The UK’s national security and investment regime – insights and experience so far

The UK’s Government’s Department for Business, Energy & Industrial Strategy (BEIS) has published its first report on the new national security and investment regime which sets out a range of data from the regime’s first three months (4 January – 31 March 2022) that provides some useful indicators of BEIS’s experience so far. More information is expected to be published shortly in the form of “Market Guidance Notes”.

BEIS has also published a Memorandum of Understanding (MoU) with the UK’s Competition and Markets Authority (CMA) which sets out broad principles and a framework for ongoing collaboration between BEIS and the CMA – a point of interest for merging parties navigating parallel national security and competition reviews.

This blog sets out some key takeaways for parties to consider from the Annual Report, the MoU and our experience navigating the regime so far.

What are the key takeaways?

The 222 notifications submitted in the first 3 months of the year highlight the wide net cast by the UK’s new regime. 

Notifications received were slightly below original expectations, which BEIS suggests may be due to a fall in M&A activity over the period. However, compared to the number of deals reviewed under the previous public interest regime and the UK’s merger control regime, 60-80 notifications a month is a high number. The vast majority of notifications (196) were mandatory, with 25 voluntary notifications and 1 application for retrospective validation (for a notifiable transaction which completed without clearance).

As we have experienced in these first few months, parties should not underestimate the UK regime’s ability to catch a broad range of different transactions. Transactions require a detailed assessment of the relevant transaction structure, the application of the mandatory sectors as well as the overall risk assessment for a possible call-in. Whilst the most common mandatory sectors both in terms of mandatory notifications and call-ins were (perhaps unsurprisingly) the defence and military & dual-use sectors, the statistics show mandatory notifications submitted across all 17 sensitive sectors. Deals involving businesses active in artificial intelligence, data infrastructure and advanced materials were also responsible for significant numbers of filings, underlining one of the stated intentions behind the regime: to tackle modern threats involving cutting-edge technology.

Voluntary notifications have been made across a broad range of sectors both within the mandatory sectors and in other sectors such as “professional, scientific and technical activities”, “transport and storage” and “information and communications”.

Our experience and the statistics published by BEIS show how the regime is pulling in a significant number of filings that do not raise national security concerns, including internal re-organisations and cases where a notification has been submitted due to ambiguity in interpretation of the mandatory sectors. Out of the 222 notifications submitted, only 17 have been called in for in-depth review. This is in line with Government expectations and its underlying policy of having an expansive regime where a large number of deals are caught but the vast majority are cleared quickly. The breadth of the regime was a conscious decision and, for many investors, is an inevitable side effect of the new screening process.

The regime has largely been living up to the Government’s promises of efficiency and speed for the vast majority of notifications but its broad scope invariably creates an additional hurdle for a large number of transactions. 

Notifications are being accepted quickly: BEIS’s average is 3 working days, which is slightly longer than our own experience. Where no issues arise, notifications are being cleared comfortably within the initial 30 working day period. Decisions to call-in a transaction for a full assessment are also being taken well within the 30 working day initial time period: the average is 24 working days with the shortest time being 11 working days.

The statistics on acceptance and clearance timelines in no-issues cases are reassuring for investors and align with our own experience. In no-issues cases, notifications can often be prepared fairly quickly (provided all parties produce the information required by BEIS) and can be submitted and then cleared with minimal follow up requests.  

However, for a large number of transactions – including those involving very small businesses and where no national security risks arise - the regime has added another layer of complexity. Firstly, parties must carry out a thorough filing and risk assessment in order to avoid missing a filing, incurring civil and criminal penalties and the transaction being legally void. Secondly, filing obligations and potential outcomes need to be factored in to deal documents and timing.

• If a mandatory notification obligation is triggered, parties will have a common interest in securing clearance before closing and will therefore tend to agree appropriate conditions and long-stop dates, although cooperation provisions should be considered carefully given the sensitive (and less predictable) nature of information which might need to be provided. 
• If a deal falls outside the mandatory regime but a buyer considers it prudent to make a voluntary filing given a potential risk of call-in, conditions, cooperation and risk allocation can be a point for negotiation.

It is still too early to see how the regime handles the more complex, substantive cases that are currently undergoing in-depth review. 

Over the period covered by the Annual Report, only 3 call-in notices had received a final notification (clearances) and no final orders (remedies) had been imposed. Since 31 March, BEIS has announced two “retrospective call-ins” (Nexperia / Newport Wafer Fab and Altice / BT) but those reviews – as well as other deals called-in during and since that period - are on-going.

It therefore remains to be seen how some of the cases currently in in-depth assessment will be resolved. Experience is developing and can vary on a case-by-case basis but it is worth noting that unlike the CMA, where parties have an allocated case team and a dialogue on issues arising, levels of transparency during a national security review have tended to be lower and in some cases parties have been frustrated by the absence of communication on timing or status of the investigation or indeed the reason why a particular transaction has been called-in. 

More details of those cases called-in during the initial 3 month period covered by the Annual Report and which are resolved with some form of remedy being imposed are expected over the coming weeks.

Parties undergoing parallel review under the national security regime and the competition regime have been given a clearer understanding of the framework and principles guiding information sharing and cooperation between the two authorities.

The MoU recently published by BEIS contains useful guidance for parties to understand the extent of information sharing and possible impact of parallel competition and national security reviews. Notably, “both [regulators] have market monitoring capabilities, and it is not envisaged that either will rely on the other to identify transactions of interest to either statutory regime”. That being said, the two authorities will ensure that each is apprised of the status of the other’s review and will look to engage with each other and share information under the relevant statutory information gateways in the NSI Act where appropriate (subject to national security concerns). BEIS also has a statutory power to request information from the CMA under the NSI Act.

Where the interplay between the two authorities will be most relevant for transaction management is where the ISU or the CMA are looking to impose a final order / conditions on a transaction. The UK Government has stated that BEIS “will, where appropriate, consider aligning the review processes of BEIS and the CMA should it be judged helpful in certain cases, by requesting a voluntary extension period with the merger parties to ensure that remedies are effective and that BEIS and CMA avoid any clash in remedies […] For national security reasons, it may not always be appropriate to align review processes.” Parties should plan early to anticipate the extent to which any national security / competition conditions are likely to be in conflict and whether a shift in the timeline for alignment purposes (or on the other hand the ISU deciding alignment on timelines is not appropriate) could impact your transaction.

For our previous coverage on the NSI Act, please see the fourth edition of our Foreign Investment Monitor and our previous blogs including key takeaways for the life sciences industry and key takeaways for infrastructure investors.

Please do not hesitate to get in contact to discuss the UK national security and investment regime in more detail and how it might impact your transactions.