In May 2024, the UK government published updated market guidance on its National Security and Investment Act 2021 (NSI Act). The new information aims to clarify the steps businesses, higher education establishments and research institutions need to take to comply with the rules.
What is the National Security and Investment Act?
The NSI Act enables the government to scrutinise business acquisitions that could have implications for UK national security. Those taking on businesses in the relevant sectors will need to notify the government of their intention. The government will then review the acquisition.
It can impose conditions and may even block or unwind an acquisition if it has security concerns.
There are 17 sectors where mandatory notification is required, as follows:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Communications
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
- Defence
- Energy
- Military and Dual-Use
- Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
- Transport
What is in the May 2024 updated guidance on the government’s NSI Act powers?
In May 2024, the government issued updates on how it will handle NSI notifications. The guidance includes:
- Clarification on which factors will be taken into consideration by the government in assessing whether an acquisition is of concern on the basis of national security
- Guidance on outward direct investment when a party is gaining control over a qualifying entity based outside the UK
- More help for higher education establishments and research institutions
- Adjustments to the general guidance
How does the government decide when to conduct a full national security review?
The updated policy statement explains how the authorities will decide whether to call in an acquisition for a full national security review under section 3 of the NSI Act.
The call-in power allows the authorities to examine an acquisition in detail. The power can only be used on the basis of national security concerns. Following call-in, an acquisition may be cleared, blocked, or unwound, or conditions imposed.
The authorities will look for three primary risk factors, as follows:
- Target risk, looking at whether the entity or asset being acquired could be used in a way that could pose a risk to national security
- Acquirer risk, where there are concerns over the potential actions of an acquirer once they have control of the organisation or asset
- Control risk, where the level of control that will be acquired could pose a risk
The issues the government will take into account when deciding whether to call in an acquisition include:
- Whether there is a risk of harm or disruption to critical national infrastructure or government or defence assets, including risks to the supply chain and the danger that a transaction could create a dependency that might be a danger to national security
- Whether a risk exists to the UK’s military, intelligence, security, or technological capabilities, including through the acquisition of goods, technology, sensitive information (including data), intellectual property, know-how and expertise
- Whether an acquisition is in certain sensitive areas of the economy that could pose a risk to national security
What changes have been made to the guidance for the higher education and research-intensive sectors?
Higher education and research organisations frequently work in sensitive areas where mandatory notification of an acquisition is required. Failing to notify will mean that the acquisition is void and could expose the acquiring party to civil or criminal sanctions.
The government has an increased level of interest in academic collaborations that are connected to or that could be used in connection with notifiable acquisitions, i.e. those in the above sectors.
Notification is recommended when the acquirer will be gaining greater control over an asset through licensing intellectual property or commercial rights over future intellectual property.
Even collaborations and activities that are receiving UK government funding may still need to be notified. Collaborations unconnected to the above activities could also be of interest in certain cases.
When should a higher education institution make an NSI Act notification?
The government has put a Research Collaboration Advice Team (RCAT) in place to help protect the work of researchers and ensure that the UK research sector is both open and secure.
RCAT can assist academics in navigating the rules, including when they are part of international collaborations.
Examples of higher education and research acquisitions that should be notified and that the government could call in for assessment include:
- Contract or sponsored research
- Sponsoring a research position such as a research chair
- Sponsoring a research theme
- Licensing all forms of intellectual property
- Developing or creating research centres
- Developing university or research spin-out companies, i.e. companies created to use research commercially
- Funding employees or students in university programmes
What is the guidance when acquiring an entity or asset outside the UK?
If an outward investment leads to a party taking control of a qualifying entity or asset, the acquisition may be subject to mandatory notification, meaning that clearance will be needed before the transaction can be completed.
The NSI Act will apply to outward direct investment from the UK when all of the following apply:
- The acquisition is of a right or interest in, or in relation to, a qualifying asset or qualifying entity
- The entity or asset being acquired is from, in, or has a connection to the UK
- The level of control being acquired meets or passes a certain threshold, including:
- Voting rights of more than 25%
- Voting rights that allow you to pass or block governing resolutions of the entity
- Material influence over the policy of a qualifying entity, such as the power to appoint board members and influence the strategy and direction of the entity
- The ability to control or direct a qualifying asset or an increase in this ability
- The acquisition was completed on or after 12 November 2020
Qualifying entities include:
- Companies
- Limited partnerships
- Any other corporate bodies
- Partnerships
- Unincorporated associations
- Trusts
Qualifying assets include:
- Land
- Tangible moveable property
- Ideas, information, and techniques with industrial, commercial, or other economic value, i.e., intellectual property
How 3CS can help
If you are considering an acquisition that could have national security implications or you need advice on whether to notify the authorities of a transaction, our corporate lawyers can help.
For advice, guidance, or representation in respect of the National Security and Investment Act, please get in touch with us.
