Investing in the UK: Implications of the 2021 National Security and Investment Act

January 2022 saw the introduction of the UK’s 2021 National Security and Investment Act (NSI Act), a new and more extensive national security regime for investment that allows the British government to scrutinise, and potentially block, acquisitions and investments in sectors or locations which it deems could have an adverse influence on national security.

The regime has some marked change from the previous one and has new and substantial implications for Japanese companies investing in the UK. Still, foreign investors including Japanese firms, have been reassured that the UK remains “very much open” for business, with only a small number of transactions expected to be caught up in the new regime.

Nine months on from the introduction of the NSI Act, an expert panel has addressed BCCJ members to consider its implications and reflect on its operation so far. The panellists spoke in a webinar titled “Investing in the UK: Implications of the 2021 National Security and Investment Act.”

Hosted by Maud Gittens, first secretary economic security at the British Embassy Tokyo, the event provided detailed information on the NSI Act from the perspectives of government, legal advisory and politics. Panellists comprised Danny McCarthy, head of operational policy in the Investment Security Unit at the Department for Business, Energy and Industrial Strategy (BEIS); Veronica Roberts, partner at professional services firm Herbert Smith Freehills; and John Gray, partner at strategic advisory FGS Global.

Having worked on the reforms since 2018, McCarthy stressed that it was a product of “long-term consideration” rather than any kneejerk response to foreign investor worries.

“This legislation wasn’t brought forward in response to the threats of any one particular country, but [to make the UK] more in line with the reforms worldwide by our friends and allies,” he said. “The UK remains firmly open to international investment – it’s a very small minority of transactions that pose national security risks.”

The new legislation requires mandatory notification for transactions that meet two conditions:
• above certain thresholds, such as the acquisition of a shareholding stake or voting rights in a qualifying entity that exceeds 25%
• in one of the UK’s specified 17 “sensitive” areas of the economy, including advanced materials, artificial intelligence, energy and defence.
More details are outlined on the British government website.

“An investor must notify and have clearance before a transaction can take place, so that’s something to build into deal timetables,” McCarthy said.

The NSI Act also provides for voluntary notification for transactions in other sectors. However, “whether a transaction comes in via the mandatory route or voluntary route, there is a call-in power for the secretary of state—the business secretary—to decide whether to call in a transaction for a detailed national security review,” he said.

Fortunately for overseas investors though, there is a new clear and specific timetable for government decision-making, with most transactions getting a binding decision “within 30 days.”

Notably, the regime also applies to international transactions where an entity conducts business in the UK or supplies goods and services to consumers in the UK. However, McCarthy stressed that the British government was “not seeking to intervene in tangential deals from afar.”

Nine “final orders” have been made so far under the new regime, including deals involving aerospace technology, sensing technology and electricity, among others.

Herbert Smith Freehills’ Roberts gave a legal practitioner’s viewpoint on the new regime, describing it as having “brought the UK into line with a number of other foreign investment regimes around the world.” One key difference is that it applies to both UK-based and overseas investors.

“The good news is the process is really straightforward in terms of putting a notification together and submitting it. It’s much shorter than many merger filings you need to do for cross-border transactions and some other foreign investment filings,” Roberts said.

“In our experience, the ISU [Investment Security Unit] has quickly confirmed the notification is complete. You can expect to wait a few days, no longer than a week for the ISU to come back and say ‘The notification is complete; we’re now starting the 30 working-day clock.’”

In contrast, “for merger control clearances in cross-border transactions, some regimes can take months for an authority to start the clock after confirming it has all the information it needs.”

Roberts noted that the regime applies to intragroup reorganisations and has potential extraterritorial applications, hence it could be worthwhile doing a voluntary filing or seeking the ISU’s guidance in advance of a transaction occurring.

Examining the NSI Act’s political implications, FGS Global’s Gray was keen to reassure Japanese investors that “Japanese investment into the UK is seen as high quality and most desirable.”

Gray also stressed the importance of the business secretary being the final decision-maker and said the current view is that government should generally avoid intervening in the economy.

However, he warned foreign investors to consider the potential role of the British media in scrutinising foreign takeovers and noted that for sensitive transactions, in particular, the acquirer’s track record would likely receive extra attention from both UK politicians and the British media.

“You’ll see media campaigns urging the secretary of state to take a particular action on a certain transaction … so, for foreign investors, the role of the British media should be a part of the due diligence process,” Gray said.

The panellists also considered other issues such as information-sharing between jurisdictions, noting the UK’s close ties with allies such as the United States.

Roberts noted that the ISU is open to companies putting forward potential remedies to any national security issues, although the government would make the final decision.

She also noted the significance of the UK opening its new Office for Investment on the same day the NSI Act was introduced—another indication that the UK “remains very much open for business.”