What the BEIS Reshuffle Means for the UK’s Investment Screening Regime

On 8 February 2023, the UK Prime Minister, Rishi Sunak, announced his government’s decision to restructure the Department of Business, Energy and Industrial Strategy (BEIS), splitting it into a number of separate departments. The restructuring will involve the Investment Security Unit (ISU), the unit responsible for operating the UK’s investment screening regime under the UK National Security and Investment Act 2021 (NSIA), being moved to sit within the Cabinet Office. A new senior minister – the current head of the Cabinet Office, Oliver Dowden – will be made responsible for having oversight of the ISU and will become the new decision-maker under the legislation.  

These are significant changes, likely to result in material disruption to delivery by the ISU in the short term. While a combination of statutory deadlines and political pressure to sustain efficient performance should protect most in-flight transactions from material delay, some delay cannot be ruled out for the most complex cases, especially given the open-ended nature of the process following a decision by the government to call a transaction in for review.  

It is not clear yet whether the restructuring will lead to any change in current policy or substantive approach to the assessment of national security issues by the UK Government - and in particular if this greater proximity to central government will lead to increased politicisation of the decision-making process.

Why has this happened?

It is now more than a year since the NSIA came into effect. Using its new powers to scrutinise transactions with a UK nexus, the government has called in for detailed investigation well over 100 transactions, of which it has blocked or required the unwinding of five,[1] and has required remedies in a further eight to mitigate risks to UK national security.[2] The remainder of deals, thought to involve somewhere between 1000 and 1800 filings, have been cleared. Broadly speaking, the ISU has been operating effectively, notwithstanding concerns about the “black box” nature of the process (see further below), which is particularly acute where transactions involve substantive issues.

There is no suggestion that the move is a response to concerns about how the regime is operating. The reorganisation is part of a wider initiative to refocus the activities of BEIS and create a department focused on energy – all of which is unrelated to the operation of the NSIA.  However, it is rumoured that a shift into the Cabinet Office has long been desired to give the Prime Minister’s Office more oversight over the operation of the UK’s investment screening regime. The wider BEIS break-up seems to have presented a convenient opportunity to make this happen. There is also a certain logic to having the ISU sit within the Cabinet Office. This is the department that supports the Prime Minister in overseeing government and which also has the responsibility of supporting the National Security Council and Joint Intelligence Organisation. The ISU sitting in a more centralised position within the Cabinet Office also aligns with its role as a central coordinator of national security reviews. 

Transparency issues

Unrelated to the reorganisation, a parliamentary inquiry was recently opened in relation to information sharing by the ISU, with a call for evidence on this topic being issued on 1 February 2023 by the BEIS Sub-Committee on National Security and Investment (the “Committee”). The Committee has requested evidence on how effectively the ISU communicates with the firms involved in transactions and how this could improve; as well as how the impact and effectiveness of the NSI regime could be measured.[3]

The outcome of this inquiry could be timely if any recommendations to improve transparency are taken on board as part of the restructuring. The ISU’s operational approach has been criticised for a lack of transparency, making it difficult for parties to understand and assess the risk of a transaction raising national security concerns, as well as to engage with the ISU, or government more broadly, in respect of concerns that do arise (see our previous client alert which also touches on these transparency issues).   

What does this mean for the parties engaging with the UK’s investment screening regime?

In the short term, shifting the ISU to an entirely new department will lead to significant operational disruption, placing pressure on delivery for in-flight cases. Parties involved in straightforward transactions will be protected from delays by statutory timelines, meaning that the ISU will be required to stick to its 30-working-day time limit to decide whether or not to call transactions in. One might expect an increase in the time taken to accept filings, although the ISU is likely to have a keen eye on its performance metrics given that an annual report is due to be prepared at the end of March 2023, which will include reporting on the average number of days to accept filings. Last year’s report confirmed that acceptances took an average of three to four days, comparing the ISU’s performance favourably to that of the Committee on Foreign Investment in the United States (CFIUS).[4]

Comfort can also be taken from the fact that the new decision-maker, Oliver Dowden, is known to be familiar with the regime and national security-related issues in the context of foreign investment, having been both in government when the NSIA was being legislated, and responsible for public interest interventions under the UK’s old public interest regime[5] in his role as Secretary of State for DCMS.

For more complicated cases, however, where the timelines can be extended and the process is more generally open-ended, it cannot be ruled out that the disruption will lead to some delay. That said, the same considerations outlined above in relation to overall timelines and efficiency statistics will mean that both the government and the ISU will be motivated to keep such delays to a minimum.

From a policy perspective, it is not clear whether the government’s restructuring will lead to any change in the substance of decision-making and the degree of intervention in foreign investment cases. With the BEIS Secretary of State as decision-maker, the process was one step removed from central government and therefore - at least optically - more independent. It remains to be seen whether this change will expose the decision-making process to a greater degree of politicisation, notwithstanding the applicable legal constraints, which should act as safeguards to ensure that interventions are based on genuine national security concerns.

MoFo’s global National Security Group has extensive first-hand experience navigating foreign investment regimes all over the world, including in the United States, Germany, Japan, China, and the UK (both in relation to the new NSIA and under the old Enterprise Act regime).

For background on the UK’s new national security regime, please see some of our previous alerts:

• Reflections on the UK Government’s decision to Unwind Nexperia’s Acquisition of Newport Wafer Fab (29 Nov 2022)
• The UK’s New National Security Regime – the First Three Months (21 June 2022)
• Several UK Government National Security Interventions Confirm Heightened Deal Risk for UK Investments (31 May 2022)

[1] The transactions blocked include: the acquisition of know-how relating to vision sensing technology from the University of Manchester by Beijing Infinite Vision Technology Company Ltd in July 2022; the acquisition of Pulsic Ltd by Super Orange HK Holding Ltd in August 2022; the acquisition of Newport Wafer Fab by Nexperia in November 2022; the acquisition of Upp Corporation Limited by L1T FM Holdings UK Limited (whose parent company is LetterOne Core Investment S.a.r.l.) in December 2022; and the acquisition of HiLight Research Limited by SiLight (Shanghai) Semiconductors Limited in December 2022.

[2] The remedies imposed have included: (i) restrictions regarding the transfer of sensitive information, technology or intellectual property; (ii) the introduction or enhancement of security requirements, requirements to maintain strategic capability in the UK or of the provision of certain services to the UK government; (iii) requirements to notify or obtain UK government approval for certain contracts, activities or asset transfers; (iv) requirements to notify the UK government regarding compliance with remedies; (v) requirements to provide the UK government access rights to enable inspection or audit by the UK government; (vi) restrictions on the appointment of board members or staff; and (vii) requirements to install UK government observers on the board.

[3] See https://committees.parliament.uk/work/7264/information-sharing-by-the-investment-security-unit/

[4] See https://www.gov.uk/government/publications/national-security-and-investment-act-2021-annual-report-2022

[5] The public interest regime under the Enterprise Act 2002 was the predecessor to the current foreign investment screening regime.