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Foreign investment monitor Q2

A new standalone national security regime - the evolving approach to investment screening in the UK

After years of discussion and consultation about reforms, the UK has now aligned itself more closely with its allies by significantly strengthening its powers to intervene in deals that may threaten national security. The National Security and Investment Act 2021 marks a step-change in the UK government’s power to screen, impose conditions on and block deals which pose unacceptable risks.

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The new UK regime applies equally to British investors as the government seeks to underline its ‘Global Britain’ strategy.

Once the new regime commences – expected to be towards the end of 2021 – it will require mandatory notification of investments in 17 strategically sensitive sectors that cross certain share/voting right thresholds. Any mandatory transactions that are not notified will be void, with potential criminal consequences for those completing a notifiable transaction without approval. The regime will also give the government broad and retroactive powers to call in investments it considers could give rise to national security concerns. With no turnover thresholds, the new regime reflects growing disquiet around advanced technologies – often developed by innovative start-ups – and other sensitive assets falling into potentially hostile hands.

We are expecting a significant volume of secondary legislation before the new regime comes into force together with more guidance on what constitutes a threat to national security. Given this is a constantly evolving area, this question has been central in the debate around the NS&I Act to date.

The act is not the only manifestation of the UK’s approach to protecting national security. Other recent government initiatives include:

  • proposals to allow ministers to block companies listing on the London Stock Exchange on national security grounds (consultation launched on 7 June 2021);
  • the proposed Telecommunications (Security) Bill currently passing through the House of Lords which aims to boost the security standards in UK telecommunications networks; and
  • the formation of the Research Collaboration Advice Team within the Department for Business, Energy and Industrial Strategy (BEIS) to offer researchers guidance on how to protect their work from hostile activity, particularly in relation to cyber security, export controls and IP protection.

Despite these developments, the government insists the UK remains “open for business” and has recently set up the Office of Investment and the Investment Council to continue to encourage capital into the UK – all the more important following the pandemic, Brexit and accusations that the Competition and Markets Authority is now so aggressive that it is proving a deterrent to investment.

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The new UK regime applies equally to British investors as the government seeks to underline its ‘Global Britain’ strategy.

The new NS&I regime is specifically billed as “national security” and not a foreign investment regime – it also applies to British investors – to underline the government’s “Global Britain” messaging and strategy. Although the number of transactions reviewed for national security concerns will increase exponentially compared to interventions under the existing public interest regime (such as the recent national security intervention in Nvidia/Arm), the government expects a small proportion to merit detailed assessment (approximately 5 percent), with even fewer (approximately 1 percent) requiring remedies. The UK says it intends the new regime to be a predictable and efficient process for investors, although the real test will be how it works in practice. The new Investment Security Unit, housed within BEIS, has thus far demonstrated a welcome willingness to engage with investors in the transitional period between the existing public interest regime and the NS&I Act coming into force. Such openness will be critical to the success of the new system.

Our team

Please get in touch with us or your usual Freshfields contact if you would like to discuss these or any other regulatory issues in more detail.