The phrase ‘national security’ is at the heart of but not defined in the National Security and Investment (NSI) Act 2021. There are some insights from related legislation and other sources, but the absence of definition means there is legal and consequently business uncertainty.

From 4 January 2022 when the NSI Act 2021 came into full effect, the meaning of national security became crucial to M&A activity concerning the UK. The government estimates that between 1,000 and 1,800 transactions per year will need to be notified and about 10% subject to a detailed analysis.

The background to the Act is the outcome of a government review that identified ‘there will be reforms to the government’s approach to the ownership and control of critical infrastructure to ensure that the full implications of foreign ownership are scrutinised for the purposes of national security’. In the period between that review and the adoption of the Act, changes were made to the Enterprise Act 2002, a competition law-based regime, which allowed the government to review transactions falling within six sectors — some of which such as advanced materials were non-obvious topics within a national security agenda.

Experience to date under the Enterprise Act 2002 shows that:

• The Ministry of Defence is an important agent,
• The economic sectors called for review were mostly predictable as possible areas of concern,
• The target businesses have all been UK-based,
• The nationality of the purchaser does not seem to be neutral, and
• The issues of concern are:
  • The protection of and access to sensitive information,
  • The maintenance of the UK aerospace industry, and
  • The continuity and integrity of the supply of services (products) or capability to service products important to the government.

Consideration of other sources for an understanding of the phrase national security are helpful but not conclusive. Examples of other sources are the Security Services Act 1989, the House of Lords case, Secretary of State for the Home Department v Rehman and responses to requests made under the Freedom of Information Act 2000. Outside of the UK the USA’s Defense Production Act 1950 is similar in spirit and wording to the Act — yet that has resulted in peculiar outcomes, such as the requirement for the Chinese gaming company Beijing Kunlun Tech Co Ltd to sell Grindr LLC, a popular gay dating app.

The very broad catchment of notifiable transactions under the Act, covering 17 sectors, raises the political and legal risk of the government extending the meaning of national security beyond what it has meant to date. In particular, the risk is that the Act becomes a tool for industrial policy.

However, for three reasons the government does not have a free hand to define what national security means. First, the government is bound by the contextual definitional meaning of that phrase. Second, decisions and actions taken under the Act are subject to an appeal for judicial review. Third, pursuant to international agreements of which the UK is a signatory, the UK is bound by the obligation to accord foreign investments fair and equal treatment.

It is too early to say whether the Act will be a tool for government to impose its industrial policy and so raising the risk of preventing successful UK businesses from being acquired by non-UK businesses, limiting shareholder exit options, and restricting investment flows.

*With kind permission of the publisher, this article is a summary of the article The National Security and Investment Act 2021 by Kiran Desai, published by Lexxion in European Competition and Regulatory Review, (4/2021) – see https://core.lexxion.eu/article/CORE/2021/4/12

**Failure to notify a transaction subject to mandatory notification under the Act automatically renders the transaction void and risks financial and even criminal penalties for the transaction parties. There are no financial or market share thresholds under the Act and many small and mid-cap transactions that previously did not require any regulatory review in the UK are subject to the Act. For advice on the possible application of the Act, please consult either Simon Barnes at [email protected] or Kiran Desai at [email protected]