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It’s been one year since the commencement of the National Security and Investment Act 2021 (the Act) in the UK on 4 January 2022. Following our recent article on the first year of the Act, we’ve also summarised some of the key take-aways so far, below.
The Act introduced the first stand-alone regime for screening acquisitions and investments to protect UK national security. The Act requires mandatory notification of certain transactions involving entities in 17 sensitive sectors of the economy, backed up by a voluntary notification regime and a power for the Secretary of State (SoS) for the Department for Business, Energy & Industrial Strategy (BEIS) to call-in transactions for national security review. For a fuller summary of the various provisions of the Act please see our recent article and also our online hub on the Act.
The first annual report from BEIS (covering 4 January – 31 March 2022) (BEIS report) notes that, of the 222 notifications in the first 3 months, only 17 were called in. The average times to call in mandatory and voluntary notifications were 24 and 22 working days respectively. Therefore, in most cases, deals are being cleared comfortably within the initial statutory window. However, as we discuss further below, it’s not always easy to predict: (a) which deals will be called in; or (b) the outcome of a national security review.
The breadth of the drafting of the Act has been borne out in the variety of the orders made by the SoS so far. For example, the first deal blocked wasn’t an acquisition or investment transaction. Rather, it concerned the licence of intellectual property in vision-sensing technology by the University of Manchester to a Chinese semi-conductor company with state links. The SoS’s concern was the potential military use of the relevant imaging technology. In addition, in September, the SoS used the Act to impose remedies in respect of the acquisition of development rights in the Stonehill Project (an energy development project aimed at improving the GB National Grid’s ability to utilise renewable energy).
As expected, the SoS has focussed on geopolitically sensitive sectors. The BEIS report revealed that the 5 most common sensitive sectors for mandatory notifications were Defence, Military/Dual Use, Critical Suppliers to the Government, AI and Data Infrastructure. In November the SoS ordered that the acquisition of Newport Wafer Fab (a Welsh semiconductor company) by a Dutch subsidiary of a Chinese buyer be unwound due to national security concerns. The second deal to be blocked was the proposed acquisition of Pulsic, a semi-conductor design company, by Chinese group Super Orange HK. In December the SoS blocked another acquisition of a UK semi-conductor business by SiLight (Shanghai) Semiconductor Limited.
Also, in the context of the global focus on energy security, the SoS has imposed remedies in respect of various transactions relating to critical UK national energy infrastructure, including the Stonehill Project (mentioned above), the acquisition of XRE Alpha Limited by China Power International Limited and the acquisition of Electricity North West Limited by Redrock Investment Limited (although this order was revoked when the parties decided not to proceed with the deal). The SoS was also reported to be reviewing the proposed acquisition of 60% of the gas transmission business of the National Grid plc by a consortium led by Australia’s Macquarie.
While, as anticipated, a number of deals involving Chinese or Russian parties have been subject to remedies and orders (all deals blocked so far have involved Chinese parties), buyers from neutral or friendly jurisdictions haven’t avoided scrutiny. For example, remedies were imposed in respect of the acquisition of telecoms company Truphone by a German entrepreneur. Action has also been taken in respect of deals involving US (e.g. acquisition of satellite business Inmarsat by Viasat, Inc), UAE (the acquisition of aerospace business Reaction Engines by Tawazun) and Australian (see above) parties. It’s clear that, where critical national infrastructure or advanced technology is involved, the SoS will consider more than just the risks arising from the buyer’s country of domicile.
The flexibility in the Act allowing the imposition of a variety of remedies is being fully utilised by the SoS. Remedies imposed have ranged from behavioural undertakings typically seen in an FDI context (e.g. enhanced controls to protect sensitive information and technology, appointment of board representatives, audit rights and measures ensuring continuation of supply to the UK government) to commercial restrictions (e.g. giving the government control over offtake arrangements relating to the electricity grid). The Inmarsat transaction was approved subject to the parties committing to economic undertakings, including expansion of job numbers and R&D spending.
Although the Act has only been in force a year, what’s clear so far is that the SoS is prepared to utilise the full breadth and flexibility of the legislation. This means it is difficult to predict which transactions might attract the attention of the SoS and what the outcome of any national security review might be. While we wait for a more consistent course of practice to emerge, parties to potential corporate transactions should err on the side of caution when considering the potential applicability of the Act and engage with counterparties, advisors and (where necessary) the Investment Security Unit as early as possible in the deal process.
 These are Advanced Materials, Advanced Robotics, Artificial Intelligence, Civil Nuclear, Communications, Computing Hardware, Critical Suppliers to the Emergency Services, Critical Suppliers to the Government, Cryptographic Authentication, Data Infrastructure, Defence, Energy, Military and Dual-Use, Quantum Technologies, Satellite & Space Technologies, Synthetic Biology and Transport.
 Indeed, one of the concerns during the consultation process was that the lack of a definition of “national security” would enable the government to use the Act as a proxy for industrial strategy.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.
16 January 2023
News 23 MARCH 2023