UK NSIA 3rd Annual Report: key trends and takeaways

The UK Government has published the third Annual Report on the National Security and Investment Act 2021 (NSIA), providing a welcome insight into the regime’s operation from 1 April 2023 – 31 March 2024. This is the second report to cover a full year since the NSIA came into force on 4 January 2022 (see our blog posts on the first Annual Report here, and the second Annual Report here).

This highly anticipated report sets out key trends in enforcement over the relevant period, as well as the types of transactions which have required greater scrutiny. Notably, for the first time the report includes year-on-year comparisons, a spreadsheet which consolidates key statistics, and new information - including the number of withdrawals from called-in transactions by area of the economy, and the average number of working days it took to issue a final order. 

We discuss the most significant stats and key takeaways below.

Notifications and timing

The Government received 906 notifications during the reporting period, marking a 4.5% increase from the previous financial year (of 865 notifications). The reporting period ended with a higher number of notifications than seen in several of the earlier months. But it remains to be seen whether we can expect this trend to continue as we move through 2024. 

While both the number of mandatory notifications (753) and retrospective validation notifications (33) has increased since the last Annual Report (up from 671 and 15 respectively, with retrospective validations having more than doubled), the number of voluntary filings dropped by one third (from 180 to 120). This decrease may indicate that fewer precautionary filings are being made, as familiarity with the application of the regime increases, or that there is greater clarity for businesses and practitioners in light of the ISU’s updated market guidance. 

Of the notifications received, only 3% (24) were rejected during the relevant period, in comparison to the previous figure of c.5% (42). Again, this suggests that there may be an increased understanding of the NSIA’s scope or greater clarity in light of the ISU’s updated market guidance, leading to more acceptances by the ISU. The most common reason for rejection (in 10 out of 24 cases) was that the transaction should have been notified under a different type of filing (e.g. under the mandatory rather than the voluntary regime or vice versa). 

All accepted notifications were cleared or called-in by the ISU within the statutory time limit of 30 working days, mirroring the level achieved by the Government last year. However, the average number of working days to accept a notification, or provide written reasons for a decision, has risen, most notably for voluntary filings (up from 5 to 10 working days for acceptances, and 10 to 16 working days for written reasons). 

Call-ins

A total of 41 call-in notices (covering both notified and non-notified acquisitions) were issued during the relevant period. Of the 847 notifications reviewed, only 4.4% of these were called in for a more in-depth review, a fall from 7.2% in the previous Annual Report. This may suggest that the ISU is becoming more adept at quickly screening out the vast majority of non-problematic transactions within the initial review phase, consistent with the stated aim of the Cabinet Office’s November 2023 Call for Evidence, to "minimis[e] the burdens it places on companies and investors”.

As expected, the largest proportion of call-in notices were issued after receipt of a mandatory notification (53.7%), followed by voluntary notifications (36.6%) and non-notified acquisitions (9.8%). The areas of the economy where the most transactions were called in were, unsurprisingly, Defence (34%), Military and dual-use (29%), Communications and Advanced materials, and, perhaps more surprisingly, Academic research and development in higher education (each accounting for 24%). However, while academic research and development in higher education has gained higher prominence in terms of call-in notice numbers this year, there have previously been final orders in this space, including the first NSIA prohibition which prevented the acquisition of certain intellectual property by a Chinese company under a licence agreement with the University of Manchester. For comparison, last year’s sector with the highest number of call-ins was Military and dual-use (37%). 

A new category of statistics related to call-ins has been published in the latest report, showing the number of withdrawals from a called-in acquisition by area of the economy. Academic research and development in higher education, and Professional, scientific and technical activities had the highest number of withdrawals (five each), Information and communication closely followed with four withdrawals, and Defence and Communications were each related to three withdrawals. However, given that acquisitions can be associated with more than one area of the economy (and there were only 10 withdrawals in total), there is clearly cross-over between the categories listed.

Final notifications and final orders

There were 38 called-in acquisitions in which the Government either issued a final notification (i.e. a clearance) or a final order (i.e. conditions or a prohibition). Of this number, 33 resulted in a final notification, meaning 86.6% of transactions were cleared, and only 5 final orders were issued (with two being varied shortly after). This is much lower than the previous reporting period, during which 57 final notifications and 15 final orders were made. It is also notable that no prohibitions were made during this period, in contrast to the 5 made previously. This may suggest that the ISU is becoming more skilled at identifying potentially problematic transactions and is focusing on intervention via conditions in these cases. However, it is equally a small sample size and may instead simply be a function of the specificities of the caseloads across the two reporting periods.

Most of the acquisitions that resulted in a final notification or final order were associated with the Defence sector. Defence accounted for 30% of the final notifications issued, followed by Military and dual use, Advanced materials, and Academic research and development in higher education with 24% each. Defence also accounted for 4 of the 5 final orders issued, with Military and dual use, and Communications affecting 2 out of the 5 final orders. 

As was the case in the previous reporting period, no penalties were issued, and consequently no appeals were filed against penalties or costs in FY 2023-24. There were also no criminal prosecutions concluded during this time. Instead, parties were asked to provide reassurance to the Government that steps had been taken to prevent any recurrence of a failure to notify a mandatory transaction (of which there were 34 instances) – perhaps a signal that, while the Government has not adopted a draconian approach to date, multiple offences would not be looked upon so lightly. 

The Government also published a new category of statistics in this area: the average number of working days it took to issue a final order. This shows that there were, on average (median and mean), 56 days between accepting a notification and making the order. It remains to be seen from future data whether this timing will decrease or increase.

Origins of investors

The majority of accepted notifications came from the UK (61%), with the next largest source being the US (26%) and the third listed as ‘Others’ (10%). 

Whilst just 3% of accepted notifications came from China, they represented 41% of call-in notices and 48% of final notifications. This call-in figure is consistent with the previous reporting period where 42% of call-in notices related to China. We would anticipate that close scrutiny of Chinese investment in sensitive sectors will continue going forward. However, it is also interesting that the ISU specifically emphasises in the report that the figures should not be interpreted that “41% of notifications or acquisitions associated with China were called in”. The ISU seems keen to highlight this to avoid the (mis)perception that inward investment from China is necessarily problematic. 

Of the 10 deals that were withdrawn during the reporting period, eight of these involved investors with ties to China. This may suggest that Chinese investors in particular are abandoning transactions following a “call in” for fear of an adverse final order being made public. Indeed, unlike in the previous reporting periods, no final orders issued listed China as the origin of investment. The areas to which these withdrawals related is also interesting, as the largest numbers of withdrawals related to Academic research and development in higher education, and Professional, scientific and technical activities. These are perhaps areas where there may not be the same familiarity with the NSIA and associated risks when compared to other areas of the economy, and an area where the ISU has since issued specific guidance. 

UK acquirers closely followed China with the second highest number of call-in notices (39%), with the US a little further behind (22%). This is a reflection of the “country agnostic” approach adopted by the NSIA. Indeed, the highest number (61%) of accepted notifications related to acquirers associated with the United Kingdom. This highlights how the NSIA is relatively unusual in international terms, as its investment screening regimes applies equally to domestic and international investors. While this affords the Government broad powers, the statistics show that it also results in administrative burdens for the ISU.