Recent proposals to amend the UK’s national security investment screening regime mean that investors may in future be required to make mandatory, suspensory, pre-closing filings to the UK Government when seeking to invest in a broader range of companies developing generative artificial intelligence (AI). The UK Government launched a Call for Evidence in November 2023 seeking input from stakeholders on a number of potential amendments to the operation of the National Security and Investment Act (NSIA) regime, including whether generative AI, which the Government states is not currently directly in scope of the AI filing trigger, should expressly fall within the mandatory filing regime. The Call for Evidence closes on 15 January 2024.
This blog sets out how the NSIA regime operates, how investments in companies developing AI are currently caught by the NSIA, and the Government’s proposals to refine the scope of AI activities captured by the regime, including potentially directly encompassing generative AI.
UK national security investment screening
The NSIA entered into force at the outset of 2022. It imposes mandatory filing obligations on investors acquiring certain control rights in a number of ‘sensitive’ areas of activity. The relevant control threshold categories are investments of (i) more than 25%, 50%, or equal to or more than 75% of either the voting rights or shares in a company, or (ii) sufficient voting rights to secure or prevent the passage of any class of resolution governing the target company’s affairs. Crossing from one control threshold to another, e.g., where an acquirer already holds more than 25% of the voting rights but acquires more such that it crosses the 50% threshold, triggers a new filing. A mandatory filing obligation applies where that target is active in the UK in one or more of 17 areas of activity that are considered sensitive to the UK’s national security. These include defence, advanced robotics, satellites and space technology, and AI.
The specific activities in these 17 areas of activity that trigger mandatory filing obligations are delineated in detail in the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (Regulations).
Where a mandatory filing is triggered, the parties cannot close the transaction until the Secretary of State in the Cabinet Office (Secretary of State), acting through the Cabinet Office’s Investment Security Unit (ISU), clears the acquisition. The Secretary of State has the power to impose conditions on transactions, or to prohibit them outright. Acquisitions of ‘material influence’, a lower level of control, do not trigger mandatory filings, but can still be called-in for review by the Secretary of State. Investments outside the 17 prescribed mandatory areas of activity can also be called-in for review. Notably, all investors (including from the UK) are subject to the NSIA’s obligations, and there are no minimum financial thresholds, meaning acquisitions of small start-ups can be caught.
AI acquisitions under the current regime
AI is one of the 17 sensitive areas of activities caught by the Regulations. Cabinet Office Guidance (Guidance) states that national security risks can arise from the use of AI as it is “inherently dual-use and potentially easy to repurpose”, and consequently “technologies that are used for the commercial market and consumers could also be repurposed and used in manners which could give rise to national security concerns”.
Currently, investors must make a mandatory filing if they are acquiring the requisite level of control in a company that:
- either conducts research into AI or develops or produces goods, software, or technology that use AI; and
- conducts these activities for the purposes of: (a) identifying or tracking objects, people, or events, (b) advanced robotics, or (c) cyber security.
The Guidance provides that acquisitions of companies that develop AI for use cases such as facial recognition, image classification, real-time tracking, autonomous vehicles, digital twinning, threat detection, or vulnerability discovery could all require mandatory notification. Companies using AI in sensitive ways could also be captured under other mandatory filing sectors, such as Critical Suppliers to Government, or Advanced Materials.
Government consultation on amending the AI activities in-scope
The Government’s Call for Evidence is seeking views on a number of potential amendments to the NSIA regime, and the scope of the Regulations, including whether it should amend the types of AI activities that would necessitate a mandatory filing in two scenarios:
- First, the Government is seeking views on whether it should refine the current scope of activities caught by the AI filing trigger. The Government notes that stakeholders provided feedback that the Regulations capture AI activities that do not pose any national security risks. The precise shape that any such amendments would take is currently unclear.
- Second, the Government is interested in hearing from stakeholders as to whether new areas should be added to the AI sectoral trigger, and refers specifically to generative AI, which is not currently in-scope. Given the proliferation of the use of generative AI, and depending on whether the Government decides to curtail the activities within scope of the AI filing trigger, this inclusion could potentially capture a broad range of companies and lead to a large number of new NSIA filings.
If the Secretary of State decides to amend the Regulations to expressly include companies active in generative AI, investors in this area of activity would need to factor the time and additional cost of the mandatory NSIA filing and review period into their deal-making. The Secretary of State would be able to prohibit or condition investments in these companies – for example, by restricting the information that can be shared with the new acquirer, requiring a Government board observer, requiring operations to remain in the UK, or appointing a Government-approved Chief Information Security Officer. Only amendments to secondary legislation would be needed to bring these changes into effect. However, the precise timeline depends on whether the Secretary of State decides to issue a detailed consultation on specific amendments, which depends on the responses received to the Call for Evidence.
Covington frequently advises both acquirers and targets on the application of the UK NSIA. Our technology regulatory practice regularly advises the world’s top technology companies on their most challenging regulatory, compliance, and public policy issues in the UK, EU and other major markets. We are monitoring developments in AI regulation closely and will be updating this site regularly – please watch this space for further updates.