary. There were also 33 retrospective validation applications (where parties seek retrospective recognition that a transaction is valid in law after it has been completed without NSIA approval).

Clearances, call-ins and final orders

The vast majority of transactions received clearance. Only a small percentage of transactions were 'called-in' for an in-depth national security review - just 41 of all notifications reviewed (representing 4.4%, versus a slightly higher 7.2% during the previous reporting period), as well as four non-notified acquisitions. Ultimately, only five final orders imposing conditions on the relevant transactions to mitigate national security risks were issued. No final orders blocked transactions from taking place altogether (or ordered them to be unwound retrospectively). However, ten transactions were abandoned post call-in.

Turnaround time

Only once the ISU accepts a notification does the clock start on the 30-working day 'review period' to decide whether to call-in the relevant transaction for a more detailed assessment (or to clear it). Somewhat surprisingly, the average time it took for the Government to accept or reject notifications following submission appears to have slowed. On average, it took six working days to accept a mandatory notification and eight working days to accept a voluntary notification, whereas both averaged four working days in the prior period. The time taken to reject notifications similarly increased. On average it took 29 statutory working days (i.e. just within the statutory review period) to decide to call-in a notification once accepted. Again, this represented a slight increase versus the prior period.

Sector and jurisdictional focus

The highest proportion of all accepted and rejected notifications related to defence (48%), critical suppliers to government (19%) and military and dual-use (17%). Transactions touching the defence sector and military and dual-use were also the most likely to be called-in, accounting for 39% and 29% of all call-in notices issued, respectively. Many notifications related to more than one sector.

In terms of origin of investment (an acquisition may be associated with multiple origins), parties associated with China remained subject to the greatest level of scrutiny, with 41% of all call-in notices relating to acquirers with Chinese links (consistent with 42% in the prior period). The next most significant proportion of call-in notices related to acquirers associated with the UK (39%) and USA (22%). Ultimately, none of the five transactions subject to final orders imposing conditions were linked to China. However, ten transactions were abandoned post call in and, of these, eight originated from China. This may reflect a tendency of Chinese investors to walk away from deals where an in-depth review and possible intervention might ensue.

Enforcement

Non-compliance with the requirements of the NSIA can attract civil and criminal penalties. However, as with the previous reporting period, no penalties were issued and no criminal prosecutions were concluded. Where offences were identified (principally where notifiable transactions had been completed without approval) the ISU decided not to impose any penalties, but rather asked the parties to provide reassurances that steps had been taken to prevent any recurrence.

Key takeaways

First, even if the parties to a transaction are confident it will be cleared, the implications of the NSIA regime for deal timetables remain appreciable (and long stop dates in transaction documentation should accordingly allow sufficient 'buffer'). In practice, parties generally continue to make submissions as early as possible in their M&A process, including before (and sometimes well before) exchange of contracts. However, this needs to be balanced against the risk that the deal falls apart or that the agreed terms differ sufficiently from the notified deal, requiring a new notification. Taking regulatory advice to determine whether the NSIA regime applies at the outset, and navigating the regime if it does, has become a standard part of the transaction process for M&A deals with a UK nexus. The high number of retrospective validation applications in this reporting period is a reminder that the ISU pro-actively monitors market developments to identify transactions which should have been notified and that an acquisition completed without approval under the mandatory notification regime is void.

Both call-ins and subsequent final orders have remained relatively limited, and the Government's messaging in the Report around the purpose of the NSIA regime is consistent with the accompanying statistics. The regime is intended to be "effective but light-touch" and not to be used to "interfere unnecessarily with investment" or for objectives other than protecting the UK's national security. The Report reiterates that "The UK continues to encourage investment and is committed to remaining a free and open economy". The ISU's relative tolerance of breaches has continued, but we anticipate that its approach will start to change now the regime is firmly established.

Group restructurings – a closing word of caution…

The NSIA regime's net is cast extremely widely. Perhaps most notably (and often counter-intuitively), group restructurings which are entirely internal in nature can, of themselves, trigger mandatory NSIA notification obligations. Parties planning to undertake reorganisations, be it as a preparatory step in advance of a sale transaction, as part of a post-deal integration/consolidation exercise or otherwise, should tread carefully and seek specialist guidance to avoid slipping up.