The UK's National Security and Investment Act (NSI Act) has been in force for almost two years. It enables the UK Government to scrutinise M&A deals and a range of other transactions (including acquisitions of assets only, without any related business or enterprise) on grounds of national security (click here for our detailed briefing). Many of the sectors where prior notification (for qualifying transactions) is mandatory relate to infrastructure, including communications and data, energy and transport. Unlike similar regimes in other countries, there is no requirement for a foreign (non-UK) investor to be involved. There are also no financial thresholds or de minimis exemptions; instead the focus is generally on the nature of the underlying business or asset in which an interest is being acquired (and whether it falls within the list of sectors/activities that the Government is concerned about).
It will be apparent from the brief description of the NSI Act above that it can easily "bite" on a wide range of infrastructure deals. So what lessons can be gleaned from the experience of past 2 years, particularly as regards the infrastructure sector?
Most deals are cleared without "call in"
The good news from the perspective of infrastructure investors is that clearance remains the norm, with over 90% of transactions during the reported period being cleared without being called-in. A "call in" means that the Investment Security Unit (ISU) has decided that the transaction requires further investigation; this will normally result in a delay in completing the deal (and will always do so in relation to deals subject to mandatory notifications). On the other hand, the regime captures a high number of transactions overall.
Close to 1000 deals are notified per year
Between 1 April 2022 and 31 March 2023, 866 notifications were received. Whilst this is slightly below the Government's initial estimate of 1000-1850 per year, it is still a substantial number.
Energy and infrastructure deals appear to account for a significant proportion of overall notifications, but because of the way the figures have been set out, we have not been able to arrive at a precise figure.
A significant proportion of call-ins relate to infrastructure
As you might expect, defence and military-related acquisitions featured prominently in terms of the number of transactions called-in by the UK government. But infrastructure also features heavily, with the top 10 sectors (in terms of call-in numbers) including energy, data infrastructure and communications. Indeed, communications and energy were the second and third highest categories for the number of final orders made (behind military and dual use).
Call-in typically results in substantial delay to completion
In the 2022-2023 period, 65 transactions were called in; this is broadly similar to the number of deals subject to a more formal process of scrutiny (involving, at a minimum, a Phase 1 investigation) over the course of a year by the CMA under the UK's merger control regime. The average number of days from call in to final order was 77 – which highlights the potential for significant delay in completing deals.
Very few deals are blocked – but infrastructure deals can be problematic
In practice, very few deals are blocked – only 5 were blocked or subject to a divestment order between 1 April 2022 and 31 March 2023. In most cases, security concerns are addressed by the imposition of conditions. An example of a deal which raised concerns in the infrastructure sector (but was ultimately cleared) was the proposed acquisition of development rights for the "Stonehill Project", aimed at improving the UK Power Grid's ability to use renewable energy by StoneHill Energy. The concern appears to have been that a majority shareholding in StoneHill owned by a Chinese government department (the State-Owned Assets Supervision and Administration Commission) could pose risks to the UK's critical energy infrastructure network. However, rather than blocking the deal, the Government imposed a package of remedies requiring StoneHill to obtain Government approval before appointing a power offtake operator and preventing the sharing of information from that operator to StoneHill.
Refining the NSI Act regime: more change on the way?
To reflect its experience over the past 18 months, and recognising the high clearance rates, the Government has recently launched a Call for Evidence covering potential changes to the NSI Act regime. As part of this, Government is considering whether there are any sectors currently subject to mandatory notification that should no longer be (due to limited national security risks arising) and also, conversely, whether some of the mandatory sectors should be expanded. Infrastructure investors should note the proposals to:
- expand the scope of the Communications category by reducing the minimum turnover threshold for public electronic communications networks or services below the current £50m cut-off;
- expand the scope of the Data Infrastructure category to bring within scope entities that own, operate, manage, or provide services to, colocation data centres; and
- to update the Energy category to include multi-purpose interconnectors over time (to reflect changes made by the Energy Act – see section 9 below).
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