NSIA Review: a chance to “trim” the red tape for UK Investors?
As previously discussed, the NSIA came into force on 4 January 2022 and is the key pillar of the UK’s investment screening regime.
It has always been understood that the first few years of the regime would be a learning process, and the Investment Security Unit (ISU) was obliged by statute to consult stakeholders to actively consider amendments within the first three years of the regime coming into force. It is therefore no surprise that the ISU has commenced that process. What is perhaps unexpected, is that Deputy Prime Minister, Oliver Dowden (the decision maker under the regime) sees this review as a clear opportunity to refine the NSIA and reduce the regulatory burden of the regime on businesses.
The Call for Evidence is broad, but of most interest will be the ISU’s focus on the scope of the mandatory notification regime and, in particular, the following areas:
- a potential watering down of the mandatory notification obligation for internal re-organisation;
- the application of the regime to liquidation, insolvency and step-in rights; and
- updates and clarifications to 11 of the 17 mandatory notification sectors.
We have provided an overview of some of these key points below.
Currently, internal re-organisations can trigger a mandatory notification where an entity obtains a direct or indirect interest in a qualifying business of more than 25%. This is the case even where the ultimate parent entity remains the same (e.g. if an additional entity is inserted between a parent and subsidiary). The underlying rationale is that whilst ultimate control remains unchanged, the manner in which that control is exercised is different. Whilst that may be true in theory, the situations where any tangible concerns might arise in this context may seldom (if ever) arise in practice, and many have questioned whether this situation should give rise to a mandatory filing obligation.
The benefits of removing the mandatory notification obligation on internal re-organisations are tangible. For example, based on the ISU’s current approach, continuation fund transactions can give rise to mandatory filing obligations; conversely, if the internal re-organisation requirement were removed, these transactions would not give rise to a mandatory notification (unless an investor were to increase its interest in excess of 25%).
Insolvency and enforcement of security
One of the significant issues identified even before the regime came into force was the need to file mandatory notifications for time critical situations concerning distressed businesses. Namely, whether a filing should be made where temporary control is obtained by liquidators, official receivers or special administrators, or for lenders to exercise their step-in rights.
In relation to the appointment of insolvency practitioners, whilst the ISU has seen limited scenarios where mandatory notifications have been required, it is considering whether further exemptions to the regime can be made for the appointment of liquidators, official receivers or special administrators.
The ISU also appear keen to understand the impact of the NSIA mandatory notification requirements on automatic enforcement rights and the availability of lending where step-in rights might be compromised by NSIA filing obligations. Given that the timely exercise of step-in rights can be critical in certain cases, concession here may give lenders additional flexibility and security in managing distressed situations.
The Call for Evidence explores potential changes to 11 of the 17 sectors that give rise to a mandatory notification obligation, including by extracting specific activities into their own standalone definitions (e.g. semi-conductors), expanding certain definitions (such as critical suppliers to the emergency services), and clarifying several definitions (e.g. advanced materials and defence). A full review of each proposal is beyond the scope of this article but we discuss below a couple of the prominent sectors.
The defence sector definition is not only drafted in broad terms in the NSIA, but has been interpreted by the ISU even more expansively. In particular, our experience of the ISU’s current application of the defence sector definition implies that any business supplying any goods or services to the MoD (even basic civilian services) would be captured – notwithstanding that mere supply is not in and of itself captured by the statutory definition. Unsurprisingly, therefore, the defence sector has generated by far the largest number of mandatory notifications to date, with 47% of mandatory filings relating to this sector (more than double any other).
Although the ISU has not set out specific proposals in relation to defence, there is clearly a desire to reduce the number of NSIA notifications in the defence sector. This is welcome, with scope for providing clearer, more precise guidance and focusing reviews on important areas, rather than requiring mandatory notification for any company that merely supplies the MoD (especially those that relate to non-specialised goods or services).
Even since the NSIA became law in 2021, there has been a significant change in how businesses seek to use AI. The current sector definition captures not only companies concerned in AI research but also those that are developing products or software that use AI for three specific purposes (tracking of people/objects/events, advanced robotics, and cybersecurity). Whilst the definition captures not only those entities that are developing the relevant AI but also their customers deploying AI through their own products or services, the overall scope of notifications is narrowed significantly by the three specific use cases.
That said, with businesses increasingly deploying new AI tools to enhance their products in ways that may be at least adjacent to the three identified purposes, the ISU appears keen to clarify, whether by amendments to the definition or through guidance, the areas where AI may raise sufficient concerns to merit mandatory notification.
The advanced materials sector definition is complex and covers the research, development and manufacture of a range of high technology materials, which might have uses ranging from energy transmission, military capabilities and other advanced technologies.
It also captures companies concerned with the extraction, refinement, processing, production and end of life recovery of 45 different “critical materials”. “Critical materials” ranges from “common” materials such as lead, platinum and graphite, to rarer materials such as those commonly used in battery and semi-conductor technologies. These activities raise challenges, particularly in determining what amounts to the ‘processing’ of critical materials. By way of illustration a jeweller producing a platinum ring should not raise obvious national security concerns, but the act of melting and casting platinum could be interpreted as a form of processing.
In addition to clarifying the definition of advanced materials insofar as it relates to more technical materials, the ISU is also proposing to update its approach to certain materials and minerals by extracting these into a “critical minerals” section. This would align the NSIA’s approach with that of the British Geological Survey in an imminent publication on critical minerals.
Along with further clarification in the definition of advanced materials as a whole, it is hoped that these changes will give businesses more certainty when assessing whether to make notifications under the advanced materials sector definition, in particular where there is no realistic prospect of national security concerns.
The Call for Evidence covers a broad range of topics and is open for responses until 14 January 2024. The nature and scope of the requests provides plenty of opportunities for businesses and their advisers to provide comments, both in general terms and by reference to specific examples as to how the NSIA and accompanying instruments and processes can be improved. The focus is primarily on creating a more business friendly regime, and dialling back the rather expansive notification requirements that came into force on 4 January 2022. Whilst it is clear that the bulk of NSIA regime will remain intact (rightly so), this is a constructive opportunity to refine the regime to ensure that resources of businesses, their advisers and government, are dealt with effectively to identify genuine concerns and avoid unnecessary administrative filings.