Since coming into force on 4 January 2022, the NSIA has created a very expansive stand-alone regime – moving the UK from something of an investment screening outlier to one of the more robust and demanding systems globally. A summary of the regime can be found in our earlier piece: UK National Security and Investment - now is the time to Act. Most notably, it includes a mandatory notification regime for transactions in certain sensitive sectors, and involves significant financial and criminal sanctions (as well as commercial consequences) for non-compliance. The Secretary of State (SoS) for Business, Energy and Industrial Strategy (BEIS) is the key decision maker, with the day-to-day operation of the regime conducted by a new specialist body: the Investment Security Unit (ISU).
Overview
At a time of significant global turbulence, and given that the regime is still relatively nascent, it is difficult to distil definitive trends or themes, particularly in light of the lack of transparency on ISU decision making and the fact that national security concerns often evolve rapidly. Nevertheless, we set out below a number of observations from the NSIA’s first year in operation:
- Statistics to date – the publicly known numbers suggest an active and interventionist regime that is generating in-depth reviews at a rate surpassing initial expectations.
- Type of transactions caught and low threshold for intervention – it is not just share acquisitions conferring control that are caught, but any transaction where concerns are identified (with a very low threshold for intervention based on nebulous concepts of "material influence" and acquiring control of assets to a "greater extent").
- Sectors in focus – although a number of sectors have so far been prominent, there appears to be particular attention on semiconductor technology.
- Nationality agnostic…apart from China? – despite the regime having no black or white lists for the origin of the investor/acquirer, the regime is undoubtedly having a particular impact on transactions with a Chinese angle.
- Beyond ‘national security’? – there are suggestions that the UK Government might be leveraging these newly conferred powers to address other issues, ones shaped as much by industrial policy considerations.
- Creative commitments – the range of conditions that have been imposed is extensive, encompassing both structural and behavioural remedies, and suggests a welcome flexibility on the part of Government.
- Opaque rules and procedures – there remains uncertainty about the legislation, its correct interpretation and how aspects of the regime operates in practice.
Statistics to date
Information about the numbers of notifications made, or transactions ‘called in’ for an in-depth national security assessment since January 2022, are not available; although high-level statistics are expected to be published in the next annual report (for the year to 31 March 2023). However, the April 2022 Annual Report (i.e. based on less than three months of activity) suggested that the total number of notifications has broadly matched expectations.
The Government does sometimes publish information about call-in notices or final (clearance) notifications, primarily where the parties involved have already disclosed this information publicly, or the SoS considers it appropriate to do so. However, there is still only very limited public information.
By contrast, notices of Final Orders (i.e. an order imposing conditions or blocking a transaction) are published on the UK Government website. These announcements reveal a more interventionist, but also more pragmatic, approach than had been expected, with a Final Order issued in relation to 14 transactions:
- As of 31 December 2022, there have been five prohibitions. Two of the prohibited transactions saw the Government make use of the NSIA’s retrospective powers to require the purchasers to divest shares already acquired prior to the NSIA coming into force.
- There have been nine further cases where conditions have been imposed that must be satisfied before a transaction can close, although conditions were revoked in one case in December 2022, and were varied in another case in early 2023.
The fact that the UK Government has, in a number of cases, imposed conditions rather than simply blocking transactions is encouraging. It demonstrates that a pragmatic approach will be taken to situations where the Government has identified perceived risks, and that it is willing to engage with parties on ways to mitigate those perceived risks (see further below).
Although the total number of notifications broadly matched expectations (at least as at April 2022), Final Orders have so far happened at a rate surpassing what was anticipated under the NSIA's initial Impact Assessment. This level of intervention has not gone unnoticed, particularly when compared with the relative lack of scrutiny under the predecessor national security regime under the Enterprise Act 2002. For example, in December 2022, the Financial Times noted that the "volume of interventions” is roughly "half the number of mitigation measures made by the Committee on Foreign Investment in the United States (CFIUS) last year in the US", an economy that is nearly seven times larger than the UK's.
It is also noteworthy that the pace of Final Orders has picked up markedly in the second half of 2022, with 6 interventions in the last quarter. It will be interesting to see if this level of intervention continues into 2023, noting that there are currently no publicly acknowledged reviews ongoing (despite speculation in respect of several high-profile matters).
Scope of transactions caught and low threshold for intervention
The first year of the NSIA has seen the legislation apply to a variety of transactions. Interestingly, a number of deals that have undergone in-depth national security assessments (including ones that were ultimately blocked or subject to conditions) did not fall within the regime’s mandatory requirements – e.g. transactions involving the acquisition of development rights, intellectual property and licences. This underscores the scope and flexibility of the regime, and highlights that it is not just M&A and share investment activities that are of concern to the Government.
Parties also need to be aware of the breadth of the regime's so-called 'trigger events', which are not confined to transactions with external parties but even include internal re-organisations. Furthermore, there is a low threshold for intervention. The Government is able to ‘call in’ transactions on the basis of a somewhat nebulous concept of "material influence" – i.e. in relation to relatively low shareholdings which, from experience in the UK merger control context, can be as low as 10-15%. For deals involving assets to be caught, a person gaining ‘control’ of the asset needs only to be able to use, or direct the use of, the asset to a "greater extent" than before.
Sectors in focus
Final Orders have ranged across the 17 sensitive sectors of the economy under the NSIA. In the 2022 Annual Report, BEIS confirmed that the most common sectors triggering a mandatory notification have been defence, military and dual use, critical suppliers to government, artificial intelligence and data infrastructure.
However, it is noteworthy that four of the five blocked transactions involved the provision of either computer chip or semiconductor technology. The production of this technology has been heavily impacted by the pandemic, and the resulting supply chain complications. One might, as such, anticipate that these sectors will likely continue to feature highly on the Government’s NSIA agenda.
Nationality agnostic…apart from China?
It is worth noting that the NSIA is not a ‘Foreign Direct Investment’ regime as such – would-be acquirers and investors in focus do not need to be ‘direct’ investors, or indeed ‘foreign’. In many instances the problematic party is not the acquiring party itself but, instead, its beneficial owners or even individual shareholders. This was demonstrated in the most recent prohibition where the presence of Russian oligarch shareholders upstream in the acquirer group created concerns.
Final Orders to date have included interventions in relation to domestic investors and investors based in friendly trading partner jurisdictions. For example, a number of US- and EU-based investors have had their deals probed and, in two instances, subjected to conditions. Nevertheless, the reality indicates a predominantly strong focus on China. The data is striking:
- Of the five deals blocked, four involved Chinese backers/owners. The only other prohibition was the above mentioned transaction in which Russian oligarch shareholders were present upstream in the acquirer group.
- Of the nine transactions subject to conditions, a further four have involved Chinese stakeholders.
Taken together these points underscore the potential additional scrutiny of transactions involving Chinese parties – even if the Chinese aspect appears remote, peripheral or insulated from the levers of control. However, the published information gives only a limited glimpse of all transactions reviewed by the ISU. It is not known, for example, how many deals involving Chinese investors or companies have been granted unconditional approval, and so the statistics highlighted above could instead reflect a high number of notifications by Chinese investors or companies, rather than a policy position on the part of the ISU. Nevertheless, it is prudent to assume that deals involving Chinese stakeholders should expect more detailed scrutiny.
All about ‘national security’?
An important feature of the NSIA is the omission of a definition regarding 'national security'. Beyond underscoring the broad discretion afforded to the SoS in their interpretation of what amounts to a ‘national security’ risk, there is a possibility that lines become blurred and conditions are used to address other issues – ones shaped by industrial policy considerations.
In the context of the Viasat/Inmarsat deal, the inclusion of economic undertakings required from Inmarsat such as "an expansion in the number of highly skilled jobs in key areas and a 30% increase in overall research and development spending in the UK" might suggest that considerations other than ‘national security’ could be at play. Indeed, the statement in Parliament by the current SoS (Grant Shapps) regarding the Nexperia BV/Newport Wafer Fab review stated that "jobs and skills are something we are keen to preserve", whilst making no direct reference to national security. The use of the NSIA regime as a lever to meet other Government objectives therefore cannot be ruled out, and is something of which parties need to be aware.
Creative commitments
As highlighted above, during the course of 2022 nine transactions were given conditional clearance. The conditions imposed have been various and varied, encompassing both structural and behavioural remedies (or a combination of both), and not always with an obvious connection to a perceptible national security issue or concern. This is notable insofar as behavioural remedies have rarely been considered acceptable or appropriate in a UK merger control context, but yet they have featured prominently in the conditions imposed during the NSIA’s first year in operation.
There is no public 'list' of specific remedies that might be required in order to allow clearance of a transaction. The SoS need only be satisfied that the content of a Final Order is necessary and proportionate for the purposes of preventing, remedying or mitigating a national security risk. That being said, the conditions imposed in 2022 broadly fell into the following categories:
- Control of information – both in relation to information sharing between the target and acquirer, but also the ongoing protection of secure information.
- Forward-looking behavioural obligations – continuing to provide "strategic capabilities" to the UK Government or maintaining activities in the UK.
- Amendments to the internal management of the parties – ranging from appointments of Government-approved information security officers, auditors or observers, to required changes to members of the boards of the respective companies.
- Implementation of security measures – specific security procedures that must be put in place by the parties (often following an audit completed by a Government-approved auditor).
- Notification requirements – parties required to notify (and sometimes obtain consent in advance) for disposals of certain assets.
The willingness of the Government to consider such conditions, rather than simply block transactions, is welcome. However, given the nature of the concerns (i.e. national security), there appear to be limits to the amount of transparency that the Government is willing and able to provide. Thus even where parties seek actively to engage in possible remedy discussions, there may be little engagement in return, and there may be little in the way of visibility as to why proposed commitments were ultimately ignored or deemed insufficient.
An intentionally opaque black box?
The NSIA is, by virtue of the very concerns that it addresses, an unsurprisingly complex piece of legislation. Furthermore, the nature and sensitivity of the subject matter in question means that some stakeholders are finding the NSIA regime more opaque than is the case with other regulatory processes.
The ISU has to date been engaged and open to helping interested parties navigate the new rules, whether through formal or informal channels, and a clear effort is being made to routinely publish guidance.
Despite this, there remains uncertainty about the legislation, its correct interpretation and the regime’s operation in practice. This is not helped by gaps in the issued guidance to date and, more pertinently, the opaque nature in which the notification and decision process operates. Unlike the UK’s merger control regime, ISU decisions are not made public unless the notified matter results in a Final Order being issued, or the SoS chooses to publicise a clearance decision. Even where a Final Order is issued, the information made public is sparse and often appears to have limited precedent value.
It has also been noted that (similar to its CFIUS regime in the US) once a transaction is called in for review, engagement from the assigned ISU case team is often minimal. Following the blocked acquisition of Newport Wafer Fab's semiconductor factory, Nexperia BV announced its intention to appeal the Final Order and noted that the "far-reaching remedies which Nexperia offered to fully address the Government’s concerns have been entirely ignored". While some limits on transparency may be expected, it will be interesting to see the extent to which the Government’s powers and discretion are tested and potentially curtailed (or at least clarified) in the event the matter ultimately proceeds to court. In the long term, such a lack of engagement and transparency could undermine the credibility of the regime, particularly to the extent that it appears that it is being used to meet unrelated Government objectives.
Looking forward
If current experience is symptomatic of the future, the vast majority of transactions reviewed by the ISU (including those notifications made on a mandatory basis) will likely pass through the checks with relative ease and speed. However, the lack of clarity around the review process and timing will likely remain, and result in frustration and legal uncertainty for transacting parties. As such, further guidance would be welcome from the ISU, in particular on how the regime operates in the context of complex deal structures (such as those involving private equity) and circumstances where, for example, internal re-organisations do not need to be notified on a mandatory basis.
Given the robust enforcement powers the Government has for sanctioning non-compliance (and, in particular, for failing to make a mandatory notification), the NSIA is not something that can be ignored. But even where jurisdictional requirements are observed, transacting parties will need to take into account the NSIA in light of the timing implications and potential commercial uncertainty the review process can entail. Consequently, how best to factor these points into deal documentation, and how to allocate risk, will continue to be challenging.
Please get in touch with us to discuss the impact that the NSIA regime could have on your business. Hogan Lovells practises law at the intersection between business and Government and is particularly well placed to help – having a deep understanding of the regulatory landscape and the detail of the NSIA regime. We also have extensive experience of working inside Government, and advising corporations on the machinery of Government and its policy priorities. Let us help you navigate the regime and, if necessary, engage with Government and relevant stakeholders.
Authored by Christopher Peacock, Christopher Hutton, Matt Giles, and Harrison Gower.
