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The National Security Act: Emerging trends from the UK's first interventions

Updated 1 December 2022


"The new system is working", according to the UK Government's inaugural report on the operation of the National Security & Investment Act 2021 ("NSI Act") published in June 2022. That report covered the first 3 months of the new regime (4 January to 31 March 2022), noting that 222 notifications had been received across the whole range of sectors. At that point in time, however, no final orders had yet been issued by the Government.

Now 11 months into the new regime, what more can we say about the impact that the NSI Act is having on deals with UK national security aspects?

First intervention: Clearance with remedies: UK investors are not exempt

On 14 July 2022, the acquisition of Sepura Ltd by Epiris LLP (a UK private equity firm) became the first transaction to be cleared under the NSI Act, subject to remedies. The target of the acquisition, Sepura, is a UK-based developer and supplier of digital radio devices (and associated ecosystems) that utilise Terrestrial Trunked Radio (or 'TETRA'), a technology that offers a resilient and secure voice and data platform designed specifically for government and emergency-service users (see Travers Smith advises Epiris on the acquisition of Sepura).

Since 2017, Sepura had been owned by Hytera Communications, a Chinese-based provider of communications devices.  While the Epiris acquisition transferred the Sepura business into UK ownership after a period of overseas ownership, the transaction nonetheless required a package of remedies, including the implementation of enhanced controls to protect sensitive information and technology from unauthorised access, and the maintenance of UK capabilities in repairing, servicing and maintaining devices used by the UK emergency services.

This case is an important reminder that UK investors are not exempt from the scope of the NSI Act: unlike other FDI regimes, the focus of the UK's NSI Act is on the activities of the target relevant to national security (as opposed to purely the nationality of the investor).

First prohibition: IP licences are squarely in the frame

On 20 July 2022, the UK Government ordered its first block under the NSI Act. The blocked deal was the acquisition of certain IP by Beijing Infinite Vision Technology Company ("Beijing Infinite") from the University of Manchester.

The deal was not a share acquisition, and therefore did not require mandatory notification under the NSI Act. (Notification is only mandatory in the case of acquisitions of certain levels of shares or voting rights: see our previous briefing). It was therefore notified voluntarily.

Under the licensing arrangement, Beijing Infinite would have secured rights to use IP relating to the University's vision-sensing technology, which the UK Government considered had application to the defence sector.

Despite the type of deal not being the main focus of the NSI Act (indeed, the Government's guidance indicates that it expects to rarely call-in acquisitions of qualifying assets as compared to acquisitions of qualifying entities) it is perhaps not surprising that the first block under the regime applies to a case with a politically sensitive origin of foreign investor (i.e. China) and the UK's defence sector.

Second prohibition: Chinese investment in the defence sector (again)

A month later, on 17 August 2022, the acquisition by Hong Kong's Super Orange HK of UK-based Pulsic was also blocked under the NSI Act. Pulsic is active in electronic design automation products ("EDA"), used to facilitate the building of integrated circuits that could be used in civilian or military supply chains. The Government considered that that the EDA could be exploited to install features without the user’s knowledge, and that this posed risks to the UK defence sector.

Again, it was the link to defence that led to the national security concerns and the ultimate block. This case is also a second example of the UK Government proving its appetite to block transactions involving entities from politically sensitive countries (thus far China, in both this and the Beijing Infinite example above).

Second remedies order: UAE investment in the defence sector

On 2 September 2022, remedies were ordered by the UK Government in relation to the proposed acquisition of shares in UK aerospace firm, Reaction Engines, by the UAE-based Tawazun Strategic Development Fund.

In the UK Government's view, the deal risked sensitive IP of Reaction Engines being covertly accessed by hostile actors, presenting a national security threat to the UK.

The substance of the remedies has not been published. It is therefore, as yet, unclear how similar the theory of harm in this case is to those in the Beijing Infinite and Pulsic examples above, both of which also concern UK defence (and therefore whether the different country of origin of the investor in this case played any role in the acceptance of remedies as opposed to a block, despite the scant reasoning given by the Government referring to the presence of 'hostile' actors).

Third remedies order: Chinese asset acquisition in the energy sector

On 14 September 2022, the first intervention since the appointment of the new UK Prime Minister, and Jacob Rees-Mogg as the new Secretary of State for BEIS, was announced. Remedies were required in relation to the proposed acquisition of development rights for the 'Stonehill Project' (a project aimed at improving the UK Power Grid's ability to use renewable energy) by Stonehill Energy.

In a move away from the previous 'defence'-related examples, national security concerns arose in relation to the security of an important UK electricity asset, and services provided to the National Grid. NSI Act clearance was made subject to a package of remedies requiring Stonehill Energy to obtain Government approval before appointing a power offtake operator, and preventing the sharing of information from the power offtake operator to Stonehill Energy. (Again, as in the Beijing Infinite example above, the deal was an asset acquisition and therefore did not require mandatory notification under the NSI Act).

Although not referred to in the Government's reasoning, a Chinese government department (the State-Owned Assets Supervision And Administration Commission) owns, either directly or indirectly, 75% of more of the shares in Stonehill Energy (i.e. the acquiror).

This case therefore demonstrates that acquisitions of critical assets by parties linked to politically sensitive states (in this case a Chinese government department) will not necessarily face blocks where national security concerns arise, and that remedies (in this case behavioural commitments) will be considered where the UK Government finds these to be appropriate.

Fourth remedies order: US investment in the space/communications sector

Most recently, on 15 September 2022, remedies were ordered by the UK Government in relation to the proposed acquisition of UK-based Inmarsat, a provider of global mobile satellite communications services, by US-based Viasat.

The Government's national security concerns centred on the protection of information and maintenance of strategic capabilities. Therefore, NSI Act clearance was made subject to assurances that controls are in place to protect information from unauthorised access, and that strategic capabilities will continue to be provided by Inmarsat and Viasat to the UK Government. The substance of the remedies includes a guarantee to increase the number of highly skilled jobs in certain areas of the UK, and to increase R&D spending by 30% in the UK – both supporting the UK's National Space Strategy.

Third prohibition: Retrospective call-in: Risk remains if new concerns come to light or political pressure mounts

On 16 November 2022, after a drawn-out review process lasting almost 6 months, the acquisition by Nexperia (a Netherlands-based subsidiary of Chinese phone manufacturer Wingtech Technology) of a majority stake in Newport Wafer Fab (Newport) was prohibited. As the transaction had completed (back in July 2021), the practical effect was to require Nexperia to divest at least 86 percent of Newport (this being the percentage acquired under the transaction in question).

By way of background, on 25 May 2022, the acquisition by Nexperia of Newport was retrospectively ‘called-in’ for a full national security assessment. Newport, based in Wales, is the UK’s largest manufacturer of semiconductors.

The then-Secretary of State, Kwasi Kwarteng MP, had initially opted not to formally review the deal under the NSI Act. However, only days later, the decision was reversed following pressure from other politicians and industry players, and the transaction was ‘called-in’ for review. The case fell under the purview of three successive Secretaries of State: with the final decision being taken by Grant Shapps MP, as successor to Jacob Rees-Mogg MP and previously Kwasi Kwarteng MP. After delaying the review period on three occasions, the UK Government prohibited the transaction, requiring Nexperia to divest of the Newport shareholding that it acquired under the deal in question.

This case therefore illustrates that risks of call-in (and the resulting potential for far-reaching remedies) remain and are, in part, subject to moving political landscapes here in the UK. Landscapes which may continue to move following recent appointments of new Secretaries of State (and indeed, the UK Prime Minister).

Again, the acquiror has Chinese links. The Government's concern can be broadly characterised as a risk of know-how and other expertise being accessed by, or leaked to, a politically sensitive state. The final order refers to a national security risk relating to technology and know-how that could result from the potential reintroduction of compound semiconductor activities at the Newport site (and the potential for those activities to undermine UK capabilities), as well concerns surrounding the location of the site (based in the 'South Wales Cluster' of semiconductor activities). In the UK Government's view, the location of the Newport site risked facilitating access to technological expertise and know-how in the South Wales Cluster, potentially preventing the Cluster from being engaged in future projects relevant to national security. Whilst not stated in its final order, Government concerns have also been reported surrounding the well-publicised chip shortages in the UK.

The prohibition is therefore not out of kilter with the Government’s appetite to make full use of its powers under the NSI Act where UK national security concerns arise. Nexperia has stated its intention to appeal the final divestment order, referring (amongst other matters) to an offer that it states was made to the UK Government to refrain from conducting the compound semiconductor activities of potential concern.

Key takeaways

Where UK national security concerns arise, the first months of the NSI Act demonstrate the UK Government’s appetite to take strong action. The prohibition of transactions, at least in the case of acquirors linked to politically sensitive states and sectors that are key to the UK’s national security, are happening and can be expected to continue. However, the UK Government has also demonstrated a pragmatic stance when considering the appropriateness of remedies packages even where politically sensitive states are involved.

To date, the three prohibitions have related to acquirors with Chinese links and transactions that pose risks to the UK defence sector (in two cases) or semiconductors, within the mandatory 'advanced materials' sector (in the other). However, notifications have been received across all sectors covered by the NSI Act and therefore it is only a matter of time before the scope of sectors in which action is taken broadens. Indeed, clearances subject to remedies have now been seen in the emergency services, energy, satellite communications, critical national infrastructure (specifically for quantum timing and atomic clocks) and aerospace spheres. A broad range of remedies have been imposed, typically including restrictions on the sharing of information and, in two examples (Sepura and CPI), the maintenance of strategic capabilities in the UK.

At the other end of the spectrum, i.e. deals which do not raise material national security issues, the new system appears to be working efficiently. Filings are generally accepted by the UK Government within a small number of days, with clearance received within the initial review period without significant requests for further information.

However, the UK Government’s action to date also reflects the focus of the NSI Act on the activities of the target, rather than purely the nationality of the investor. UK based investors and acquirors based in politically friendly nations – including the US in the Inmarsat and Iceman cases are not exempt from notification or from facing in-depth probes into their deals. Indeed the purchase by Altice, the French telecom group, of a stake in BT was also retrospectively called in for assessment by the UK Government, although ultimately no action was taken.

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