The National Security and Investment Act 2021: reflections on the first year

A reasonably smooth process

The UK’s Department for Business, Enterprise and Industrial Strategy’s (BEIS) NSIA Annual Report 2022 (the Report) noted the average number of working days between a mandatory notification being accepted by BEIS’s Investment Screening Unit (the ISU) and a decision to call-in a transaction as being 24 working days. This is broadly consistent with our experience during the first year of the NSIA’s operation with transactions typically being cleared towards the end of the 30 working day period after acceptance of a notification. A notable point is that getting decisions by the ISU expedited, even in the context of insolvency-related restructurings, has proved difficult. 

In the period covered by the Report, there were no final orders. However, in one transaction subject to a final order where we acted for an acquirer, the clearance process took a total of 19 weeks. This demonstrates that the completion of transactions may be subject to considerable delay where the UK Government does decide to impose a final order.   

Impact on deals being felt

The NSIA’s impact is being felt strongly on certain transactions. In the first year of the NSIA’s operation, the Secretary of State for BEIS (SoS) issued 16 final orders. Nine of the final orders approved the relevant transactions subject to conditions, with five prohibiting transactions in their entirety. The other two final orders varied or revoked orders already made. 

For example, in the case of Newport Wafer Fab, the UK Government ordered Nexperia BV to sell its 86% shareholding in the UK’s largest semiconductor plant, Newport Wafer Fab, 16 months after the acquisition. This was the first transaction to be blocked by the UK Government on national security grounds using its power to retrospectively review transactions completed before the NSIA entered fully into force and is reportedly subject to an application for judicial review. See our recent article which discusses this intervention further. 

The UK Government’s use of its powers provided for in the NSIA indicates that parties should not assume that their transactions will not be subject to an intervention if they represent a perceived risk to UK national security. However, whilst no up-to-date data in relation to the number of transactions notified to the ISU is available, it appears likely that only a small percentage of deals are being made subject to conditions.        

Both share and asset transactions are impacted

The UK Government has taken aim at both share and asset transactions. While most of the final orders relate to share acquisitions, the first transaction prohibited by the UK Government related to an asset acquisition. 

The transaction in question was the entry into a licence agreement between the University of Manchester and Beijing Infinite Technology Company Ltd. (BITC) which enabled BITC to use intellectual property relating to vision sensing technology. The SoS determined that the technology in question had dual-use applications, including the potential that the technology could be used to build defence or technological capabilities, which could present a national security risk to the UK due to the identity of the acquirer. 

Furthermore, the SoS issued a final order in relation to the proposed acquisition by a Chinese state-owned company of development rights for an energy project. The SoS imposed conditions requiring the acquirer, Stonehill Energy Storage Limited, to obtain approval from the UK Government before appointing a power offtake operator and restricting the sharing of information from the power offtake operator to the acquirer. 

These orders demonstrate that parties to certain asset acquisitions, particularly those closely related to the 17 sensitive sectors of the UK economy covered by the mandatory notification regime, will need to consider the risk of the UK Government intervening in their transactions. 

A plethora of sectors are in sight

The final orders issued during 2022 demonstrate that the UK Government has a range of sectors in its sights, including companies involving in the following:

• artificial intelligence;
• communications;
• data infrastructure;
• defence;
• energy; 
• military and dual-use; and
• quantum technologies.

This underlines the broad range of sectors that the UK Government considers can give rise to a risk to national security. Given the UK's on-going energy security issues, amongst others, we can expect the energy sector to continue to be in the UK Government’s sights this year.

Many jurisdictions are affected, but China is in focus

The UK Government's powers under the NSIA have been used to intervene in transactions involving both UK and foreign acquirers. Furthermore, investors with links to close allies of the UK such as Germany and the US have been subject to final orders, demonstrating that even domestic acquirers or acquirers from allied jurisdictions can be perceived to represent a risk to UK national security. However, of the five final orders prohibiting transactions, four related to acquirers with links to China and the other related to an acquirer with links to Russia. 

Relevantly, in our experience, there have been indications that, as expected, the ISU is liaising with its counterparty regulators in other jurisdictions, demonstrating the importance of applying a strategic and coordinated approach to filings in multiple jurisdictions.   

A pattern of conditions is emerging

While it is too soon to draw up a definitive list of conditions typically deployed by the UK Government, and conditions will no doubt continue to vary as between transactions, the conditions imposed in the final orders to date fall within four broad categories:

• information security measures: for example, in the Connect Topco Limited Final Order, the SoS required controls to be put in place to protect information from unauthorised access;
• obligations to notify or obtain consent for disposals/transfers of significant assets: for example, in the Ligeance Aerospace Technology Co. Ltd Final Order, there is a requirement to notify the transfer of assets out of two subsidiaries of the entity being acquired;
• restrictions on the target's board membership and/or management/staff/personnel: for example, in the Truphone Limited Final Order, the SoS required the acquirer to appoint a Chief Information Security Office approved by the SoS; and
• maintenance of strategic capabilities (for example, manufacturing) in the UK and continuity of supply to the UK Government: for example, in the CPI Intermediate Holdings, Inc. (CPI) Final Order, the SoS required the acquirer to retain CPI's research, development and manufacturing capabilities in relation to atomic clocks in the UK.

Interactions with other UK national security-related regimes

It is also clear that the UK Government sees the NSIA as complimenting the other legislative tools in its national security-related armoury, such as sanctions. In ordering L1T FM Holdings UK Ltd. (L1T) to sell its 100% stake in Upp Corporation Ltd. (Upp), the SoS stated that the risk to national security related to the ultimate beneficial owners of LetterOne Core Investments S.à r.l (the parent company of L1T) (LetterOne) and Upp’s expanding full fibre broadband network. LetterOne’s ultimate beneficial owners reportedly include Mikhail Fridman and Peter Aven who are targeted under the UK’s Russia-related sanctions. It is possible that information obtained under the forthcoming Foreign Influence Registration Scheme may also feed into the UK Government’s decision making process when considering whether to intervene in transactions using its powers in the NSIA (see our recent article for further discussion).

Should you have any questions on the matters discussed in this article, please contact Matthew Townsend, Dominic Long, Jonathan Benson, Christopher Best or your usual contact at Allen & Overy LLP.