National Security and Investment Act – The Q1 results are in

In a previous blog article “It’s a matter of national security”, I wrote about the new National Security and Investment Act that came into force in January 2022.  The UK’s Business Secretary, Kwasi Kwarteng, published last week the UK government’s first report (“Annual Report 2022”) on this national security regime and covers the period 4 January to 31 March.

The report is replete with data points, evidencing the thoroughness of the UK government’s investigations and analysis. Key points are:

• The average time to inform parties that a notification has been accepted on the system is 3 working days.  
• Where the government has called-in a deal it took, on average, 24 working days to decide, with the shortest time being 11 working days, and all have been decided within the deadline of 30 days.
• The government received 222 deal notifications in the three-month period. Of these, 17 were called-in by the government for further assessment and of those, 3 were cleared and the other 14 cases were still being assessed at the end of the reporting period.
• 22 voluntary notifications were rejected, and one mandatory notification was rejected.
• The number of notifications received was slightly less than the number of qualifying acquisitions that have been notified. This is because single notifications have been accepted to cover multiple qualifying acquisitions, typically in the context of group reorganizations (which are caught by the legislation).  
• The most common areas of the economy in which mandatory notifications were made were (in descending order):

  • Defense

  • Military and Dual Use

  • Critical Suppliers to Government

  • Artificial Intelligence

  • Data Infrastructure

• Mandatory notifications in respect of Synthetic Biology were the least common.
• For voluntary notifications, the most common areas of the economy included professional, scientific, and technical activities; data infrastructure; energy; computing hardware; arts, entertainment, and artificial intelligence.

What this means

• It seems clear from the data (and is borne out by our experience) that the UK government is adhering strictly to the timelines set out in the legislation and there is a quick turnaround in terms of notifying parties whether a notification has been accepted – this is very encouraging.

• It is also commendable that the UK government appears to be taking a pragmatic approach to internal reorganizations (i.e., allowing parties to include all transaction steps in one notification). There was much debate ahead of the coming into force of the legislation about the appropriateness of including within its scope transactions where there is no ultimate change of ownership.  While the UK government didn’t ultimately agree to the carving out of internal reorganizations from the mandatory notification regime, it has at least taken steps to mitigate the administrative burden.

• Several mandatory notifications were rejected because they should have been voluntary notifications. This demonstrates that parties and their advisers need to consider carefully at the outset if the transaction is notifiable or not. Clearly, it won’t do to treat a transaction as falling with the mandatory regime as a failsafe.

• I was surprised that only 222 notifications have been made in the first three months, given the amount of M&A activity and that the introduction of the legislation was well-publicized. I can only assume that a significant number were high-value public M&A transactions. If so, this implies that some smaller, private M&A deals were simply not being notified that nevertheless could pose a national security risk and in certain cases fall within the mandatory regime. Remember there is no deal materiality threshold in the legislation.

• The UK government’s 2020 Impact Assessment estimated between 70 and 95 call-ins per year. By simple extrapolation, the 17 call-ins from 222 notifications imply that fewer acquisitions were called in than the Impact Assessment estimated. This may indicate that advisers and parties have taken a conservative approach to notifying - not surprising given the severity of the potential penalties for failure to make a mandatory notification).

• Deals involving Artificial Intelligence (AI) feature prominently in both the mandatory and voluntary notifications made. This is no doubt because the definition of AI in the legislation is very broad and cuts across multiple industry sectors. 

• Relatively few deals in the Synthetic Biology sector were notified in Q1 2022. This may be because many of these transactions involved the acquisition of minority stakes falling below the relevant threshold. However, it could also indicate a lack of awareness that fundraisings resulting in a +25% acquisition of shares or voting rights could potentially require notification.

• There is no mention in the report of the call-in power having been exercised retrospectively; under the legislation, any deal entered into between 12 November 2020 and 4 January 2022 can be called in if it raises any national security concerns. I assume this is because the UK government will only exercise this power sparingly (as indeed it has indicated).

• There is also no mention of whether any called-in deals concerned the proposed acquisition of assets rather than entities (which again is consistent with the UK government’s stated position that its call-in powers would only be exercised sparingly in these circumstances). 

The UK government is required to publish future annual reports covering years from 1 April to 31 March, enabling parties and their advisors to build an informed picture of emerging practice in this hugely important area. Based on the findings of the current report, the UK government is taking a methodical, efficient, and practical approach to evaluating potentially in-scope transactions.