Key figures
- The Investment Screening Unit (ISU) received 906 notifications (up from 865) during the reporting period of April 1, 2023 to March 31, 2024, of which the vast majority (83%) were mandatory filings.
- The number of voluntary filings fell compared to the previous period (from 179 to 120) and the number of retrospective validation applications (i.e., cases that have been completed without prior approval) rose to 33 (from 15 in 2022-23).
- 41 deals were called in for an in-depth review (down from 65), including four that were not notified.
- Five of those 41 ended in government intervention (down from 15), of which one related to a deal not notified. None was prohibited (compared to five in 2022-23).
- On average it took 29 working days for the ISU to call in a transaction, a slight increase on 2022-23. In-depth assessments resulting in clearance took an additional 48 working days on average, or 53 working days where conditions were imposed.
- Consistent with 2022-23, nearly half of mandatory notifications related to the defense sector but the government also intervened in deals across a range of sectors, including communications, energy, computing hardware and advanced materials.
Initial processing periods increase
Of the notifications reviewed, the government dealt with 95.6% of cases in the initial 30-working day review period. However, the period for the ISU to accept a notification increased for both mandatory and voluntary notifications (averaging six working days and eight working days, respectively, up from four last year), adding to the timeline for cases that ultimately raise no concerns. The time taken to reject notifications also increased in the reporting period.
The reason behind the increases to these initial periods is unclear. It could be the result of a highker number of more complex cases being notified in the reporting period. Alternatively, it could represent an overall increase in the time taken for the ISU to start its statutory review and reach an initial decision across all types of cases—this would be of more concern.
Parties will need to build in extra time for NSIA reviews which, with the increased period for acceptance, are now taking closer to two months rather than six weeks.
Likewise, the average time to call in a transaction for in-depth review was marginally longer (29 working days for both mandatory and voluntary notifications), albeit within the statutory deadline of 30 working days.
The number of rejected notifications decline
Following the submission of a notification to the ISU, the ISU will take a decision to ‘accept’ or ‘reject’ that notification, with feedback provided where a notification is rejected. Rejected notifications may be resubmitted after any feedback is addressed.
Rejections in the reporting period were significantly lower compared to the previous period (24, down from 42). This suggests an improved understanding of the information required in the notification.
As previously discussed, updated Market Guidance and a revised section 3 statement provide welcome clarifications and updates on the scope of the regime. Further revisions were anticipated prior to the U.K.’s July general election. For now, however, it appears to be business as usual under the newly installed Labour government; the timing and scope of any developments remains to be seen.
In-depth reviews are getting quicker
However, in welcome news, the duration of the in-depth review period appears to be falling. Whilst the additional duration of in-depth reviews resulting in clearance was unchanged, in-depth reviews resulting in intervention were substantially shorter, falling from: 81 working days to 53 working days. This is an expected corollary of fewer extensions.
During an in-depth review, the ISU has 30 working days to assess national security risks and to determine whether remedies are required. The ISU can unilaterally extend this period by up to 45 working days and further extensions can be agreed between the ISU and the acquirer.
There has been a marked decline in the use of extensions in the reporting period. The ISU unilaterally extended the review period on 12 occasions in the reporting period, down from 29 times in the previous period. Similarly, voluntary extensions were used on only four occasions—down from ten occasions in the previous period.
This may indicate that the ISU’s capability to complete in-depth reviews in the 30-working day period is increasing on account of ISU experience with the NSIA regime, and the fact that extensions are most often used in the most challenging cases and where remedies are required (of which there were fewer during this period).
In the report, the government warns against drawing conclusions about timing trends given the small number of cases with interventions, but in our view this decrease is striking.
High proportion of voluntary notifications called in
Voluntary notifications represented a higher proportion of the transactions called in for in-depth review (37%, up from 27% in the previous period). Of the 117 voluntary notifications reviewed during the reporting period, 15 (13%) were called in for an in-depth review.
Based on our experience, this likely represents notifications of assets related to one of the 17 mandatory sectors. These are not subject to a mandatory notification requirement, but (according to government guidance) are more likely to face call-in. Research collaborations and agreements with higher education institutions are also often subject to voluntary notification (and the government has been proactive in encouraging this).
On initial inspection, intervention appears down
Intervention figures for the reporting period (five final orders, no prohibitions) initially give the impression that intervention is down. However, looking at cases since the reporting period, a different picture emerges: there have been six final orders in the less than six months since the end of the reporting period (albeit no prohibitions).
Withdrawals may mask actual interventions
Of the 41 transactions called in for in-depth review, parties withdrew the notification in ten instances, so no final determination was made by the government on national security risk. This is in line with the 11 withdrawn transactions in the previous reporting period, but higher as a proportion of call-ins.
Significantly, half of these withdrawals were related to academic research and development in higher education. This may be because the government has been encouraging universities to notify their arrangements, releasing guidance for higher education and research-intensive sectors in May this year.
Withdrawals also occurred in relation to professional scientific and technical activities, and the information and communication sector.
Chinese investment continues to attract scrutiny
Investment from Chinese-affiliated entities continued to receive the highest degree of scrutiny, with 41% of deals called in for in-depth review relating to Chinese investors. This is despite China representing only around 1% of mandatory notifications.
Conversely, none of the five deals subject to conditions was linked to China. Nevertheless, eight of the ten withdrawals were linked to China, suggesting a preference on the part of Chinese investors to abandon a transaction when faced with an in-depth review and possible intervention.
Investment from the U.K. and the U.S. also came under scrutiny. Two deals subjected to conditions involved U.K. investors and two involved U.S. investors. As with the previous period, we expect the government’s main concern here is the sensitivity of the target assets.
Commitments favored over penalties
Like the previous reporting period, no penalties were issued, and no criminal prosecutions were concluded. This is despite the ISU receiving 33 retrospective validation applications (of which all but one were accepted) and the ISU identifying 34 offenses of completing a notifiable acquisition without approval. The ISU instead requested that parties provide commitments to guard against repeat offenses. It is unclear whether, as the regime continues to mature, waning tolerance of such breaches will result in a change of approach.
