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:

  1. either conducts research into AI or develops or produces goods, software, or technology that use AI; and
  2. 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.

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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.

Photo of Marianna Drake Marianna Drake

Marianna Drake counsels leading multinational companies on some of their most complex regulatory, policy and compliance-related issues, including data privacy and AI regulation. She focuses her practice on compliance with UK, EU and global privacy frameworks, and new policy proposals and regulations relating…

Marianna Drake counsels leading multinational companies on some of their most complex regulatory, policy and compliance-related issues, including data privacy and AI regulation. She focuses her practice on compliance with UK, EU and global privacy frameworks, and new policy proposals and regulations relating to AI and data. She also advises clients on matters relating to children’s privacy, online safety and consumer protection and product safety laws.

Her practice includes defending organizations in cross-border, contentious investigations and regulatory enforcement in the UK and EU Member States. Marianna also routinely partners with clients on the design of new products and services, drafting and negotiating privacy terms, developing privacy notices and consent forms, and helping clients design governance programs for the development and deployment of AI technologies.

Marianna’s pro bono work includes providing data protection advice to UK-based human rights charities, and supporting a non-profit organization in conducting legal research for strategic litigation.

Photo of Marty Hansen Marty Hansen

Martin Hansen has over two decades of experience representing some of the world’s leading innovative companies in the internet, IT, e-commerce, and life sciences sectors on a broad range of regulatory, intellectual property, and competition issues, including related to artificial intelligence. Martin has…

Martin Hansen has over two decades of experience representing some of the world’s leading innovative companies in the internet, IT, e-commerce, and life sciences sectors on a broad range of regulatory, intellectual property, and competition issues, including related to artificial intelligence. Martin has extensive experience in advising clients on matters arising under EU and U.S. law, UK law, the World Trade Organization agreements, and other trade agreements.

Photo of Lisa Peets Lisa Peets

Lisa Peets is co-chair of the firm’s Technology and Communications Regulation Practice Group and a member of the firm’s global Management Committee. Lisa divides her time between London and Brussels, and her practice encompasses regulatory compliance and investigations alongside legislative advocacy. For more…

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Lisa counsels clients on a range of EU and UK legal frameworks affecting technology providers, including data protection, content moderation, artificial intelligence, platform regulation, copyright, e-commerce and consumer protection, and the rapidly expanding universe of additional rules applicable to technology, data and online services.

Lisa also supports Covington’s disputes team in litigation involving technology providers.

According to Chambers UK (2024 edition), “Lisa provides an excellent service and familiarity with client needs.”

Photo of James Marshall James Marshall

James Marshall advises on all aspects of competition law and foreign direct investment (FDI) screening, with a focus on merger and FDI control, investigations and enforcement, commercial counselling, and abuse of dominance. He has strong experience in the life sciences, energy & infrastructure…

James Marshall advises on all aspects of competition law and foreign direct investment (FDI) screening, with a focus on merger and FDI control, investigations and enforcement, commercial counselling, and abuse of dominance. He has strong experience in the life sciences, energy & infrastructure, digital and technology, financial services, and sports sectors.

James regularly leads cross-border teams to steer clients through both the merger control and FDI aspects of major global deals. Clients turn to James to help them navigate complex global transactions, and to find innovative solutions to antitrust enforcement and counselling matters.

Earlier in his career, James worked with the UK Competition and Markets Authority (CMA), where he helped develop the UK’s antitrust and regulated sector enforcement regimes. He also practiced for several years in the Asia-Pacific region and has experience advising on competition, regulatory, and public policy issues in Asia and the Middle East.

James is a former Chair of the Competition Section Advisory Committee of the Law Society of England and Wales. He is highly recommended by Legal 500 and is recognized as leading adviser by Who’s Who Legal. James is dual qualified in England and Wales, and the Republic of Ireland.

Photo of Christian Ahlborn Christian Ahlborn

For more than 20 years Christian Ahlborn has been advising multinational corporates, banks and other institutions on all aspects of global competition law, combining an in-depth understanding of the subject with a pragmatic approach.

Christian is qualified in England & Wales and in…

For more than 20 years Christian Ahlborn has been advising multinational corporates, banks and other institutions on all aspects of global competition law, combining an in-depth understanding of the subject with a pragmatic approach.

Christian is qualified in England & Wales and in Germany and is widely recognized as a market-leading competition lawyer. He is also a trained economist. Christian belongs to a small group of antitrust practitioners who can bring both a legal and economic perspective to a case.

Christian advises major corporates, banks and institutions on all areas of global competition law. He has a broad range of experience in EU competition law, particularly in relation to complex M&A, behavioral antitrust work, control of dominance issues and State aid control. He is well-known for extensive work on high-profile matters.

Christian’s experience spans many industry sectors, with particular experience in financial services, IT, fast-moving consumer goods and mining.

During his career Christian has been seconded to the European Commission’s Directorate-General for Competition and to the Bundeskartellamt. He is also well known on the Brussels market.

Photo of Tomos Griffiths Tomos Griffiths

Tomos Griffiths is an associate working across the technology regulatory and competition groups in London.

Tomos joined the firm as a trainee solicitor in 2021, qualifying in 2023. His practice covers technology regulation, competition law, and regulation that spans the two. His recent…

Tomos Griffiths is an associate working across the technology regulatory and competition groups in London.

Tomos joined the firm as a trainee solicitor in 2021, qualifying in 2023. His practice covers technology regulation, competition law, and regulation that spans the two. His recent experience includes advising clients on data protection compliance, foreign direct investment screening, and competition law litigation.

As a trainee solicitor, Tomos also gained experience in capital markets and commercial litigation for clients in the technology and life sciences sectors.