Investing in UK Defence – Under Regulatory Scrutiny

The UK’s increased defence spending and zero-tariff trade on aircraft parts with the US is generating broad interest in the UK defence sector.

Yet investors should be aware of mandatory regulatory filing requirements.

M&A transactions in the UK defence sector will almost invariably require Government approval under the National Security and Investment Act 2021 (NSIA). Under this regime, investments in specified sectors are reviewed on national security grounds and the vast majority are cleared unconditionally. However, if they give rise to concerns, they may be approved only subject to conditions or even blocked by the UK Government (acting through the Chancellor of the Duchy of Lancaster who sits within the Cabinet Office).

Mandatory Reporting

A mandatory NSIA notification is generally triggered when:

1. 1. 1. the target’s activities fall into one or more of 17 specified sensitive sectors, including defence, but also commercial sectors, such as computing hardware, cryptographic authentication, data infrastructure, advanced materials, advanced robotics and satellite and space technology; and
      2. an investor will gain 25% or more of shares or voting rights in the target or increase its existing holding beyond key thresholds: 25%, 50%, or 75%.

Notably, there is no minimum revenue or market share threshold and, unlike the CFIUS regime in the US, investments by both domestic and foreign persons are subject to NSIA scrutiny. Investments in non-UK target companies can also be caught if undertaking certain qualifying activities within the UK or supplying goods and services to persons in the UK.

Mandatory notifications must be made and approvals received before the transaction completes. A standard approval process can take close to two months, with possible longer timeframes if the transaction is called in for closer scrutiny. Transactions that complete without approval may be voidable and subject to civil or criminal penalties on the acquirer.

In the first instance, investors should take account of the regulatory timeline when drafting the transaction documents (for example, by making NSIA clearance a condition precedent to completion and determining any long-stop date), scheduling closing, and planning post-closing integration.

Remedies or Conditional Approval

Equally important, however, is that investors are alive to the possibility that the UK Government may impose “remedies” to mitigate the risk to national security, thereby making approval conditional on complying with certain mandatory measures.

While transactions with acquirers associated with China account for a large share of blocked transactions, conditions have been imposed on transactions with investors from the UK, the US, and other allied countries. Moreover, in the last 12 months, 48% of all called-in deals related to UK investors and 20% related to US investors.

Typical “behavioural” remedies (as opposed to structural remedies, usually requiring corporate restructuring or divestiture) may include ring-fencing sensitive assets within dedicated “SecureCos,” restricting access to sensitive information, government step-in rights, appointment of UK-resident directors, retaining certain capabilities or supply chains within the UK, or commitments to maintain UK-based R&D and jobs.

Government Review Process and Timeline

Normally, the acquirer would file the NSIA notification, disclosing various details about the target’s activities, including whether it:

• • • is authorised to receive or hold classified information, typically by holding facility security clearance (FSC, formerly known as List X);
    • researches, develops, produces, holds or owns any dual-use items;
    • has supplied the UK government over the past 5 years; and
    • is party to any contracts that require its personnel to hold National Security Vetting (NSV) clearance.

From the date when the NSIA notification is deemed complete, the Government has 30 working days to determine whether the transaction can be cleared or warrants “calling in” for further assessment. The vast majority of notifications are cleared at the end of this initial screening stage, with the latest NSIA Annual Report showing only 4.5% of notifications being called in for review (although call ins are more likely in relation to activities in the defence sector than any other).

Where the UK Government issues a call-in notice, it has an additional 30 working day period (which can be extended by 45 further working days) to decide whether to impose remedies (or prohibit the deal).

During the call-in period, the “clock” is suspended whenever the UK Government asks for further information or requests the parties to attend a meeting with the regulators.  In practice, therefore, where a transaction is called in, particularly where remedies may be required, it is not unusual for the NSIA review to extend beyond the statutory deadlines, further drawing out the closing timeline.

Scope of Review

The Government’s national security review is risk-based, focusing on:

1. 1. 1. Target Risk – The nature of the target’s activities and how the target’s acquisition could be exploited to threaten national security (e.g. control over sensitive technology, strategic assets, cryptographical systems, or supply to government or security forces).
      2. Acquirer Risk – The identity and affiliations of the acquirer, including connections to hostile states, entities, or persons, or history of compliance/security issues or other characteristics that may increase risk.
      3. Control Risk – The degree of control that the acquirer would gain over the target, with higher degrees of control exacerbating any national security risks already identified.

Call-in Powers and Voluntary Notification

Even if the mandatory regime does not apply – for example, because the level of voting rights being acquired is below 25% or because the activities of the target fall outside the 17 specified sensitive sectors - the Government can still assess a transaction if it has a reasonable suspicion that the transaction gives rise to a national security risk.

In such circumstances the Government can issue a call-in notice any time within six months of it becoming aware of a qualifying transaction or five years from completion of the qualifying transaction, whichever is later.

To mitigate against such risk, the parties can submit a voluntary NSIA notification to flush out any interest from the UK Government, in which case the review process outlined above will be relevant.

Signalled Reforms

The UK Government has signalled plans to reform the NSIA as part of its Plan for Change. It is presently (until 14 October 2025) consulting on amending the 17 mandatory sensitive sectors to update and hone the scope. These changes are not expected to amount to a major change in the present scope of activities, however, particularly in terms of target companies active in the defence industry.

Separately, the UK Government is developing changes to reduce red tape for businesses, for example by removing the requirement for business to have to notify certain internal reorganisations and the appointment of liquidators, special administrators, and official receivers. The Government will also look to publish more guidance in due course based on stakeholder feedback and will continue to look for ways to increase transparency.

Co-ordination with other regulatory regimes

If considering investment in a multinational defence company or a UK defence company which supplies to foreign governments, investors need to be cognisant that a single investment might trigger mandatory notification obligations under multiple foreign direct investment (FDI) regimes. In these cases, a close analysis of local requirements is required as the scope of each regime can differ based on local law. Investors should ensure any required filings are closely co-ordinated, especially if making filings in multiple EU Member States given cooperation mechanisms which enable the exchange of information between governments and the European Commission.

Further, even within the UK, investors should ensure alignment and consistency with any competition filings to the UK Competition and Markets Authority or other contact with UK sectoral regulators, given possible contacts and coordination between the Government and these bodies.

Investor Considerations

In summary, investors considering entry into or expansion within the UK defence industry must navigate an enhanced national security regulatory landscape. Key considerations include:

• • • Accounting for regulatory approvals as part of the overall transaction timeline. This is particularly the case where an investment may be called in or trigger filings under multiple FDI (and/or competition) regimes.
    • Foreign investors, especially from certain jurisdictions, may face heightened scrutiny or limitations on acquiring UK defence companies due to concerns about control, access to classified information, or influence over strategic assets.
    • Where a transaction affects a target’s foreign ownership control or influence (FOCI) status with regard to security clearance, careful consideration should be given to the deal structure in advance of execution and how best to mitigate adverse effects on existing clearances.
    • Being prepared for potential ongoing government oversight, including obligations around security clearances, operational restrictions, and regular compliance reporting.

The considerations mean that thorough regulatory diligence of a target company and the full scope of its operations prior to investment are a critical step in any potential acquisition process. Although it depends very much on the identity of the buyer, the risks of an acquisition or investment being prohibited outright are relatively low.  However, a failure to identify a filing obligation or to recognise that a deal may require remedies in order to secure approval, can have significant negative consequences in terms of delay to completion and potential legal sanctions, as well as impacting the commercial deal that the parties wanted to do.