UK Government Issues Second Report on Investment Screening Regime

For the period between 1 April 2022 and 31 March 2023, the UK government received 866 notifications under its investment screening regime, 93% of which were cleared within 30 working days. The government issued final orders to block, unwind, or impose conditions on 15 transactions, mainly in the defence sector. Of the transactions called in for in-depth reviews, 42% involved an investor of Chinese origin. Four of the five prohibition decisions involved investors of Chinese origin, while the fifth involved a Russia-linked origin of investment.

The United Kingdom’s investment screening regime under the National Security and Investment Act (NSI Act) came into effect on 4 January 2022. The NSI Act allows the UK secretary of state to investigate on national security grounds certain acquisitions that meet the criteria set out in the NSI Act.

Acquisitions of entities active in 17 particularly sensitive sectors of the UK economy are subject to mandatory preclosing notifications. [1] The UK secretary of state has the power to “call in” acquisitions for a further in-depth assessment. The NSI Act also provides for the voluntary notification of acquisitions in sectors outside the 17 sectors subject to mandatory notification. Acquisitions of stakes in qualifying entities of as low as 25% (or lower, if they give rise to material influence) in qualifying entities may be subject to review under the NSI Act.

For more information on the NSI Act and the first report, please refer to our previous publications, UK Government Publishes Its First Report On The UK’s Foreign Direct Investments Regime and UK National Security and Investment Act Comes Into Force on 4 January 2022.

CASE VOLUMES

Published 11 July 2023, the second report (Report) covers the period between 1 April 2022 and 31 March 2023 (Reporting Period). During the Reporting Period, the Investment Security Unit (ISU), which is responsible for reviewing notifications under the NSI Act, received fewer notifications than anticipated. [2]

Mandatory notifications accounted for almost four times more than voluntary notifications.

Table 1 – Volumes of Notifications Received Under the NSI Act

SECTORS OF FOCUS

The sectors associated with call-in notices are set out below. Most call-in notices were with respect to the Military and Dual Use and the Defence sectors.

Table 2. Call-in Notices Issued, by Area of the Economy

Most transactions that were subject to a final order (i.e., were cleared subject to conditions, prohibited, or unwound) were in the Military and Dual Use sector.

Table 3. Final Orders by Area of the Economy

COUNTRIES OF FOCUS

The UK government has been at pains to emphasise that the NSI Act is not specifically directed at foreign direct investment (FDI) and that it is “agnostic” as regards the country of origin of the investment. The Report repeats this, stating that each case is judged on its own merits and the individual national security risks it poses.

However, the Report includes for the first time details on the origins of the investments reviewed under the NSI Act, stating that more than 40% of the transactions called in for further review had Chinese origins of investment.

Table 4. Call-in Notices by Associated Origin of Investment

Similarly, 8 of the 15 transactions that were subject to a “final order” (i.e., that were cleared subject to conditions, prohibited, or unwound) had Chinese origins of investment.

Table 5. Final Orders by Associated Origin of Investment

Furthermore, four out of the five prohibition decisions involved investors of Chinese origin, while the fifth prohibition decision involved an investor with alleged ties to Russia.

Table 6. Prohibition Decisions

RETROACTIVE CALL-IN POWERS

Under the NSI Act, the UK government has retroactive power to call in any qualifying acquisition completed between 12 November 2020 and 4 January 2022, when the NSI Act came into force. Two of the five prohibition decisions referred to above related to transactions that had completed prior to 4 January 2022, when the NSI Act came into force.

In Newport Wafer Fab/Nexperia, the Final Order required Nexperia to sell at least 86% of Newport Wafer Fab, which it had acquired on 5 July 2021, and in LetterOne/Upp, LetterOne was required to sell 100% of Upp following the Final Order. LetterOne had acquired Upp on 21 January 2021.

TIMING

Under the NSI Act, the initial review period following mandatory notification is 30 working days from the point the ISU accepts a notification as complete. During the Reporting Period, the ISU accepted filings as complete within five working days on average. If a transaction is called in for an in-depth review, there is an additional review period of 30 working days, with the possibility of an additional 45 working days (and further extensions beyond this, subject to agreement with the acquirer). The average number of working days between calling in an acquisition and making a final order during the Reporting Period was 77 working days.

During the Reporting Period, all cases were decided within the statutory timelines.

COMMENT

Although the UK government says that the NSI Act is “agnostic” about the origins of investment, in its second year of operation it appears that the investment screening regime is evolving into an FDI regime, and that investments from China are seen as particularly risky.

It is also relevant to note that as Russian investments have been curtailed as a result of sanctions, the UK government ordered the Luxembourg-registered private equity firm LetterOne Core Investment to unwind its completed acquisition of UK-based fibre network provider Upp Corporation further to the NSI Act, as a result of LetterOne’s ultimate beneficial owners’ reported links to Russia.

The Defence and Military and Dual Use sectors remain a focus of UK government enforcement under the NSI Act. Most notified acquisitions are still cleared unconditionally, with the UK government, in certain cases, willing to accept remedies in order to permit clearance.