Heralded as the “biggest shake-up” of the UK’s national security regime for 20 years, the National Security and Investment Act 2021 (NSI Act) came fully into force on January 4, 2022. Eighty-five days in, on March 30, 2022, Cooley hosted a panel discussion on the implementation of the new regime, with speakers including Lord Callanan, the Business Minister responsible for the implementation of the NSI Act; Beth Martin, Deputy Director of the Investment Security Unit (ISU); Craig Melson, an Associate Director at techUK; and Dillon Martinson, Special Counsel in Cooley’s Washington, DC, office where he advises clients on national security and foreign direct investment (FDI) matters. Cooley’s Christine Graham and Juan Nascimbene moderated the discussion.
We’ve summarized below 10 key insights and takeaways from the event. (Please register if you would like to receive a recording of the panel discussion.)
1. The NSI Act aims to strike a balance between national security and continued investment into the UK
Lord Callanan explained that the NSI Act, at its core, aims to strike a delicate balance between ensuring that the UK retains its position as an attractive jurisdiction for foreign investment and protecting the UK’s national security. It is a significant “upgrade” from the Enterprise Act 2002 – the primary legislation for the review of mergers in the UK – which previously gave the Secretary of State powers to intervene in transactions on national security grounds. The upgrade is intended to help cope with the new demands of a modern globalized economy, geopolitical shifts, intensifying international competition and technological change.
The NSI Act provides the UK government with targeted and specific powers to intervene in transactions solely on national security grounds – not on political or economic grounds – and, as noted by Beth Martin, there are strict controls in place to ensure this. Lord Callanan added:
“We want [investment] to be with predictability, with transparency, whilst at the same time protecting our national security.”
2. The lack of a definition of ‘national security’ follows the practice of other governments – and aims to ensure that its interpretation can evolve over time
National security risks evolve over time, making it difficult to place parameters on what the concept of “national security” means at any given point. Therefore, in line with other foreign investment screening regimes, there is no definition of “national security” in the NSI Act. Instead, the Section 3 Statement sets out the three main risks that the government will consider when assessing national security risks: target risk, control risk and acquirer risk. Lord Callanan explained:
“Many [experts] said it would be a fool’s errand attempting a comprehensive definition [of national security] because, of course, as soon as you say what it is, you also say what it is not, and you provide potential loopholes.”
3. The new regime is nationality agnostic
Lord Callanan clarified that transactions are considered on a case-by-case basis under the regime. Given that individuals may be citizens of one country but place their allegiance to another country, the government considers that the right approach is to be nationality agnostic and non-discriminatory. Consequently, the regime will apply to UK investors and non-UK investors.
4. The UK government’s expectations regarding the number of acquisitions posing a threat to national security have not changed
According to government estimates, between 1,000 and 1,830 deals per year could be affected by the regime. Lord Callanan noted that there has been a steady flow of notifications under the regime, which has been largely in line with the government’s expectations. Only a small number of these notifications pose a threat to national security.
5. The UK government has not ruled out creating a ‘white list’ of investors
Lord Callanan stated that the government will continue to monitor how the NSI Act is working in practice to determine whether a “white list” of non-problematic investors will be appropriate.
6. The UK government is liaising closely with its allies on investment security issues
Lord Callanan confirmed that the government is closely cooperating with the US and other international partners to share information on investment trends and risks, analytical approaches, and threat assessments. Lord Callanan noted:
“We will continue to engage with a range of international partners on any specific cases if there are cross-border transactions or companies that operate in both administrations, and the [NSI] Act does include specific provisions to allow us to do this.”
7. The current notification review process is working efficiently, and no gaps have been identified
Beth Martin explained that once the ISU receives and accepts a notification, it has a 30-day “triage” period to decide whether to “call-in” the transaction. So far, this period has provided sufficient time to assess national security risk. Beth Martin explained:
“That 30-day timeline is a deadline, not a target. So obviously, where we can process a case more quickly, we will always endeavor to do that.”
8. The NSI Act is separate from the sanctions regime and other actions being taken against Russia, and Russian individuals and entities
Lord Callanan emphasized that the NSI Act is an important tool to protect national security. Outside of the context of national security, there are other tools available to address the potential risks raised by Russian individuals and/or Russian entities, including the sanctions regime and other new legislation. For example, the government has recently passed the Economic Crime (Transparency and Enforcement) Act 2022, which aims to prevent anonymity of property buyers in the UK, and expands provisions relating to unexplained wealth orders and sanctions. Lord Callanan noted:
“Our action on Russia is substantial, but it is not all linked to this particular legislation.”
9. The ISU is happy to provide informal guidance on the new regime to businesses
Lord Callanan encouraged businesses that have any questions to contact the ISU, which can provide expert, interactive and informal guidance on the regime.
10. The ISU will publish its annual report and market guidance notes in due course
In the coming weeks and months, the ISU will publish its first annual report and market guidance notes. The annual report will set out the numbers of notifications received and which have proceeded to a call-in. The market guidance notes are expected to reflect the experience of the regime so far and will aim to aid compliance with the NSI Act. The notes will draw on analysis of notifications received, as well as market monitoring intelligence.
If you have any questions about how the NSI Act may impact your investments/transactions, please do not hesitate to reach out to us.