The Government has published the outcome of its call for evidence on the National Security and Investment Act 2021. Between now and Autumn 2024, the Government will focus on five key areas, which we discuss in this briefing: publishing an updated "Section 3 Statement" on how the Government will use its call in power under the Act; publishing updated market guidance; consulting on changes to the Act's mandatory notification regime; considering certain technical exemptions to the mandatory notification requirements; and making further improvements to the operation of the NSI system.
The call for evidence was launched in November 2023 with the aims of honing the scope of the Act's mandatory notification regime (which applies to transactions in certain specified sectors of the economy), improving NSI notification and assessment processes and developing guidance and communications on how the NSI Act works. The Government notes in the published outcome that during period the Act has been in force, "the global security environment has deteriorated and the economic security threats we face have continued to evolve." Since November, of course, the global security landscape has continued to shift, and refining the regime so that it remains up to date with that changing landscape, while also reducing the regime's burden on businesses, will be a challenge.
The five key areas of focus the Government has identified for itself in the consultation outcome are set out below.
Publish an updated "Section 3 Statement" in May 2024
The "Section 3 Statement" sets out how the Secretary of State expects to exercise the power to call in a transaction for review under the NSI Act regime. While 80% of respondents agreed or strongly agreed they had a good understanding of the risks the Government is seeking to address, there were requests for more transparency and clarity in some areas, including how the Government assesses the national security risk of a transaction. The Section 3 Statement will therefore be updated to help stakeholders better understand the factors that the Secretary of State expects to take into account in exercising the call-in power.
In our response to the call for evidence, Mishcon and other respondents suggested that consideration be given to a "fast track" process for certain types of acquirer, for example those who have already had a prior transaction cleared through the NSI system. The Government has confirmed, however, that it is not considering such a process, on the basis that some targets are considered so sensitive that they will always warrant screening and so transactions need to be assessed on a case by case basis.
Publish updated market guidance in May 2024
The Government will publish further market guidance on topics raised by stakeholders, including the application of the NSI Act to academia and to Outward Direct Investment. Consideration is also being given to whether further guidance can be provided on the application of mandatory notification to Automatic Enforcement Provisions in secured lending agreements.
Consult on updating the mandatory areas by Summer 2024
The call for evidence sought feedback on the definitions of the 17 sensitive areas of the economy that are subject to the mandatory notification regime, and in particular possible additions to the list of 17 areas. A number of respondents also asked for clearer definitions for the Artificial Intelligence and Advanced Material areas and additional or clarified guidance for the Defence and Critical Suppliers to Government areas. In our response to the call for evidence, we requested clarity on certain aspects of the AI sector definition.
The Government is therefore launching a formal public consultation on updating the mandatory sector definitions by the summer. This will include proposals for a standalone Semiconductor area and a Critical Minerals area. The Government is also considering adding water to the list of areas subject to NSI mandatory notification.
Consider technical exemptions to the mandatory notification requirement for inclusion in legislation to be laid in Autumn 2024
Respondents to the call for evidence broadly supported building in some targeted exemptions from mandatory notification, for example certain types of transaction that tend to confer either minimal levels of control or no additional control. The Government also intends to bring forward legislation to exempt the appointment of liquidators, official receivers and special administrators. The NSI Act's Investment Security Unit will also undertake a national security assessment to understand whether exemptions for internal reorganisation transactions are feasible.
Improving the operation of the NSI system
Finally, the call for evidence had welcomed suggestions on changes to the Investment Security Unit's operational processes, the notification forms and the NSI Notification Service portal. The Government has already made improvements to the ISU's operational processes, including routinely offering calls at key stages of the process and providing senior contacts to engage post call-in. The ISU is assessing the technical feasibility of other suggestions received.
Next steps
Mishcon de Reya's NSI Act working group in our Corporate department, which responded to the Government's call for evidence, regularly advises on the application of the NSI Act regime. We look forward to engaging with the Government's consultation on updating the mandatory notification sector definitions. We have an online checker which offers a series of simple questions to understand whether notification under the NSI Act is likely to be required or at least considered for your transaction: National Security and Investment Act on-line checker.