Emerging from the legislative fog: the UK’s transformative foreign investment regime comes into sharper focus

The scope of the UK’s forthcoming national security regime has become clearer this month, with the UK Government recognising, in the scope of the mandatory sectors, businesses’ need for clarity and speed when getting deals done - while also prioritising its own flexibility to respond rapidly to evolving national security concerns.

So far in 2021, the National Security and Investment Bill (NSI Bill), initially announced by the Government last November, has proceeded unscathed to the House of Lords and now faces various amendments in that chamber. Alongside this, the Government has provided important new information about the Investment and Security Unit (ISU) that will review transactions, as well as details of the secondary legislation that will govern the new regime in practice. These developments have shed light on some key issues - including by providing further clarity on the scope of the sectors in which notifications will be mandatory - but significant questions remain outstanding.

Mandatory Sectors - Government emphasises future flexibility over certainty and predictability

One of the key aspects of the regime is the definition of those particularly sensitive sectors which will require mandatory notification of transactions. Following concerns raised by businesses and other stakeholders (with some 94 responses to the consultation demonstrating a high level of engagement), about the very wide scope of the proposed mandatory sectors, not least given criminal consequences and automatic share invalidity, the Government has now published a refined set of sector definitions, with a view to ensuring they are more targeted and proportionate. In particular, the Government proposes to substantially narrow the mandatory regime’s scope for artificial intelligence, critical suppliers to the Government and the emergency services, data infrastructure, energy, and military and dual use technology.

By way of example, the definition of artificial intelligence has been narrowed down to focus on just three higher risk applications (the identification or tracking of objects, people and events; advanced robotics; and cyber security). “Quantum technologies” have been refined to focus on entities that develop or produce specified quantum technology - removing entities solely engaged in research or at other levels of the supply chain. And the definition of energy, whilst subject to further consultation, will include a detailed breakdown of what is / is not covered (retail electricity has been excluded from the application of the rules).

This sector list remains a work in progress and the Government is still engaging with industry stakeholders to consider how it can further refine the scope of the relevant sectors. Indeed, final definitions are only likely to be published after the NSI Bill itself has passed Parliament and will be set out in regulations in May/June 2021 before the Act takes effect. The Government has also emphasised that the definitions – once published – are by no means final, and it will retain the power to update the scope of these sectors by means of secondary legislation. This is seen as critical to responding promptly to evolving national security concerns – although the Government will also have the ability to ‘call in’ non-notified transactions regardless of sector under the voluntary regime.

Regulations to provide insights on how the regime will operate

The Government has also published policy statements covering the ten regulations that will be issued once the NSI Bill receives Royal Assent. These set out new details of the procedural elements of the regime and will cover:

• how the Secretary of State expects to exercise the call-in power in relation to completed or anticipated trigger events. The statement will aim to provide predictability and transparency, and to assist entities and their advisers in understanding which acquisitions are more likely to be called in for scrutiny and whether to voluntarily notify the Secretary of State of their trigger events
• the Secretary of State’s power - in addition to defining the 17 sectors subject to mandatory notification - to specify the description of a qualifying entity for the purposes of a notification; make changes to the circumstances in which a notifiable acquisition takes place or does not take place; and exempt acquirers with specified characteristics from the mandatory regime.
• technical issues such as the form and content of notifications, providing documents, and calculating penalties.

Nice to meet you, ISU

The Investment Security Unit (ISU) - the operational unit within BEIS that will be the front office in handling notifications and call ins  under the regime - is already being set up, and is expected to be in place by the summer. Transactions will also be screened using cross-government expertise, with processes to underpin this put in place before the regime is launched.

Despite (or perhaps because of) the sheer number of notifications the ISU is expected to receive under the regime (estimated at 1,000 - 1,830 annually), ministers are understood to be focussed on ensuring that the new system is not overwhelmed by notifications and is as frictionless as possible once the Act is in force. The goal remains that non-problematic deals (expected by BEIS to be around 90% of notified transactions) will be approved very quickly. Guidance for how parties will be able to engage with ISU decision-makers will be published by the summer, and this will seek to provide reassurance that the process will transparent and predictable (and not unduly politicised).

Bill progressing through Parliament…

The legislation is now being scrutinised in the House of Lords, where the Government has again faced calls to provide a definition of national security or (as the Foreign Affairs Committee report has called for) a framework for the criteria which the Secretary of State must have regard to when assessing a risk to national security – or at the very least to clarify that factors such as employment or the desire to protect UK business from international competition cannot be taken into account.

However, Ministers have dismissed the concern that, absent a definition, there would be a lack of clarity on what constituted legitimate national security risks; referring to the deliberate choice not to include details of factors to be taken into account to keep the legislation sufficiently flexible to protect the nation; and confirmed that the Government could be challenged in the Courts if it were to seek to use the powers in the Bill for a purpose beyond national security.  After debate, the amendments tabled so far have either been withdrawn or not put to a vote.  An apparent compromise is to more fully spell out the factors which are considered relevant to national security in the Statement of Policy Intent, which is of course capable of amendment as easily as any SI is.

... but timing delays don’t mean last-minute deals in extra time

The Government had initially aimed for the NSI Bill to become law by Spring 2021, but this has been gradually pushed back. The NSI Bill is now likely to be approved by Parliament around May 2021 and, assuming the ISU is ready to deal with the influx of notifications by the end of summer, the regime is likely to come fully into effect in the Autumn.

However, the retroactive provisions in the NSI Bill give the Government the power to “call-in” transactions that completed between 12 November 2020 and the law coming into force. For transactions completing in this interim period, the ISU has already been providing informal guidance to parties about transactions that may fall within the scope of the regime. Despite concerns that it would face a deluge of transactions in this period, BEIS has said that it is currently only seeing a handful of transactions being raised with officials each week.