National Security and Investment Act 2021: FTI Consulting Expert Perspectives

Since 2017, the Government has been considering wide-ranging reforms to its powers to scrutinise foreign investment. The UK stood out amongst its peers in not having a tailormade foreign investment screening regime; instead, powers stemmed from the Enterprise Act 2002. Lord Callanan noted this legislation had been brought in a time when only half the UK’s population even had internet access, and well before the publication of the Climate Change Act. Geopolitics has changed dramatically since then, with increasing competition between states, sweeping technological change and the rise of non-state threat actors.

Enhanced scrutiny of foreign investment is undoubtedly a global trend. Japan recently expanded their own powers and individual EU Member States, backed by the Commission, are also taking a more hawkish view on investment; in 2021, Germany tightened their powers and Sweden introduced proposals for a screening regime for the first time.

Western countries, in particular, have become increasingly concerned about ‘strategic’ investments on the part of Chinese investors. The definition of ‘Critical National Infrastructure’ is also broader today. Additionally, the increasing strategic significance of capabilities such as dual use robotics and artificial intelligence mean Governments are more wary about such advanced technologies falling into potentially hostile states’ hands. Therefore, the is now more pressure to safeguard against risks by scrutinising investments at an earlier point in a firm’s development, including where the implications of a technology for a state’s security interests may not have fully materialised.

Lord Callanan was clear in his remarks that the NSI Act is an evidence-based regime to ensure the UK is open for business, but not open to exploitation. He went on to highlight four key elements of the new regime:

• The Act does not change the UK’s stance of being open to investment.
• The Government wants to encourage investors to come and do business here.
• The regime is seen as a tool to guarantee the UK’s national security within a changing dynamic environment.
• This represents a modernising of the UK’s powers, bringing them in line with that of key allies, and will be familiar for those who have dealt with likeminded countries, such as the US’ Committee on Foreign Investment in the United States (CFIUS) process.

He added that the powers in the Act are limited to national security and cannot be used for anything else. The Minister considered that the vast majority of acquisitions will be unaffected; only a small number of acquisitions offer a security threat, so the powers have been focused on the 17 most sensitive sectors of the economy. When designing the regime, the Government felt it was important to make it as accessible as possible for business, creating a clear and predictable process so they can plan with confidence.

Under the new Act, investors and businesses must notify a dedicated Investment Security Unit (ISU), sitting in the Department for Business, Energy and Industrial Strategy (BEIS), through a single digital portal about certain types of transactions in the 17 designated sensitive sectors. The ISU then investigates and takes action if necessary to address any national security risks. It is the Department, and ultimately the Secretary of State, who makes the decision rather than the Competition and Markets Authority. In summary the process looks like this:

	Step One: Trigger Event A Trigger Event is when a person/company gains control of a qualifying entity and one or more of the following happens: Where an existing shareholder acquires more than 25%, 50% or 75% of votes or shares in an entity The acquisition is of voting rights in the entity that enable the person to secure or prevent the passage of any class of resolution governing the affairs of the entity. The acquisition enables the person to ‘materially influence’ the policy of the entity (even if the total shareholding is less than 25%). Note there is no minimum turnover threshold.
	Step Two: Government Review Proposed acquirers of shares or voting rights in companies and other entities operating in sensitive sectors of the economy will be required to seek authorisation and obtain approval from the Secretary of State before completing their acquisition. The Secretary of State will be able to ‘call in’ statutorily defined acquisitions of control over qualifying entities and assets (‘Trigger Events’) to undertake a national security assessment (whether or not they have been notified to the government). Those companies not required to notify will be encouraged to use a voluntary notification system if they consider that their Trigger Event may raise national security concerns. The Secretary of State has the power to ‘call in’ these voluntary acquisitions for up to five years after the transaction is made.
	Step Three: Enforcement The Secretary of State will have the power to impose remedies on proposed acquisitions or, as a last resort, block transactions. For non-compliance, the Government will have the power to impose sanctions, including fines of up to 5% of global turnover or £10m, whichever is greater, as well as imprisonment of five years.

In-Scope Sectors

Lord Callanan described the three possible outcomes that follow the notification of a transaction.He suggested that the Government anticipates using the last of these sparingly:

• Full approval is given
• Conditions are imposed on the transaction
• The deal is blocked or unwound

The Minister set out that once an acquisition is cleared, the Government cannot return to it unless false or misleading information was provided. He cited that this will mean investors can proceed with certainty. Lord Callanan also suggested transparency is an important element for the UK’s new regime and so the Government will produce a detailed report each year on how the NSI is preforming, including reporting the numbers of screenings in different sectors.

Offering his reflections on the first month of  the new regime being in operation, it was the Minister’s view that the ISU is working well and is staffed by highly capable people from across Government who have hit the ground running. He also commented that the online portal system the Government has developed is working well, and businesses are getting to grips with it quickly.

It is important to note is that the Government’s actions are not unique, and in fact they bring the UK in line with similar democracies. The UK’s post-Brexit trade agenda clearly demonstrates the country’s openness to foreign investment, a point the Minister regularly reinforced. Notably, the powers in the Act apply equally to all investors, domestic or foreign, making it distinct to a US regime which puts countries on a ‘white’ or ‘black’ list. Similarly, Australia and New Zealand offer their FTA partners a more liberal regime than other third countries.

That said, the new regime will likely bring about substantial change in the UK’s investment landscape. The Government’s own impact assessment for the regime (published when the Bill was first laid down) noted that the new regime would result in between 1,000 and 1,830 transactions being notified each year and about 10 requiring remedies annually. This is significant given that only 12 transactions have been reviewed by the Government since 2002. FTI Consulting’s view is that this is a conservative estimate, and the actual figure is likely to be higher given the number of sectors included in scope as well as the tendency for compliance teams to be overly cautious in their approach to regulations. By definition, this wider regime will touch on companies who may not have a pre-existing relationship with Government, and so you are likely to see greater caution on their side too.

The deliberately undefined use of ‘national security’ in the legislation is consistent with other UK legislation in the area, but does create a potentially open-ended scope of interpretation in future. Lord Callanan suggested the Government would be looking at the Act in the coming years, which allows for the updating of the mandatory notification process and changing of definitions as needed should new threats emerge, in order to keep the regime up to date.

Nevertheless, he affirmed his view that BEIS Ministers are clear this regime is to be used only for national security purposes and is not a general tool to intervene in the economy. Outside of the very small minority of threats this regime has been established to protect against, the Minister was clear that the Government wants investors to come to the UK to do business.

Managing an increased caseload will challenge Government as well as prospective investors. Departments will not be resourced equally and, while BEIS will lead the work, economically focussed departments such as Trade and the Treasury can be expected to take different views to their security-minded counterparts such as Defence or the Home Office. One of the biggest criticisms of Australia’s Foreign Investment Review Board, which has a similar mandatory notification requirement, is that investors are sometimes left waiting upwards of 6 months for a decision. Although BEIS has set out a timeframe in which they intend to make decisions (ranging from 30-105 days), they give themselves room to negotiate for more time if needed. Clearly there is scope for complex cases to get bogged down, hindered by a lack of capacity and internal conflicts within Departments.

Publicly available information, through published outcomes of cases going through the regime, will be key to understanding its real-world impact. This is an area which Lord Callanan was clear the Government had given a lot of thought to. He suggested the Government would make clear when an intervention is made but suggested that would not be the case where transactions are not reviewed. In his view, such action risked creating uncertainty in the market, and the Government is instead seeking to take a flexible and proportionate approach. The Minister also noted that, in some situations, organisations themselves may promote decisions. In his view, a body of case law will likely build up over time.

In all instances, early communication between decision-makers will be essential to both provide the relevant information and ensure swift resolution. The Government will be expecting investors to be familiar with the new rules and welcome proactive contact with officials in advance of a formal review of a transaction.

During the webinar, Lord Callanan confirmed that he was looking for feedback on how effectively the ISU and the regime is working, and welcomed industry getting in touch, especially if they were uncertain on whether a given transaction would need to be reviewed by the Government.

Insights from Ollie Welch – Senior Director, Public Affairs, FTI Consulting

The defence sector is accustomed to being scrutinised by ministers long-concerned with the security implications of foreign acquisition and inward investment. However, the inevitability that defence would be in scope for the new regime should not be allowed to detract from the potential impact of the change that it brings. As ever, the devil is in the detail – the NSI Act represents a significant expansion of the types of transaction that might be captured by future security reviews.

Beyond simply mergers and acquisitions, this now includes minority investments, intra-group transactions, acquisitions of voting rights and control of assets. Suddenly, much more activity may appear in-scope for scrutiny that, if not properly managed, risks serving as a disincentive to foreign investors in an increasingly competitive global market. Moreover, not only is the Government expected to intervene in more transactions than was the case under the Enterprise Act 2002, as the traditional direction of innovation is reversed, and the trend for adopting civil technology for military use grows, but the question of scope also becomes increasingly relevant. The significant focus in the new regime on regulating technology and intellectual property, in fields such as advanced robotics and artificial intelligence for example, poses a question about what constitutes ‘defence’ and when does the control of technology become a security matter? No longer is this a domain exclusively of concern to suppliers to the Ministry of Defence.

Insights from Ed Bridges – Senior Managing Director, Special Situations, FTI Consulting

Significant deals in 2021 faced the challenge of a changing regulatory environment.  Responsibility for national security and investment consideration within the M&A environment stood squarely with the UK’s Competition and Markets Authority, but deal makers needed to be cognisant of the NS&I structure particularly if a transaction timetable rolled through that transition from UK CMA to UK NS&I.  The numbers of deals that will fall under the auspices of Government ministers are likely to number in the hundreds, with tens requiring detailed work and a handful requiring the most detailed review with possible remedies required.

Of course, UK Government ministers have always had the ability to interject on M&A where important matters of national security and national investment have been involved.  But with unchartered water ahead, inherent deal risk on sensitive transactions must have increased.  The strategies for reducing those risks must focus on the experience and capabilities of advisors to predict and address those risks by having deep knowledge of the individuals within that Department, strong technical skills in understanding and interpreting the requirement under legislation, and fluency in advocating a company’s position in a succinct and compelling manner. In an area prone to political influence, a combination of hard technical knowledge combined with relevant networks, political intelligence and analysis has never been more important to buyers of business.

Insights from Alex Le May – Managing Director, Industrials, FTI Consulting

We have seen a marked increase in takeovers throughout the last decade, as valuations of UK and EU industrials have lagged behind those of US counterparts and PE dry powder has risen to record levels. The growth of takeovers has seen a marked change in perception from all stakeholders, including Government, who are growing increasingly frustrated as they believe investors are allowing quality businesses to be sold at low valuations.

The NSI Act is the culmination of this, and underlines the importance of clear communication across all materials in a M&A situation. It will also be crucial to ensure that Government stakeholders are engaged effectively to clearly outline how the transaction in question will benefit the UK’s non-financial metrics.

Insights from Rob Mindell – Managing Director, TMT, FTI Consulting

The National Security & Investment Act sets out 17 areas of the economy for notifiable acquisitions, where there is a perceived risk to the UK’s national security from a change of ownership of as little as 25% of the shares or voting rights in a company. That scope includes areas of artificial intelligence, advanced robotics, computing hardware, data infrastructure, quantum technologies, satellites and space technologies. With this extensive focus on the technology sector, one might ask where such companies can be found in the UK given the lack of scaled-up businesses in these capital-intensive industries compared to the US, for example. As ever, the devil is in the detail and the new NSI regime has implications far beyond the UK. It makes the UK a forum for regulatory approval for any international transaction in these areas, provided there is sufficient connection to UK national security, including supply to UK customers or the existence of a UK subsidiary.

Moreover, given the relative small-scale and high-growth trajectory of companies in the technology sector, industry discussion has already turned to its implications as a barrier for local investment if the new NSI regime acts as an impediment to the successful exit of an early-stage investor. Will it dent valuations if a new risk factor needs to be added into investment due diligence for VC and angel investors? The CFIUS regime in the United States appears to have done little harm to the success of US technology companies, but the UK is starting from a lower base and a smaller ecosystem.

Insights from Stephen Roberts – Director, Public Affairs, FTI Consulting

There have been questions over the role of other international state actors’ involvement in the UK’s critical infrastructure for some time. At the vanguard of this has been the 20% stake held in Hinkley Point C by China’s national nuclear company CGN. In late 2021, the Government announced it was looking at ways to remove CGN from this and future projects. However, the question that remains for Government is how it will fill the funding gap left by CGN’s removal in the £20 billion project. Similarly, other investments in the UK’s critical energy infrastructure by foreign state actors, or companies closely associated with them, already exist.

Removal of these actors from the energy system which they are already embedded in is a major challenge. However, in recognition of that we can expect close scrutiny of future investment in energy networks, nuclear plants and interconnectors. If the Government does decide to utilise the powers now available to it, and block M&As in the sector, the challenge for Government will be identifying new investors that are able to invest the significant levels of capital required without relying on foreign state actors. In the nuclear sector for example, it has been notoriously challenging for Government to find companies willing to take a stake in Sizewell C to replace CGN, or for the proposed Wylfa plant which the Hitachi led consortium that included GE and others pulled out of in 2020.

Insights from Matthew O’Keeffe – Managing Director, Investor Relations, FTI Consulting

The new NS&I regime will have an impact on ports and harbours, airports and air traffic control. Within ports, the regime will capture any deal involving ownership or operation of ports and harbours that handled at least 1 million tonnes of cargo in the preceding year (or any deal involving ownership or operation of terminals, wharves or other infrastructure within a port or harbour that handled at least 1 million tonnes of cargo in the preceding year). The bar has arguably been set relatively low here; UK ports handled 439m tonnes in 2020 with the top 10 ports handling an average of 30m tonnes each. Therefore, it is hard to imagine too many ports slipping through the net.

Within airports, the regime will capture any deal involving ownership or overall responsibility for the management of a UK airport that handled at least 6 million passenger movements in 2018 (or 100,000 tonnes of freight in 2018). Here, the bar has arguably been set a little higher; while most airports of significance handled more than 6 million passengers in 2018, CAA data suggests that there are plenty of interesting exceptions including London City, London Southend, Belfast City, Cardiff, Doncaster, Leeds Bradford, Liverpool, Newcastle and Southampton. Critics may point out that as it is 15 years since P&O Ports was sold to Dubai Ports, and since the British Airports Authority was sold to the Spanish, arguing that this horse has long since bolted.

Insights from Rob Winder – Senior Director, Life Sciences, FTI Consulting

Three of the seventeen core sectors for mandatory notification under the National Security and Investment Act, namely advanced materials, artificial intelligence and synthetic biology, potentially impact the life sciences and healthcare sectors. As a result, there is significant potential for impact on transactions at all stages of company development, whether that is start-up and scale-up companies raising venture capital rounds, licensing agreements for products, or whole-company M&A. It is a developing area, and we believe that clients will need to approach transactions carefully and assess how and when to file.

Insights from Kate Brader – Managing Director, Crisis Communications, FTI Consulting

From a communications perspective, it is crucial that firms approach the new National Security and Investment regime with their eyes wide open to potential reputational risks. Working with advisors, investors and sellers must consider how they may respond if their investments were to be subject to the government’s “call in” process. This isn’t just about media engagement; it is about how you would respond to your partners or investors and other key stakeholders. FTI Consulting is ideally placed to support clients with their preparation for high profile transactions through developing crisis management as a strategic and cross-functional capability and provides real-time guidance and implementation to respond and recover when challenges and crises emerge, delivered by a dedicated team of crisis experts with communications at its core.