In line with the commitments made in the outcome of the National Security and Investment Act Call for Evidence published in April, the Cabinet Office has this week published both an updated "Section 3 Statement", which sets out how the Government expects to exercise its call-in power, and various updates to the Government's Market Guidance notes on the regime. The changes are intended to make the NSI Act review process more transparent and to be "more considerate of businesses' needs".
The new Section 3 Statement and new Market Guidance are two of the five key areas of focus identified in the Call for Evidence outcome. In this briefing, we highlight the key changes in those two areas; for an overview of all five areas of focus, see our April briefing: Government confirms overhaul of National Security and Investment Act regime for businesses amid evolving security threats.
New Section 3 Statement – key changes
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. The Call for Evidence prompted requests from respondents for more transparency and clarity in some areas. The updated version of the statement therefore includes the following changes:
- Incorporation of new entities – the guidance now confirms expressly that the Secretary of State is able to call in not just the acquisition of an entity but also the incorporation of a new entity, if the incorporation includes a change of control over an existing asset or entity – for example, the transfer of intellectual property in certain joint ventures or greenfield investment, or control over certain assets in new build energy infrastructure.
- Outward Direct Investment (ODI) – the guidance now highlights that there are certain situations where ODI may constitute an acquisition under the NSI Act, including, for example, the transfer of technology, intellectual property and expertise as part of the investment or when forming joint ventures overseas.
- Acquirer risk – there is now more information on how the Government may see risk from UK acquirers or acquirers that have previously been cleared through the NSI Act system. Relevant characteristics could include, for example, the past behaviour of the acquirer, the intent of the acquisition and whether the acquirer has cumulative acquisitions across a sector or linked sectors.
Updated Market Guidance – key changes
The May 2024 edition of the Government's Market Guidance covers a number of new issues and expands on others, including the following:
- Length of assessments – once it receives a notification, the Government aims to decide whether to reject or accept the notification within 5 working days. After that, the review period (which can last up to 30 working days) begins, during whether the Government decides whether to call in or clear the acquisition. If a transaction is called in, there is an "initial" assessment period of 30 working days, which can be extended by an additional 45 working days. The guidance now contains more detail as to what happens during each period.
- Acquisition of rights allowing the passing or blocking of resolutions – one of the "trigger events" bringing a transaction within scope is acquiring voting rights that allow you to pass or block resolutions "governing the affairs of the entity" – the guidance now explains that this covers a wide range of actions and "no particular rights are excluded from constituting such a trigger event."
- Financial distress situations – the guidance has been amended to clarify that timelines for screening an acquisition can be expedited only in exceptional circumstances, and usually only at the stage when the Secretary of State is deciding whether or not to call in an acquisition.
- Higher education and research-intensive sectors – the guidance on these areas has been substantially updated. It includes various hypothetical examples showing qualifying acquisitions involving higher education and research institutions in which the Government may consider issuing a call-in notice if it reasonably suspects that the acquisition has given rise, or may give rise, to a national security risk.
Next steps
One of the other areas of focus identified in the Call for Evidence was updating 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 formal public consultation on updating those definitions is expected by the Summer.
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 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.