How is the National Security and Investment Act impacting M&A?

The National Security and Investment Act (NSIA) was introduced in January 2022, giving the Government more power to examine and potentially either block or apply conditions to certain transactions on national security grounds. It requires certain transactions in 17 sectors deemed most likely to raise national security concerns to make a mandatory notification to the Government’s Investment Security Unit (ISU). Other transactions do not have to make a notification (although the NSIA also introduced a voluntary notification process), but the Government may review them under ‘call-in powers’. Full details on how to check if you need to inform the ISU about an acquisition (and guidance on doing so) can be found here.

What has this meant for M&A transactions in the UK?

The NSIA is a very broad and wide reaching piece of legislation which has had a considerable impact on M&A in the UK. This is due to a range of elements including the fact that it impacts on qualifying acquisitions where the amount of ‘control’ acquired exceeds the relatively low level of 25%.

There has also been some confusion around the scope of the mandatory sectors outlined by the Government, particularly in terms of AI and Defence. As the penalties for failing to comply with the NSIA can be severe and result in the deal becoming void (as well as fines or even imprisonment), those involved in transactions have understandably been taking a cautious approach.

As such, this has led to some acquisitions making notifications, which perhaps did not need to, adding to the time it takes for transactions to complete.

What next for the NSIA?

On 13 November 2023, the Government put out a ‘call for evidence’ so that it can consider making changes to the NSIA regime. The Government is looking for views from cross economy stakeholders both in the UK and overseas and will use the evidence it gathers to:

• Hone the scope of the system’s mandatory notification requirements
• Improve NSIA notification and assessment processes
• Develop the Government’s public guidance and communications on how the NSIA works and where the Government tends to see risk arising.

The call for evidence period began on 13 November 2023 and will run until 15 January 2024. In launching the call for evidence, Oliver Dowden MP commented: “In order to be truly effective, the NSI Act must also be flexible, adapting to the changing nature of our economy and evolving to consider all of those acquisitions that might be considered sensitive. At the same time, it must remain as frictionless as possible for those vast majority of deals that don’t pose any concern.

“I have therefore been monitoring the performance of the Act, including through the latest Annual Report, and listening to feedback from a wide range of perspectives. I know we can continue to improve.”

In particular, he stated he is interested in:

• The impact of the system on businesses and investors, and their experience interacting with the process
• Whether the scope and requirements of the system are proportionate and effective
• How well stakeholders understand the NSIA system, how it is likely to be used, and what national security risks may be posed by investments.

You can respond to this call for evidence here.

It remains to be seen as to what evidence the Government gathers and how this is then ultimately used to refine the NSIA; and it will undoubtedly take some time for any changes to come into effect. However, this is a welcome development and provides an important opportunity to deliver feedback on how the regime has been operating so far and how it could be improved.

In the meantime, businesses, investors and their advisers must remain alive to the NSIA and the impact it may have on any transactions and build in time for the extra due diligence needed to ensure that any qualifying acquisitions comply with the requirements of the NSIA. As such, it is important to seek legal advice at the earliest opportunity.