UK Chancellor permits acquisition of sole source defence supplier subject to conditions under the National Security and Investment Act 2021

In July 2024 ESCO Technologies Inc announced it was going to acquire the Signature Management & Power business of Ultra Maritime. The Target is a sole source supplier for the US and UK naval defence markets, providing mission critical signature and power management solutions for US and UK submarines and surface ships.

Given the transaction related to the acquisition of sole control and the defence related activities of the Target business it is not surprising that this transaction fell squarely within the UK National Security and Investment Act (NSIA) mandatory filing requirements. The transaction was structured as a two-step process with ESCO Maritime Solutions Limited acquiring 100% of the shares and voting rights of the UK entity Ultra PMES Limited, and then the assets of Ultra PMES Limited transferring to ESCO Maritime Solutions Limited, both these steps being trigger events under the NSIA.

The two transactions will likely have been notified simultaneously to the Investment and Security Unit and called in for an in-depth review, in total taking just under 8 months from announcement to approval. As is usual in these cases, the fact, date or review process of the transaction remain confidential, and it is only a short summary of the Chancellor of the Duchy of Lancaster's approval and the conditions that was published on 3 March 2025. 

The purchaser is a company listed on the New York Stock Exchange, whose main shareholders (as at Nov 2024) are BlackRock Inc (15.4%) and two other US investment firms with 11.1% and 5.2% respectively.  As such it is a US ultimately controlled company, from one of the Five Eyes countries and already an approved supplier in the US and UK defence sector. However, given the clear critical defence related activities of the Target and the importance of security of supply in this sector, it will have been subject to considerable scrutiny. There will also have been some tension between the Government's agenda of growth and investment in the defence sector, and national security concerns.

By imposing various conditions that seek to protect and ringfence the Target's UK activities and information by ensuring these remain based in the UK and enhanced security requirements are complied with, we believe a fair balance has been struck, with a fall-back position in case of future changes that might endanger the UK defence programme (which gives the UK Government significant control over possible ownership of the UK defence related business, well beyond the more typical change of control consent it will typically have in its MOD contracts). 

The Target has 410 employees and while headquartered in the US has 4 facilities based in US and UK. The conditions are proportionate in that they are clearly focussed on the Target's UK business, and its UK supply controls. The conditions are imposed on both the US parent company (Esco Technologies Inc) and the relevant UK subsidiaries (ESCO Maritime Solutions Limited and Ultra PMES Limited). The conditions summarised in the Final Order published on 3 March 2025 are:

• To meet certain sovereignty requirements to carry out work related to the contracts in support of UK defence programmes solely by ESCO Maritime Solutions Limited in the UK;
• Implement an HM Government-approved International Traffic in Arms Regulations Internal Control Plan;
• Meet certain corporate governance requirements including security clearance requirements of members of the board and the appointment of an HM Government Non-Executive Director and Chief Security Officer;
• Establish a security sub-committee responsible for issues related to UK national security; and
• If required by the Chancellor, under certain circumstances, initiate a sale and transfer of all relevant capabilities in support of the UK's defence programme and platforms.

At a time when numerous European governments have announced increased defence spending and there is a clear need for further investment and growth by suppliers in the defence sector, it is good to see the UK Government taking steps to protect national security while allowing such a transaction to proceed. Now more than ever, it will be important for governments to balance the need for increased investment in the defence sector, with ensuring the resilience and autonomy of their ability to develop strong defence capabilities.