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Freshfields Transactions

| 6 minutes read

Updating the UK national security and investment regime

Reforms to “fine tune” the system – with more opportunities ahead for stakeholders to help make the regime as pro-business as possible

A little over two years since it came into force, the UK Government has announced its next steps for the UK’s national security and investment (NSI) regime.  The reforms taking place over the next few months respond to feedback from the Government’s recent "call for evidence" and major shifts in the geopolitical environment over the last two years. 

The Government has committed to a number of reforms that will help improve certainty for business on whether a transaction falls within scope and how national security assessments are carried out.  However, it has so far resisted some more significant changes in areas where stakeholders had raised concerns. 

In fact, the reforms are described as “fine-tuning”, as the Government is confident that the regime is already flexible enough to allow it to review emerging risks such as cyber security, supply chain resilience, critical imports and data security. The UK regime is more expansive than other regimes in several respects, including its application to UK investors and a broad range of transaction types, such as asset deals, IP licences, strategic relationships and internal restructurings.  However, flexibility comes with the potential cost of less certainty – so continued engagement with Government on these issues is vital to ensure the right balance is struck. 

These reforms are part of a broader initiative within Government to hone and boost the UK’s economic defences in a time of geopolitical competition – and tension – at levels not seen since the Cold War, while also maintaining the open markets and free trade needed to stimulate economic growth and investment – and provide the financial strength needed for investment in the UK’s defences. 

For instance, the Government is also undertaking a review of potential risks from Outward Direct Investment (ODI) where investment may fuel “technological advances that enhance the military and intelligence capabilities of countries of concern”.  This is likely to result in enhancements to the UK’s export controls regime following consultation with business. 

The next few months provide valuable opportunities for businesses to feed-in and help make sure the Government achieves its declared aims of:

  • a “small garden, high fence” approach – safeguarding the UK against the small number of investments that could be harmful, while leaving the vast majority of deals unaffected and the UK a business and investor-friendly environment; and
  • tightening the UK’s “controls over the routes by which the UK plugs into the global economy…… but in a way that allows investment and trade to flow as freely as possible”.

NSI reforms ahead

Four key areas of NSI reform (or continued debate) are of particular interest to businesses and investors: 

1. The need for more transparency and predictability on how the Government carries out national security assessments:

  • The Government’s Investment and Security Unit (ISU) has faced criticism for operating as a “black box” due to opacity during reviews.  Feedback submitted during the call for evidence illustrates that stakeholders are still demanding more transparency and predictability in decision-making. 
  • In response, the Government has committed to:
    • publishing an updated “Section 3 statement” (May 2024) providing more detail on the most sensitive areas of the economy and how the Government assesses national security risks.  The update is welcome given the many geopolitical and technological developments that have taken place since the current statement was published in November 2021.  But given the inherent constraints on guidance the Government can provide on how it carries out national security reviews, it is unlikely to provide the level of transparency that businesses desire; and
    • considering further improvements to the ISU’s operational processes including considering additional touchpoints with the assessment team, changes to notification forms and technical improvements to the notification portal.
    • However, the Government continues to resist calls – including from the UK Parliament’s Business and Trade Committee – to define “national security” in a way which is well-communicated and understood by business.  The Government’s consistent view since the legislation was debated in parliament is that a clear definition would be excessively restrictive and, due to the multifaceted and constantly evolving nature of national security risks, could result in risks being missed.  

2.  Clarifying and expanding the mandatory notification sectors to reflect evolving national security threats:

  • Notification obligations are triggered if a target entity carries out specified activities within one of seventeen sensitive sectors in the UK. These specified activities are set out in detailed regulations known as the notifiable acquisition regulations (NARs).  However, applying the NARs in practice can be challenging with some definitions open to interpretation and exposure to high penalties for missed filings. 
  • The Government will launch a formal public consultation on updating the NARs and associated guidance by the summer covering:
    • clearer definitions for Advanced Materials and Artificial Intelligence;
    • standalone definitions for semiconductors and critical minerals, aligning with the UK’s latest strategies for those sectors;
    • the potential addition of water as a new sector.  This would be a departure from the Government’s previous position that the existing regulatory regime provides adequate controls, despite the fact that other regulated utilities and critical infrastructure (eg electricity and gas transmission and distribution) fall within scope, but is perhaps a response to the challenges currently facing the sector; and
    • additional/clarified guidance for Defence and Critical Suppliers to Government areas.
  • Stakeholders will be invited to provide feedback on whether the regulations are sufficiently narrow (to capture only those activities which could raise concerns) and clearly defined (to enable investors to understand whether a transaction is notifiable).  The UK Government is under a statutory obligation to review the NARs and publish a report by 4 January 2025, so we should expect to see its conclusions, possibly in the form of updated draft regulations, by the end of the year. 

3.  Limits to more efficient reviews of lower risk deals:

  • There will be no “white-listing” for “safe” investors in the foreseeable future with the Government continuing to reject calls for fast-tracking deals that involve acquirers who are well known or who have had past transactions cleared.
  • The Government confirmed its long-standing position that risks arising from the target alone can merit review and remedy and that the regime is nationality agnostic.  This position is supported by data published in the Government’s first full year annual report (when almost a third of call-ins were associated with UK acquirers and a fifth with US acquirers) and the twenty final orders made so far (at least nine of which concern investors from the UK, US, Canada or Europe).  

4.  Limited exemptions for certain types of insolvency transactions while the future position on internal reorganisations remains unclear:

  • In a welcome move, the Government has responded to stakeholder concerns regarding the impact of the mandatory NSI regimes on entities in financial distress by committing to introduce an exemption for more types of insolvencies covering the appointment of liquidators, official receivers and special administrators, aligning with the existing carveout for administrators. The Government will publish draft secondary legislation on this point.
  • However, exemption for other types of transaction – notably internal reorganisations – is still under consideration.  This will disappoint many companies and investors who have argued that internal reorganisations should fall out of scope given the very limited risk of national security concerns arising where there is no external party or new investors involved and often no ultimate change in control. 
  • Recognising feedback that pre-notifying internal reorganisations can impact investment or restructuring timelines, the Government has committed to undertake a thorough national security risk assessment to understand whether exemptions are feasible and, if so, how they could be designed.  This will be another important opportunity for businesses to submit their views. 

Much more to come – watch out for:

  • Further publications and consultations over the next few months will provide more clarity over important aspects of the regime, as well as opportunities for businesses to engage with the UK Government on the scope of the regime and how it works in practice. 
  • Please get in touch for more details on the upcoming reforms and/or how best to provide feedback to Government consultations.  To read more on developments in foreign investment reviews globally, please see our report: 10 Key Themes in Global Antitrust 2024

Next steps – indicative timeline



antitrust and competition, foreign investment, mergers and acquisitions, regulatory, uk