Is The UK Open For Business? Ten Key Takeaways From The UK FDI Regime In 2023

The UK's National Security and Investment Act 2021 (NSIA) – the UK equivalent of CFIUS – is now approaching its second anniversary. Here we reflect on our experiences of the regime in 2023 with ten key takeaways.

1. No prohibitions

While continued geopolitical turbulence and economic headwinds have contributed to decreased deal activity globally, 866 transactions were notified under the NSIA in FY2023. Although lower than the Government's initial Impact Assessment estimate of between 1,000 – 1,830 annual notifications, this figure significantly exceeds the number of notifications in comparable jurisdictions, such as Germany (306) and the US (286). Whereas in 2022 the Investment Security Unit (ISU) issued five prohibition decisions, no deals were blocked in 2023.

2. Less intervention, but the regime continues to be investor agnostic

Perhaps unsurprisingly therefore, we have also seen considerably fewer interventions from the ISU last year. However, all three of the ISU's conditional clearances in 2023 (compared with nine in 2022) involved investors from traditionally "friendly" jurisdictions:

• In February 2023, the first decision made by the Cabinet Office (see update below) saw remedies being imposed on a US private equity firm (Stellex Capital Management) in relation to the acquisition of David Brown Santasalo, a UK engineering company – and defence contractor – specialising in gear systems. This is the only the second intervention imposed on a US private equity firm.
• In June 2023, the acquisition by Canada-based Voyis Imaging of certain (unspecified) assets belonging to the University of Southampton was held to present a national security risk "as a result of potential military uplift to foreign states through gaining access to the licensed Qualifying Asset". The final order in June 2023 required Voyis to carry out due diligence checks on all new customers seeking to purchase the qualifying asset and to report this information to the UK Government on an annual basis.
• In August 2023, the Government conditionally cleared EDF's acquisition of two General Electric businesses active in the supply of propulsion systems to the Royal Navy, notwithstanding that the deal involved ultimate parents from two NATO allies (US and France).

3. Most transactions are cleared within 30 working days

In its 2023 annual report, the Government confirmed that 93% of transactions were cleared within 30 business days. While most transactions are cleared quickly and unconditionally, this statistic could be symptomatic of the NSIA regime simply capturing many transactions which clearly present no national security risks.

4. UK acquirers in the spotlight

The NSIA regime remains agnostic as to the nationality of the acquirer. In FY2023, 33% of all transactions called-in for closer scrutiny involved a UK acquirer, second only to Chinese acquirers (42%). This serves as a clear reminder that the UK foreign direct investment regime is by no means limited to foreign investments.

5. On the defensive

Defence-related acquisitions continue to feature prominently at call-in and final order, with approximately 47% of the 671 mandatory notifications in FY2023 concerning the defence sector. This was followed by the communications, energy, advanced materials, and computing hardware sectors, respectively. Transactions involving the defence sector will often result in remedies where there is a perceived national security risk around the preservation of sensitive information and the ability to support Ministry of Defence programmes.

6. Structural overhaul

Responsibility for the identification and mitigation of national security risks to the UK, and the general operation of the NSIA, rests with the Investment Security Unit, which until 2023 sat within the UK Department for Business, Energy, and Industrial Strategy (BEIS). In February 2023, BEIS was dismantled, and national security duties have now been assigned to the UK Cabinet Office, ostensibly to bring the functions of the ISU closer to central government. Early indications are that this has had a positive effect on the overall process, with a range of structural and behavioural solutions identified to facilitate clearances rather than prohibitions in 2023.

7. Updated guidance

In April 2023, the Government published updated Market Guidance for investors, including:

• Updated guidance in relation to issues such as acquisitions involving parties "suffering material financial distress" (for which accelerated reviews may now be permitted), timing of notifications, and the stages of the review (including the ability to withdraw from an acquisition, and the ability to voluntarily extend the review period);
• Updated guidance on the 17 sensitive sectors, explaining how parties should engage with the ISU where they are unsure whether a mandatory filing is required; and
• Updated guidance on completing and registering a notification form (including the submission of information classified above OFFICIAL under the Government Security Classification system).

This updated market guidance provides useful insights for businesses and practitioners to help parties make informed decisions in connection with their filing practices.

8. Reforms to come

The UK Government is consulting on how it can refine the scope of the NSIA regime, improve the notification and assessment process, and optimise public guidance and communications, to ensure that the NSIA powers "remain up to date, proportionate and transparent for businesses, while protecting the UK's national security". Among the main areas under consideration are a refinement to the mandatory notification requirements (including updating the existing categories of sensitive areas) and introducing exemptions for certain types of transactions (such as internal reorganisations or situations where temporary control of a distressed company is acquired by liquidators, official receivers, or special administrators). Responsive measures and potential legislative changes are expected to follow in 2024.

9. Towards outbound foreign investment?

Foreign investment regimes have traditionally focused exclusively on inbound investments by (typically) foreign companies into a given country's domestic businesses. However, a significant increase in global geopolitical tensions in recent years has contributed to mounting concerns that domestic companies engaging in outbound investment pose a risk to national security through the loss of technology and adversely improving certain other countries' security.

Following in the footsteps of the US and the European Commission, the UK is also now considering restricting outbound investment on national security grounds. In the Atlantic Declaration agreed in June 2023 with the US, it is acknowledged that the US is "working to develop a targeted set of controls on outbound investments in sensitive technologies with a core national security nexus", and that the UK "intends to complement this by swiftly engaging a range of business and financial stakeholders to develop an evidence base to assess and inform how the UK can best calibrate its actions to respond effectively to these risks and meet our shared objective".

10. Looking ahead

As the NSIA enters its third year, we expect the vast majority of transactions to continue to be cleared unconditionally, and for the Cabinet Office to implement a series of measures to refine the scope of the legislation and to implement greater flexibility in the notification form. We expect that internal reorganisations (involving no ultimate change of control), or those transactions involving financially distressed companies, will no longer be subject to mandatory scrutiny, and that additional guidance will be issued in respect of those sectors most likely to give rise to national security concerns (e.g., defence, semiconductors, artificial intelligence).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.