Last November, the Deputy Prime Minister issued a call for evidence on the National Security and Investment Act (NSIA), inviting stakeholders to comment on how the UK’s investment screening regime could be improved. The call for evidence has now closed, and the input received is expected to inform changes to the regime.

We set out below the key points we raised in our response, and the impact these could have on businesses, including those in the tech sector or those investing in technologies that may raise national security concerns. Many technology transactions or restructurings fall within the broad scope of the NSIA, as the 17 sectors subject to mandatory notification include areas such as “Advanced Materials”, “Advanced Robotics”, “Artificial Intelligence”, “Data Infrastructure”, and “Defence”, amongst others. Particular focus areas in tech right now include generative AI, biotechnologies, and semiconductors

Our recommendations focused on expanding the exemptions from mandatory notifications, clarifying / narrowing the scope of the mandatory sectors, and improving the transparency and efficiency of the assessment and filing process. These proposals aim to reduce time, cost, and uncertainty for all businesses subject to the UK investment regime.

01| Extending exemptions from mandatory notifications

We proposed expanding the mandatory notification exemptions to cover internal restructurings where there is no change in control of the ultimate parent entity. Notification requirements for these internal reorganisations can prevent businesses, including tech businesses, from taking even ordinary corporate business-as-usual actions and entail added time and expense. An exemption would provide welcome relief and would allow the Investment Security Unit (ISU) to focus on transactions that are more likely to give rise to national security concerns.

We also highlighted that enforcement of security over shares by lenders, nominees, and security trustees following a loan default should be exempted from mandatory notification requirements. Requiring a mandatory notification in the context of enforcement of security generates delay at a time when speed is critical. As well as protecting parties in a loan default scenario, an exemption would also reduce the burden on participants in loan markets more generally by removing the need to provide for NSIA filings in share security documents. 

02| Narrowing the scope of the mandatory sectors

The Government is also considering whether to make changes to the scope of the 17 mandatory sectors. We emphasised the need to clarify / narrow the scope of the Advanced Materials, Data Infrastructure, and Defence sectors, amongst others that could have an impact on technology transactions. These changes would reduce the need for businesses to make precautionary filings, speeding up deal timetables and reducing transaction costs and deal uncertainty. 

02|Reducing pain points in NSIA assessments and filings 

The possibility of an NSIA filing being required has the potential to cause uncertainty and slow down deal timetables, and it has often resulted in parties making precautionary notifications. To address this, we encouraged the Government to offer pre-notification engagement with the ISU. This would give parties greater guidance as to whether a filing might be needed. 

Likewise, we recommended increased transparency from the ISU as to transactions’ key areas of concern, and more substantive engagement such as ‘state of play’ meetings. This would allow transaction parties to better understand and address the ISU’s concerns about a given deal, leading to faster timetables and potentially improved outcomes.

We also noted that a ‘fast-track’ filing option for frequent fliers or investors who do not pose a threat to national security would be desirable to reduce unnecessary precautionary filings. While we understand that the ISU has publicly indicated that it does not favour this approach, this would significantly reduce the regulatory burden for investors who present the lowest national security risk.

04|Increased transparency for final orders

Although the vast majority of NSIA filings do not result in a final order, those final orders that are imposed do not include a clear decision rationale. In order to allow parties to effectively exercise their rights of defence, we recommended (to the extent it would not jeopardise national security) that the Government provide further justification of its reasoning in final orders.

What’s next?

The Government plans to examine potential reforms to the UK investment screening framework, taking into account responses to the call for evidence. The NSIA can have significant impacts on deal timetables and transaction costs, so businesses - including those in the tech sector - should keep an eye out for changes to the regime. 

The UK Government is not the only regulator considering changes to its investment screening regime – the European Commission consulted on its investment screening mechanism last year, and published its proposed reforms last week. Included in the Commission’s proposals is an Annex on sectors within the scope of the revised regime, which captures a whole range of critical technologies such as quantum technologies, advanced connectivity and navigation technologies, and robotics. Expect to see further reforms as regulators that have recently introduced investment screening regimes step back and assess whether they have had the desired effect.

To read more on the key observations and suggestions that we made in our submission to the UK Government’s call for evidence, check out our ForeignInvestmentLinks post.