National Security Regime: changes on the horizon for AI, tech and life sciences companies?

Government launches consultation into its national security notification regime which could see a shake up to key sensitive sectors to the tech and life sciences industry as it releases is latest Annual Report

As part of the publication of its 2024-25 Annual Report on the operation of the National Security and Investment Act 2021 (NSIA), the Government has announced the start of a new consultation – running from 21 July to 14 October – which will focus on potential changes to remit of the NSIA. This includes plans to adjust the scope of ‘Advanced Materials’ through the creation of specific new sectors focused on 'Semiconductors’ (which will cover ‘Computing Hardware’, which is currently a standalone sector) and ‘Critical Minerals’. The introduction of the new sectors is likely to be well received by the respondents to the consultation, who criticised the overly broad remit of ‘Advanced Materials’ in previous consultations.

The consultation will also examine the scope of key areas which tech and life sciences companies regularly find themselves falling into – including ‘Artificial Intelligence’, ‘Communications’, ‘Data Infrastructure’ and ‘Synthetic Biology’. Greater clarity in relation to these sectors is expected to be warmly welcomed by businesses, especially with the increasing adoption of AI as a bolt-on component to existing undertakings. 

Currently, companies using or developing AI are required to determine whether that AI can perceive environments, simulate cognition and make decisions to achieve an objective. On top of that, directors are left to determine whether that AI can then be used for the purposes of identification or tracking of objects, people or events, or used in advanced robotics and cyber security. Industry participants often find this assessment challenging as it requires an evaluation of both the actual and potential capabilities of their AI, notwithstanding how it is actually deployed or the relative importance of that component to an overall product or service. With more targeted guidance, the Cabinet Office may see a reduction in the number of mandatory filings made by risk-averse targets and acquirers.

The Government also intends to tackle unnecessary filings. Companies undertaking “certain” internal reorganisations, as well as the appointment of liquidators, special administrators and official receivers, will be exempt from filing a mandatory notification in the future. The precise details of this exemption (including what type of reorganisations will fall out of scope) will be clarified through secondary legislation, although the Cabinet Office has offered no indication as to when this will be tabled. 

While such exemptions make for an obvious improvement to scenarios where the NSIA was never intended to bite, the Government has stopped short of exempting other areas where a filing is usually disproportionate – particularly for newly-founded innovative companies looking to spin-out from research institutions. The proposed changes are also unlikely to address the question faced by many spin-outs as to when it can actually be said to be carrying out one of the relevant activities in scope of the regulations.

The 2024-2025 Annual Report accompanying the announcement indicated that the number of notifications has continued to increase year-on-year. A total of 1,143 notifications were made in the period, up from 906 for 2023-24. Of those reviewed, 95.5% were cleared while 4.5% were issued call-in notices, remaining broadly consistent with 2023-24 (4.4%). The Government consistently met its obligation to issue a call-in or clearance decision within the statutory 30-working day deadline, giving prospective acquirers a degree of certainty in forecasting the impact of an NSIA filing on their deal timetable. 

The most popular sector to be called in remained 'Defence', followed by 'Military and Dual Use' and 'Advanced Materials'. Of those called in, 17 final orders were made, with one order requiring divestment and the remaining 16 imposing conditions on the transaction. 

It is expected that the changes flowing from the consultation could result in 10 fewer mandatory notifications per year, although this reduction is expected to be partially offset by the proposed inclusion of the water sector within the ambit of the notification regime. We will continue to monitor developments and provide updates on the changes as they materialise into legislation over the rest of 2025 and 2026. 

If you’d like to learn more about how the NSIA applies to transactions involving AI companies, check out our podcast: Navigating the Future - Corporate Law and AI - Investing in UK companies