The National Security and Investments Act 2021 (“NSIA”) was introduced to give the UK government the right to block transactions which may result in the transfer of rights to control assets or technology considered important for the UK’ s national security and infrastructure into foreign hands, thereby potentially jeopardising UK security.
Background
The NSIA covers 17 sectors including military and defence, dual use, AI and nuclear. At a time now, where wars are being waged or threatened around the world, there has not been a time since the end of the cold war when security for the UK and Europe has felt so much at threat. The need for such legislation is clearly understandable and is accentuated by the fact that interest in completing transactions involving businesses operating in defence and related sectors is at high levels.
In summary, the NSIA requires that buyers proposing to buy or take control over entities in the 17 sectors and whose activities are within the scope of the NSIA must notify prescribed information regarding the entity, its activities and the transaction to the Investment Security Unit (“ISU”) for consideration. While the legislation does allow for notifications to be made on a voluntary basis, if a transaction is within scope, making a notification is mandatory. Completing such a transaction without a notification and clearance from the ISU is a criminal offence and means that the transaction is void.
Timing of notifications
The difficulty for the parties and their advisors in relation to affected transactions is in deciding the appropriate time to submit the notification. Until there is some certainty that a transaction is likely to complete, sellers may be reluctant to make a notification, but waiting inevitably extends the timescale for completing the transaction and prolongs the uncertainty as to whether it might be blocked.
Following receipt of a notification, the ISU must first confirm if the notification is in a form acceptable for consideration. Once they have confirmed this, they then have an initial period of 30 working days (which can be extended) to consider the notification and to decide whether to “call in” the transaction and obtain further information on which to make a decision, or to decide that no further action is required. Transactions which are “called in” can ultimately be approved, approved subject to conditions, or blocked.
How many transactions are blocked?
Regrettably, the statistics indicate that the NSIA is not very effective in targeting and blocking the transactions it was originally intended to catch. For the financial year 2024/ 2025, of around a total 1,100 notified transactions of all types c95% of these were accepted without further action and 99.9% were ultimately approved with only one transaction being blocked.
While it is reassuring that the number of transactions considered a sufficient threat to national security to require blocking was very low, this does indicate that a considerable amount of time and cost has been spent and a lot of uncertainty created in making notifications to little practical effect.
Difficulties with the system
While security is paramount, it needs to be acknowledged that the current system needs improvement and does have adverse consequences for businesses planning their growth strategies, shareholders who are securing an exit event, the UK economy and the reputation of the UK as an efficient and appropriately regulated market for doing business.
The parties may face uncertainty as to whether a transaction needs to be notified and the risk, if they don’t make a notification where a notification is required, of the transaction being void.
The difficulty in essence is that too many transactions are or may be within scope of the legislation. In our view, this is likely because of the drafting of the government guidance on the activities within some of the sectors which give rise to a need to notify. It is understandable that the intention may be to ensure that the description is sufficiently broad to encompass whatever is necessary or desirable to be caught, but in practice the breadth and importance of ensuring that any required notifications are submitted, is clearly having the effect that many more notifications are being made than is really necessary or useful.
This is a problem for parties to proposed transactions and their advisors and also for the ISU who are likely receiving more applications than was intended or anticipated. This will inevitably stretch their resources, likely lengthening the timescales for considering initial acceptance or rejection of notifications and potentially affecting the quality of the scrutiny or service that accepted notifications receive.
Clearly it is imperative that an effective system is in place to protect UK national security and that for sectors such as military and defence, and for the other sectors covered under the NSIA, appropriate safeguards for each should be in place. To take one sector as an example however, deciding what may require notification in relation to businesses having some involvement in the “Advanced Materials” sector can in some cases be very difficult both for advisors and for those involved in the business in question.
How might the system be improved?
We suggest that more analysis may be required of the activities in each sector which result in notifications and of the outcomes of those notifications with a view to reconsidering the guidance in relation to any activities within a sector that generate significantly more notifications than really is merited for the risk they have been found to present.
It has also been suggested that there could be a facility for clearance for purchasers who regularly make acquisitions so that (provided that there is no change of control or ownership) the purchaser needs to be approved only once and not on every occasion the purchaser gives notification of a proposed acquisition.
It is quite likely that there may be other or better modifications that could be made to the system, but without prejudicing national security, it is certainly to be hoped that some changes can be made to improve the situation and to protect not only UK security but also the efficiency of our economy and markets.
How we can help
If you're unsure how this act affects you or if you'd like advice on corporate law, please contact Julian Milan at julian.milan@mfgsolicitors.com or call 0121 2367388.
Sign up to receive legal insights & commentary, event updates, and the latest from mfg.