UK government outlines further changes to country’s investment screening regime

19 Apr 2024

The government has announced further changes to the UK’s screening regime, governed by the National Security and Investment Act 2021.  Following DRD’s analysis on the Act’s ‘Black Box’ operation and a review of its functioning after one year, in this report, DRD Senior Associate, Ed Bowie, assesses where the changes align with industry’s experience to date, and what the changes say about the government’s perspective on foreign investment.

The UK government’s announcement yesterday that it will streamline its flagship National Security and Investment Act 2021 will be welcomed by the UK’s antitrust and foreign investment lawyers.  In a speech to Chatham House, Deputy Prime Minister Oliver Dowden MP revealed that the government will bring forward a series of tweaks to the Act, as well as commence a more widespread review of outbound investment.

Key actions to be take in relation to the Act include:

  1. Publishing an updated Section 3 Statement, setting out how the Secretary of State expects to use the call-in power under the Act and what it is that the government is seeking to protect. This is in response to some respondents to the government’s Call for Evidence requesting greater clarity on how it goes about assessing the national security risks of a transaction.
  2. Launching a consultation with a view to updating the mandatory area definitions, including proposals for new standalone critical minerals and semiconductors categories. This reflects the fast-paced nature of technological change, as well as ongoing concern that the Act’s definitions are in some respects insufficiently clear.
  3. Considering technical exemptions to the Act’s mandatory notification requirements. This follows concern from lawyers who regularly engage with the process that the appointment of liquidators, official receivers and special administrators should be exempt from mandatory notification because automatic inclusion can detrimentally impact entities in financial distress.
The government’s announcements yesterday demonstrate that it is open and listening to the feedback it has received on how the Act is working.

While investors and their lawyers will broadly welcome these amendments, they will be disappointed that the government has rejected some respondents’ calls for a fast-track process for certain types of acquirer.  For example, respondents suggested that acquirers who have already had a transaction cleared under the Act should be treated differently to those making their first application.  However, the government has reiterated that “some targets are considered so sensitive they will always warrant screening”.  This will disappoint institutional investors looking to make regular investments into the UK.

Outside of these more technical changes to the Act, Dowden also announced potentially significant reviews of universities’ reliance on foreign income, as well as into the UK’s outward investment and exports controls.  The former is aimed at limiting the ability of foreign states to access universities’ research materials and intellectual property, while the latter is intended to combat the UK economy being “targeted by state-based actors and their proxies across our inbound and outbound investment flows”.

British investments flowing into new technologies such as AI and facial recognition, which in turn have the potential to undermine Western national security, are in the government’s sights.  Any potential new screening of outbound investment may be provided for under an amended version of the Act, although it is unclear how practical any such mechanism would be.

The government’s announcements yesterday demonstrate that it is open and listening to the feedback it has received on how the Act is working.  Dowden pointedly remarked in his speech that his “whole disposition in applying this Act is I don’t want to apply it”.  While the government has not sided with industry in relation to all the reforms that had been called for, the government’s overall attitude toward the Act and how it functions should provide some comfort.