On 10 September 2024, the Government released its latest Annual Report into the operation of the National Security and Investment Act 2021 (the NSI Act) (the Report). [1]

This is the third such report that has been published since the NSI Act came into full effect on 4 January 2022 and covers the period 1 April 2023 to 31 March 2024 (the Reporting Period).

This article sets out five key trends we consider most notable for businesses buying or selling entities or assets with a UK nexus.

1. Notifications have increased, whilst call-ins have decreased

In the Reporting Period, the Government received 906 notifications, an increase from 865 notifications in the previous twelve months. Of the notifications received, 753 were mandatory notifications, 120 were voluntary notifications, and 33 were retrospective validation applications. The Government subsequently reviewed 847 notifications. Of these, 4.4% (37) were called in, and 95.6% (810) were subject to no further action. For comparison, during the previous twelve months, 7.2% of notified acquisitions were called in and 92.8% were subject to no further action.

It is possible that the fall in the number of call-ins during the Reporting Period reflected a refinement of the Government’s views as to the types of transaction it considered may pose a risk to national security. It will be interesting to see in the next Annual Report if that trend has continued since the end of the Reporting Period (and the arrival of the new Labour government). Certainly, our own experience is that the number of call-ins has increased in recent months.

2. Call-ins remain highest in defence, but higher education growing in interest

Of the call-ins notices issued, 34% related to the defence sector, with the military and dual-use sector following at 29%. For comparison, the largest proportion of call-in notices during the previous reporting period (37%) was associated with the military and dual-use sector. While these more obviously sensitive sectors have remained prominent, acquisitions related to the academic research and development in higher education, communications and advanced materials sectors accounted for 24% of call-in notices each. Those familiar with the NSI Act will know that academic research and development in higher education is not one of the 17 sectors which triggers a mandatory notification. The volume of call-ins suggests businesses and advisors ought to assess the potential significance of acquisitions in this sector very carefully.

3. Final orders remain most prominent in defence, military and dual-use and communications

Following a call-in, if the Secretary of State is satisfied, on the balance of probabilities, that a risk to national security has arisen or would arise from the transaction, it can issue a final order attaching conditions to the acquisition, preventing the acquisition from taking place or ordering the acquirer to unwind it.

In the Reporting Period, 15 areas of the economy were represented in the five final orders issued. Four final orders were associated with the defence sector, two were associated with the military and dual-use sector and two were associated with communications. For comparison, the largest number of final orders in the previous reporting period was associated with the military and dual-use sector. It is worth noting that one of the final orders in the Reporting Period was issued in respect of a non-notified acquisition, showcasing the Investment Security Unit’s information-gathering capabilities and the importance of thorough due diligence and notification as necessary.

4. Chinese investment was again subject to the most call-ins, though the UK a close second

41% of call-ins related to acquisitions involving investors connected to China (compared with 42% the year before), with the UK a close second at 39%. Of the five final orders issued, two related to acquisitions involving investors connected to each of the UK and USA and one to each of Canada, France and the UAE. The skew in the figures perhaps stems from the fact that eight of the called-in acquisitions concerning Chinese investment were withdrawn before the Secretary of State issued his final decision. However, a key lesson must be that, as is made clear in the Section 3 Statement on how the Secretary of State expects to exercise its call in power[2], the risk associated with the acquirer does not relate solely to its country of origin and is weighed alongside the risk associated with the target and the level of control being acquired.

5. Average timings during the initial period have increased

Taking each stage of the review process in turn, on average it took six working days for a mandatory notification to be accepted as complete (compared to four the year before) and eight working days from voluntary notification to acceptance (compared to four the year before). Once accepted, it took on average 29 working days to call in both mandatory and voluntary notifications (the maximum permitted being 30 working days). In the previous year, it took on average 28 working days to call in a mandatory notification and 27 to call in a voluntary notification.

Once an acquisition was called in, it took on average 26 working days (excluding days during which information notices or attendance notices were in force) from call-in to the issue of a final notification (i.e., a decision that no further action would be taken) and 56 working days from call-in to the issue of a final order. In the prior year, these figures were 25 and 81 respectively, although the Report suggests the small number of final orders issued in the Reporting Period means that no conclusions should be drawn about any trends in the time taken to issue a final order.

What does this mean for your business?

Businesses should remain vigilant as to the application of the NSI Act to their transactions. The regime is wide reaching, and a notification should not be discounted without thorough assessment. As a reminder, failure to notify the Secretary of State of an acquisition which triggers a mandatory notification renders the transaction null and void, with significant financial penalties and criminal liability a potential outcome. While no penalties were issued during the Reporting Period, 34 offences of completing a notifiable acquisition without approval were noted – with the parties being contacted to request that steps were taken to prevent future notifications being missed.

The NSI Act: how can we support you?

The Walker Morris Competition team has significant experience advising on the application of the NSI Act and guiding clients through the filing and clearance process.

Please get in touch for further information or advice.

[1] Final Draft – NSI Annual Report 2024.docx (publishing.service.gov.uk)

[2] National Security and Investment Act 2021: Statement for the purposes of section 3 – GOV.UK (www.gov.uk)