Fine-tuning: UK modifies NSI regime

September 2024  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

September 2024 Issue

Governments across the globe rely on a range of legislative measures to safeguard their interests, including the power to scrutinise and intervene in certain transactions if they are believed to pose a potential threat to national security.

In the UK, the primary legislation addressing national security concerns is the UK National Security and Investment (NSI) screening regime. The NSI regime, which followed the National Security and Investment Bill in November 2020 and the National Security and Investment Act 2021, came into force in January 2022 and has reviewed multiple transactions to date.

“The UK government has reviewed more than 1700 transactions but very few have been found to raise substantive concerns,” notes Ian Giles, head of antitrust and competition EMEA at Norton Rose Fulbright. “Five transactions have been prohibited while another 17 have been cleared with remedies.

“All five prohibitions were in 2022,” he continues. “The government publishes limited information about the transactions it reviews, but the lack of prohibitions since then would seem to suggest the regime has had the desired effect of generally discouraging transactions that are likely to be particularly problematic.”

Despite its apparent success, early in 2024, members of parliament (MPs) warned the UK government that the NSI regime is not keeping pace with threats to UK economic security.

“The broad nature of the regime remains a concern, as well as the complexity of the sector definitions for mandatory notification,” opines Mr Giles. “While most notified transactions are cleared in less than 30 working days, working out whether a notification is needed in the first place can be challenging.

“Acquirers often have to rely on the seller or target to confirm whether the target’s activities are caught by any of the technical sector definitions,” he continues. “This includes transactions that are highly unlikely to raise real national security concerns, but nonetheless may require notification.”

Statement and guidance

In response to the concerns raised by MPs, on 21 May 2024 the UK government published updated versions of two key documents for investors seeking to assess how the NSI regime may apply to a proposed transaction.

In its analysis, Herbert Smith Freehills, draws out the areas in which new guidance and helpful clarifications have been added, as outlined below.

First is an updated statement on the exercise of the power to call-in transactions for in-depth review. The guidance on what the secretary of state is seeking to protect by using the call-in power has been expanded to provide further detail and examples of the potential national security risks that the secretary of state may consider.

New hypothetical examples have been included to illustrate how the assessment of whether to use the call-in power will be carried out in practice, with a total of seven examples in the updated guidance (compared to the five in the previous version), of which five are new scenarios.

The fundamental principle of not making judgments based solely on an acquirer’s country of origin has been retained, but expanded guidance is included in respect of the overall approach to the assessment of ‘acquirer risk’ and the characteristics of the acquirer which will be taken into account.

“The regime still focuses on an assessment of target risk, acquirer risk and control risk,” affirms Mr Giles. “However, the revised statement includes some useful additional detail and examples, such as in terms of when the government may want to take a closer look at a transaction involving a particularly sensitive target.”

Second is updated market guidance, which clarifies how the NSI regime can apply to scenarios involving outward direct investment where the acquisition leads to a party gaining control over a qualifying entity or asset that is outside the UK but the relevant UK-nexus criteria are met.

There is also more detailed guidance on how long the NSI review process will take in practice, including how statutory timelines are calculated and the circumstances in which timeframes may be expedited where parties are suffering from material financial distress.

“Changes to the more general guidance are pretty limited and often on discrete points,” adds Mr Giles. “This includes, for example, the clarification on the approach to expedited reviews where parties are in material financial distress, how outward direct investment can be caught, calculation of timelines, and expanded ‘top tips’ for completing the notification forms.”

Further steps

In addition to its modifications to the operation of the NSI regime, the UK government has indicated that it will take further steps in the coming months as it continues to fine-tune the operation of the regime.

“The UK government intends to consult on proposed changes to sector definitions and dangled the possibility of legislation introducing exemptions for certain limited transactions, such as intragroup reorganisations,” concludes Mr Giles. “The fact these changes have been proposed are a further sign that the NSI regime can be adapted in future.”

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Fraser Tennant