Policy paper

Draft statement of policy intent

Updated 2 March 2021

This was published under the 2019 to 2022 Johnson Conservative government

This is a draft statement that is now out of date. Read the final statement about exercise of the call-in power, which was published on 2 November 2021.

Purpose of this draft statement

This statement describes how the Secretary of State expects to use the call-in power in the National Security and Investment Bill (“the NSI Bill”), and the three risk factors that the Secretary of State expects to consider when deciding whether to use it.

The NSI Bill requires the Secretary of State to have regard to this statement of policy intent when exercising the call-in power.

This statement includes illustrative examples of the factors the Secretary of State will take into account when deciding whether to exercise the call-in power. These are non-exhaustive, and the Bill expressly provides that nothing in the statement limits the Secretary of State’s power to issue a call-in notice.

The context in which national security risk is assessed is constantly evolving. Geopolitical, economic, and technological developments interplay in complex ways. This fact should be borne in mind when considering this document. It is also the reason that the Bill requires that the Secretary of State, as a minimum, reviews this statement every five years.

This document is not a substitute for professional legal advice, but the Secretary of State welcomes early engagement from investors and businesses that are interested in discussing potential transactions.

Background

While investment – both domestic and foreign – makes a vital contribution to the UK economy, a small number of investment activities have the potential to pose a risk to national security.

The NSI Bill gives the Secretary of State powers to screen investments and to address any national security risks they involve. This includes a power to call in acquisitions of control over entities or assets, called ‘trigger events’, where the Secretary of State reasonably suspects that there is – or could be – a risk to national security as a result of the acquisition of control. Once a trigger event has been called in, the Secretary of State will carry out a full assessment of the potential risks and, where necessary and proportionate, impose remedies to address such risks.

The Secretary of State for Business, Energy and Industrial Strategy will be the decision-maker with regard to the use of this call-in power. They must have regard to this statement when exercising the call-in power, and will consider:

a. the target risk – the nature of the target and whether it is in an area of the economy where the government considers risks more likely to arise

b. the trigger event risk – the type and level of control being acquired and how this could be used in practice

c. the acquirer risk – the extent to which the acquirer raises national security concerns.

Assessing the national security risk of a trigger event will be the responsibility of the Secretary of State. However, acquirers, sellers, and target entities are encouraged to formally notify the Secretary of State of trigger events involving them which they consider could give rise to a national security risk on the basis of this statement. Notification is mandatory for notifiable acquisitions considered most likely to give rise to national security risks. In these circumstances, the obligation will be on the acquirer to notify, with a penalty for completing a transaction without clearance. Details of where this obligation applies will be set out in regulations made under section 6 of the NSI Bill.

Whether or not the parties have given a voluntary notification, the Secretary of State has the power to call in a trigger event which has taken place up to 6 months after they became aware (for example, coverage of the deal in a national news publication) of it so long as it is done within 5 years of the trigger event occurring. Where the acquisition was subject to mandatory notification, the 5 year time limit does not apply.

The power to address national security risks will be governed by the principles of necessity and proportionality, and will not be used arbitrarily to interfere with investment. Its use will not be designed to limit market access for individual countries; the transparency, predictability, and clarity of the legislation surrounding the call-in power is designed to support foreign direct investment in the UK, not to limit it.

The target risk

The target risk concerns the entity or asset which is the subject of the trigger event. Some entities and assets are, by their nature, more likely to give rise to national security risk.

The government considers that the economy, broadly speaking, can be split into 3 levels of risk:

• core areas – these are the headline sectors in which national security risks are more likely to arise than in the wider economy and where mandatory notification applies for some types of trigger events. These are national infrastructure sectors defined by the Centre for the Protection of National Infrastructure, advanced technology, military and dual-use technologies, and direct suppliers to Government and the Emergency Services.
• core activities – primarily within the core areas, the Secretary of State will identify in regulations the specific activities where risks are most likely to arise and where the call-in power is therefore most likely to be used. Acquisitions of entities involved in these activities will be subject to mandatory notification. While asset acquisitions will not be subject to mandatory notification, where assets are closely related to those activities, their acquisition is more likely to be called in than other assets.
• the wider economy – the government generally considers that trigger events occurring in the remaining areas of the economy are unlikely to pose risks to national security, so such transactions are only expected to be called in on an exceptional basis .

Assets

The NSI Bill will give powers to the Secretary of State to call in acquisitions of control over:

• land
• tangible (or, in Scotland, corporeal) moveable property
• ideas, information, or techniques which have industrial, commercial or other economic value

The Secretary of State expects to intervene very rarely in asset transactions. However, where assets are integral to a “core area” entity’s activities or, in the case of land, the asset is in a sensitive location, their acquisition is more likely to be called in than other asset transactions.

Example

Business A has developed a unique drone technology with a military application. Party B seeks to buy the designs and associated rights (Asset C) for that technology. Although they do not seek to buy shares in Business A itself, the acquisition of Asset C could nonetheless give rise to national security risks because of its nature and potential applications.

Land is generally only expected to be an asset of national security interest where it is, or is proximate to, a sensitive site, examples of which include critical national infrastructure sites or government buildings. However, the Secretary of State may also take into account the intended use of the land.

Example

Asset D is a piece of land adjacent to a sensitive Ministry of Defence facility. Party E wishes to buy Asset D. The acquisition may give rise to national security risks as the proximity of Asset D could allow a hostile actor to gather sensitive information about the operations of the Ministry of Defence facility.

The types of tangible moveable property of greatest national security interest will vary across sectors but are likely to be closely linked to the activities referenced in paragraph 14.

Examples of such assets may include physical designs and models, technical office equipment, and machinery.

Example

Asset F is a moulding machine used by Business G to manufacture components for UK military aircraft. Business G upgrades their facilities and Party H seeks to acquire Asset F from Business G. This may give rise to national security risks as the asset may allow a hostile actor to replicate the engineering of, or identify potential vulnerabilities in, components used in active UK military aircraft.

The types of ideas, information or techniques of greatest national security interest will, similarly, vary across sectors but are likely to be closely linked to the activities referenced in paragraph 13. Examples include trade secrets, non-physical designs and models, and source code.

Example

Asset I is the underlying source code used by Business J in its computer programmes used by UK air traffic control operators. Business J is approached by Party K who wishes to acquire the right to access and use Asset I. This may give rise to national security risks as the asset may allow a hostile actor to identify vulnerabilities in the programmes used to monitor and communicate with aircraft in UK airspace.

It should be emphasised that the Secretary of State does not ordinarily expect national security risks to arise from the routine provision of goods or services between businesses and therefore does not generally expect to call such transactions in for assessment.

Rather, as noted in paragraph 16, the Secretary of State is primarily interested in assets that are integral to a sensitive entity’s activities. That includes a small, new business whose main asset – for example, a recently created communications app – is the sole or a primary reason for the business existing.

Asset acquisitions made by an individual for purposes that are wholly or mainly outside the individual’s trade, business or craft are (with the exception of land and some items on the export control list) not within scope of the regime.

The trigger event risk

The trigger event risk is the potential of the underlying acquisition of control to undermine national security.

Trigger events may increase the ability of a hostile actor to undermine national security, or position themselves to do so. This might involve gaining control of a crucial supply chain, or obtaining access to sensitive sites, with the potential to exploit them. Further examples of trigger event risk include – but are not limited to – the potential for:

• disruptive or destructive actions: the ability to corrupt processes or systems
• espionage: the ability to have unauthorised access to sensitive information
• inappropriate leverage: the ability to exploit an investment to influence the UK

Government’s position on geopolitical or commercial questions

The risk will be assessed according to the practical ability of a party to use an acquisition to undermine national security. Parties who are unsure of whether a trigger event may pose a risk should consider what the control the acquirer will gain over the entity or asset would enable a hostile actor to do to the detriment of national security, for example controlling the long-term strategy of the entity or allowing others to use the entity’s sensitive assets.

Example

Party X acquires more than 25% of shares or votes in Company Y. Under the Companies Act 2006, a holding in a company of ordinary shares above 25% enables the controlling party to block certain key decisions which require special resolutions to be passed. For example, if Company Y wished to amend its articles of association, or reduce its share capital, it would need to secure a majority of 75%, and, with a stake above 25%, Party X would be able to single-handedly block Company Y from obtaining this majority.

As a result, the trigger event risk is higher than if Party X acquired 25% or less of shares or votes in Company Y.

In respect of assets, the Bill provides that when an acquirer gains rights or interests over an asset, it will count as a trigger event, provided that it enables the acquirer to use the asset or to direct or control how the asset is used.

Acquisitions of further control over an asset are also trigger events but the Secretary of State may call them in only where they result in the acquirer’s practical ability to use, or to direct or control how the asset is used, to a greater extent than prior to the acquisition. For example:

• if an existing co-owner of an asset subsequently agrees with the other co-owners that they will have sole decision-making responsibility about the use of the asset
• if someone who previously had a right of way over land close to a sensitive site then bought that land

Similarly, although loans, conditional acquisitions, futures, and options are not exempt from scrutiny, the overwhelming majority of these are expected to pose no national security concerns, including within the core areas. In the rare circumstances where they do pose concerns, the Secretary of State generally only expects to intervene when an actual acquisition of control will take place (e.g. a lender seizing collateral).

The acquirer risk

The acquirer risk concerns the national security concerns related to a specific acquirer.

While it is expected that parties will do due diligence and notify the Secretary of State where they have concerns, the Secretary of State recognises that even thorough commercial due diligence will not necessarily capture national security concerns. Therefore, detailed assessments will be the responsibility of the Secretary of State.

The acquirer risk will be considered alongside the target risk and the trigger event risk; the Secretary of State recognises that even where an acquisition of control may have the potential to undermine the UK’s national security, the vast majority of acquirers will not seek to use it in this way. For example, the Secretary of State recognises that pension funds may be long-term investors in entities that operate in the UK’s national infrastructure, but will not often seek to interfere in their processes even if they have the capability to do so.

The acquirer risk will be assessed on a case-by-case basis. Factors which will be considered by the Secretary of State when deciding whether to exercise the call-in power will include:

• those in ultimate control of the acquiring entity
• the track record of those people in relation to other acquisitions or holdings
• whether the acquirer is in control of other entities within a sector or owns significant holdings within a core area, as this increases their potential leverage
• any relevant criminal offences or known affiliations of any parties directly involved in the transaction

Clearly, national security risks are most likely to arise when acquirers are hostile to the UK’s national security, or when they owe allegiance to hostile states or organisations. However, the National Security and Investment regime does not regard state-owned entities, sovereign wealth funds – or other entities affiliated with foreign states – as being inherently more likely to pose a national security risk. The Secretary of State recognises that these organisations may have full operational independence in pursuing long-term investment strategies with the object of economic return, raising no national security risks.

As such, when considering the acquirer risk, the Secretary of State will consider the entity’s affiliations to hostile parties, rather than the existence of a relationship with foreign states in principle, or their nationality.

While, clearly, the Secretary of State is more likely to call in a trigger event following an acquisition of control by a hostile actor, the fact that the Secretary of State has exercised their call-in power should not be taken as a judgement that the acquiring party is necessarily hostile.