The National Security and Investment Act 2021 – a potential threat to foreign investment and collaboration?

The National Security and Investment Act 2021 – a potential threat to foreign investment and collaboration?

The National Security and Investment Act 2021 (NSIA) came into full effect on the 4th of January 2022, bringing with it an extensive new investment screening regime. The new regime introduced two new reporting systems – a mandatory review requirement on transactions in 17 sectors, and a voluntary filing regime for all other qualifying investments outside of these sensitive sectors. The government estimates that ‘between 1,000 and 1,800 transactions per year’ will require notification and approval and about 10% ‘subject to a detailed analysis’[1].

The regulation of foreign investments under national security and foreign investment regimes is not unique to the UK. Rather, it is part of a recent trend across the globe, with such regulation growing increasingly more comprehensive and expanding in scope to ‘unprecedented levels’[2]. This is certainly the case with the NSIA, which gives the UK government wide powers to call in investments for review on the basis of national security and impose any remedies it deems necessary. Whilst the law is supposedly aimed at ‘[strengthening] oversight of acquisitions of potentially sensitive companies’, its far-reaching nature, alongside potential civil and even criminal penalties for breaches, has left the business community apprehensive at the possibility that the NSIA will impede overseas investment in UK business[3]. It is not unexpected that such a drastic shift in policy has given rise to public concern, as the government guidance on the effects the NSIA could have outside of the UK indicates that the Government considers the statute to have wide-ranging extra-territorial applicability[4].

Whilst it is still early days, in addition to the corporate sector, I would expect that the Research and Development (R&D) sector is also eager to see how the NSIA will be used in practice and what impacts this could have for them. Whilst the UK’s R&D strength is undeniably an asset in attracting international partnerships and investments, such as in the crucial R&D work of UK institutions during the coronavirus pandemic, it is not without risk. It is reasonable that the government has decided to address the legislative gap concerning the regulation and vetting of foreign investors and collaborators in R&D, in order to ensure sensitive information and technology is not inadvertently shared with hostile actors. However, naturally, ‘private companies, governments and other organisations’[5], who frequently invest and are involved in universities and other organisations’ research, are concerned that the new regime will have adverse effects on collaboration and international investment within the research space.

The government guidance on the operation of the NSIA concerning research-intensive sectors suggests that if a party ‘gains control over a university or research organisation’s qualifying assets’ – for example, where property (either tangible or intellectual) is licensed out by a university – ‘this will amount to a qualifying acquisition under the NSIA’[6]. Similarly, where a party ‘gains control over a qualifying asset generated by the research it has funded’, this will also be considered a qualifying acquisition[7]. Under the NSIA, the Secretary of State is able to ‘call-in’ any transaction within the scope of the regime, including those that fall outside the mandatory regime, if they suspect the transaction could pose a risk to national security. However, qualifying acquisitions are at higher risk of being called in and, after review, could be adversely affected, by the voiding of the transaction, for example. Accordingly, this risk may not be commercially acceptable to potential foreign investors or collaborators with the UK in R&D and thus have an unfavourable impact on the industry.

This legislation has only been in effect for a brief period of time and, as a result, it is impossible to say with certainty how it will be used and what significant ramifications it will have. Whilst its ‘principles and procedures have not yet been tested’, the UK government has said ‘it expects… around 10 cases requiring remedies per year’[8]. Furthermore, the government guidance indicates that it expects that the complete blocking of transactions will rarely be used and will likely use remedies involving the imposition of conditions on transactions, such as ‘limiting the extent of shareholding acquired, limiting access to sensitive information… and/or compliance checks by the Government or requiring Government approval of key personnel’[9].

[1] https://www.shoosmiths.co.uk/insights/articles/the-nsi-act-2021-what-does-national-security-mean

[2] https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2022/02/the-evolving-concept-of-national-security.pdf

[3] https://www.ft.com/content/1cb2f897-4e57-4805-bc73-268ddbaaed8c

[4] https://www.gov.uk/government/publications/check-if-an-acquisition-outside-the-uk-will-be-in-scope-of-the-national-security-and-investment-act

[5] https://www.linklaters.com/zh-sg/insights/blogs/foreigninvestmentlinks/2021/july/its-getting-closer-national-security-and-investment-act-to-take-effect-on-4-january-2022

[6] https://www.linklaters.com/zh-sg/insights/blogs/foreigninvestmentlinks/2021/july/its-getting-closer-national-security-and-investment-act-to-take-effect-on-4-january-2022

[7] Ibid.

[8] https://www.natlawreview.com/article/uk-national-security-and-investment-act-impact-ma

[9] https://www.traverssmith.com/knowledge/knowledge-container/the-uks-national-security-and-investment-act-2021-what-you-need-to-know/