15 December 20226 minute read

The first year of the UK National Security and Investment Act 2021

On 4 January 2022 the UK National Security and Investment Act 2021 (“NSIA”) came into force, which for the first time requires parties to a transaction to make a mandatory notification if the target is active in any of the 17 sensitive sectors that have been identified as potentially giving rise to national security concerns. In addition, the Secretary of State can call in transactions which raise concerns, including retrospectively transactions which took place after the NSI Bill was published in Nov 2020 (and he has used this power in relation to the Welsh Wafer transaction, see further below). Unlike some other jurisdictions the NSIA applies irrespective of whether the Target has any legal entity established in the UK, it is sufficient for the target it to have sales in, or into the UK in any of the sensitive sectors to be caught, and there is no de minimis threshold. 

Notifiable acquisitions closed without clearance are void, and failure to notify can result in imprisonment of up to 5 years on indictment and fines of up to 5% of global revenues, or £10m, whichever is the greater.

Notification is made to the Investment Security Unit within the Department for Business, Energy and Industrial Strategy (BEIS), who reviews the information provided in the submission and consult with various other relevant departments of the UK government. There is an initial 30 working day review period, with most cases being cleared during this phase. In practice we note that BEIS is taking on average 24 working days with mandatory filings. While BEIS had anticipated approx. 1,000 – 1.830 notifications per year, in the first 3 months it had received 222 notifications. Of these 222, 17 were subject to call-in notices as warranting further investigation (13 on mandatory notifications and 4 on voluntary notifications) across a broad range of sectors, but most relating to military and dual use (40%), defence (35%) and critical suppliers to Government (35%).  By December 2022 there have been 11 transactions subject to remedies and 3 transactions prohibited by the Secretary of State for Business.

In assessing transactions under the NSIA, BEIS considers whether there is a qualifying “trigger event” (which can be acquisition more than 25% of shares or voting rights or material influence in relation to a qualifying business or qualifying assets which has taken place or is in contemplation). During the initial phase BEIS will then consider three elements  to decide whether it warrants the Secretary of State calling the transaction in for an in-depth investigation, and potential remedies:  whether there is a “target risk” (which takes into account the actitives and assets the Target has in the UK relating to one of the 17 sensitive sectors, or closely related thereto), the “control risk” (whether the degree of control pose a risk to national security) and the “acquiror risk” (does the acquirer have characteristics that suggest that there is, or may be, a risk to national security). In assessing the acquirer risk the Secretary of State will consider factors such as who is the ultimate controller of the acquirer, or if the acquirer can be readily exploited by a hostile state, the acquirer’s pre-existing holdings, and links to criminal or illicit activities.

Before the end of the assessment period following a call -in notice, the Secretary of State must either make a final order (which can impose remedies or prohibit the transaction) or make a final notification of no further action. To make a final order the Secretary of State must be satisfied on the balance of probabilities that a risk to national security will arise and reasonably consider the provisions of the order are necessary and appropriate to prevent, remedy or mitigate the risk. Note however that the legislation deliberately does not define what amounts to a national security risk, so that changing geopolitical risks can be taken into account.

While the 17 transactions subject to remedies covered a range of defence and other sectors and different acquirors, the three prohibitions related to Chinese acquirors and exemplify the range of transactions and risks identified:

  • The first was the acquisition of intellectual property rights by Beijing Infinite Vission Technology Company from the University of Manchester, which was the subject of a voluntary notification and related to vision -sensing technology. The national security risk being that the technology has dual use applications, there is potential that the technology could be used to build defence or technological capabilities which may present national security risks in the UK and those risks would arise on the transfer of the IP to the acquirer.
  • The acquisition of Pulsic by Super Orange HK Holding Ltd which was subject to a mandatory notification and related to the acquisition of a UK based Target active in electronic design automation products used to facilitate the building of integrated circuits. The national security risks arising from the application of the IP to facilitate the building of cutting edge integrated circuits that could be used in a civil or military supply chain (dual use) and the potential that the electronic design tools could be exploited to introduce features into the design, including automatically and/or without the knowledge of the user that could be used to build defence or technological capabilities, and those risks would arise on the transfer of the qualifying entity and the assets to the acquirer.
  • Most recently the acquisition of Newport Wafer, a Welsh based chip fabricator which was acquired by a Dutch company, Nexperia, which was ultimately owned by Wingtech Technology. The national security risk relating to (i) the technology and know-how that could result from a potential reintroduction of compound semiconductor activities at the Newport site, and the location of the site which could facilitate access to technological expertise and know how in the South Wales Cluster, and the links between the site and the Cluster may prevent the Cluster from being engaged in future projects relevant to national security.

To conclude, once the initial teething problems with the electronic submissions were sorted out, the notification process and initial reviews seem to proceed quite smoothy, although BEIS is taking most of the allowed 30 day review period, even in what are clearly non-issue cases.  In terms of the scope of the sectors covered, the one causing the most difficulties relates to Artificial Intelligence, while the others are generally well understood. The main criticism of the current regime is the lack of transparency and interaction with the BIES team during their review, with practitioners having to try and glean from the further information requests issued to the parties what the potential risks being considered are.

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