On 20 July, the UK government prohibited for the first time a transaction under the new National Security and Investment Act 2021 ("NSIA").1 In other cases where the government has intervened so far enforcement action involved imposing conditions on the acquirer. In this advisory we take stock of the emerging practice and outline key takeaways for businesses, including US transaction parties, involved in acquisitions in and outside of the UK.

The prohibited transaction involved the acquisition by Chinese company Beijing Infinite Vision Technology of IP developed and owned by the University of Manchester. Interestingly, this did not involve a share acquisition of a company (which would have required a mandatory pre-notification), but a licensing arrangement concerning sensitive technology which was notified voluntarily.2 The decision was adopted in the same week that BEIS accepted undertakings by US-listed Parker-Hannifin in respect of its acquisition of Meggitt.

Publication of NSIA decisions are limited to final orders imposing conditions, unwinding, or blocking a transaction.3 Clearances and other procedural decisions are not published (see also our previous Advisory). Also, compared to merger control decisions, final decisions that are published are scant as the government provides no reasoning for its decision. This somewhat limits predictability and certainty.

Nevertheless, as the body of published cases expands and some insight on current and recent cases becomes available in the legal press, the following key takeaways on the enforcement have emerged:

  • Nationality does not determine outcome. Although, somewhat unsurprisingly, the only deal having been blocked so far concerned a Chinese acquirer, transactions undertaken by acquirers headquartered in countries that are close allies of the UK are not immune from close scrutiny. Experience shows that acquirers from close allies such as the US, France or Israel may still give rise to a UK national security issue where the target business is engaged in sensitive activities.4 In fact, even a UK-to-UK deal may trigger a filing.5
  • US (as well as other non-UK) transaction parties6 should carefully consider the potential UK nexus of their transaction. There are many examples of transactions involving US buyers which have recently been called in and/or closely scrutinised by BEIS. Notable examples include WindAcre/Nielsen, as well as a number of recent deals initiated under the NSIA' predecessor regime, namely Parker-Hannifin/Meggitt, Cobham/Ultra Electronics, and Nvidia/Arm. As previously highlighted, the NSIA has a broad extraterritorial reach: although UK target companies and UK-based target assets are a priority, the UK regime also captures international transactions where the target, despite not being either based in the UK or having UK subsidiaries, (i) has activities (e.g., an R&D facility) in the UK, (ii) supplies goods or services in the UK (e.g., through distributors to UK customers), or (iii) is or has an asset used in connection with activities carried out in the UK and/or in connection with the supply of goods or services to people in the UK. As such, US (and other non-UK) investors and, more generally, US (and other non-UK) transaction participants, should be live to the implications of this regime when entering into international transactions with a potential UK angle, particularly if these fall within one of the 17 sensitive sectors that require a mandatory pre-notification for share acquisitions.7
  • Defence is just one of the many sectors. As mentioned, there are 17 sectors (see Appendix III of our previous Advisory) that the NSIA identifies as requiring a mandatory pre-notification of any share acquisition. Those sectors are also highly relevant where the acquisition involves assets and hence may not require a mandatory pre-notification. According to BEIS' first report, and consistent with the cases we have seen so far, alongside the defence sector, military and dual use, critical supplies to the government, data infrastructure and AI rank among the top sectors which have been more often and more closely scrutinised by BEIS.8 This confirms the intention behind the regime to tackle modern threats involving sensitive and cutting-edge technology.
  • Transaction parties should be aware of the timing implications for closing. The statutory review period for the vast majority of deals is one to three months, and statistics so far show that the majority of deals are cleared within 30 days. However, where substantive issues emerge the review will take much longer as the government has the power to stop-the-clock in certain circumstances.9
  • ISU decision-making is opaque. Unlike merger control processes which involve a very iterative pre-notification process with the relevant case team, NSIA notifications are made very much into a "black box", the process is less iterative in the initial stages and any dialogue is very limited. Parties should also not expect the ISU to provide regular status updates during its reviews on timing or whether it has identified any potential national security concerns and/or is considering a particular set of remedies.
  • Filings are still a piece of advocacy. Unlike merger control filings, an NSIA filing is a relatively short form, submitted through an online portal. Nevertheless, it is a piece of advocacy albeit constrained by the straightjacket of the online form. This is reflected in BEIS' recent guidance that explicitly calls on the parties to use all available opportunities in the form to be as descriptive and as detailed as possible10–e.g., highlighting any circumstance as to why the case should not raise any concern. This can assist in limiting the risk of receiving extensive questions from the ISU, potentially at a late stage in the review process, and can help achieve a prompt clearance.
  • Overall problematic cases are still rare. Government statistics from the first three months of operation of the NSIA (i.e. January-March 2022) show that out of a large number of filings (222) only a very small number (17) was called-in for further review. The vast majority of these (196) were mandatory notifications which means that it is too early to draw conclusions on enforcement practices for non-notified transactions involving asset or IP acquisitions.
  • "Behavioural" commitments seem to be playing an important role in securing clearance. In a relatively high number of cases, parties have secured clearances by providing behavioural undertakings such as ensuring supplies11 or implementing enhanced controls to protect sensitive data.12 This marks a stark contrast with the decisional practice in merger cases, where structural remedies are by far more commonly accepted. In view of the first prohibition we will need to see how this practice further unfolds and whether we will see further prohibitions or disposals.

Further details on the specific cases that are referenced above can be found in the case tracker in the Annex to this advisory.

Annex - Case tracker of most relevant cases 13

Case/Parties Summary of the case
Transactions blocked

Acquirer: Beijing Infinite Vision Technology Company Ltd (BIVT)

Target: IP rights relating to vision sensing technology

This case concerned a licencing agreement that involved the transfer of IP rights relating to SCAMP-5 and SCAMP-7 vision sensing technologies from the University of Manchester to Chinese firm BIVT, which would have enabled the acquirer to use the technology to develop, test, verify, manufacture, use, and sell licensed products.

BEIS had concerns over the deal as the relevant technology has dual-use applications and could be used to build defence or technological capabilities, posing a national security risk to the UK.

The transaction was voluntarily notified to BEIS as it concerned the acquisition of assets rather than the acquisition over a "qualifying entity".

The deal was blocked on 14 July 2022.14 In terms of next steps, the parties have 28 days from the date of the decision to file an appeal for judicial review.
Transactions closed before 4 January 2022 and retrospectively called in by BEIS
Acquirer: Nexperia

Target: Newport Wafer Fab

This case concerns the acquisition of the UK's largest semiconductor producer, Newport Wafer Fab, by Nexperia, a Dutch subsidiary of China-based Wingtech.

The deal was called in on 25 May 2022, which meant that the initial review period expired on 5 July, but BEIS extended the deadline by 45 working days. It has been reported that senior government figures have warned that the sale could undermine a strategic UK industry.15
Acquirer: Altice Europe N.V.

Target: BT Group plc

This case concerns the increase by French telecom group Altice of its stake in UK telecom giant BT from 12% to 18% in December 2021.

The acquisition of this additional 6% shareholding was called in by BEIS for a full national security assessment on 26 May 2022.16 Based on publicly available information, it appears that review of the case is still pending following suspension of the deadline due to formal information requests.

The case shows how BEIS is prepared to carefully scrutinise acquisitions of small minority stakes, even below the 25% level that gives rise to a mandatory notification under the NSIA and even where the acquirer is from a "friendly" country such as France. There has been some speculation that the review was motivated by a concern that Altice is planning a takeover bid.
Transactions called in by BEIS which had not been notified
Acquirer: The WindAcre Partnership

Target: Nielsen Holdings plc

This case concerns the increase by US-based WindAcre to 27% of its stake in Nielsen-a provider of viewership and listening measurement data and analytics which has reportedly been investing in artificial intelligence (i.e., one of the 17 mandatory sectors) for market research purposes for years. Despite being UK-based, Nielsen is listed in the US, where it generates the great majority of its revenue.

After WindAcre failed to notify the deal despite crossing the 25% threshold on 18 April 2022, this was called in by the UK government for review immediately thereafter.
Other noteworthy transactions recently cleared or still pending

Merging Party: OneWeb

Merging Party: Eutelsat Communications

This case concerns the proposed merger between UK satellite company OneWeb and French satellite operator Eutelsat. Eutelsat's shareholders include the Chinese government with a 5% stake. This, together with Eutelsat's broadcasting operations in Russia, could present a potential stumbling block.

Under the contemplated arrangements, the UK government, which currently has a minority stake in OneWeb, will retain special rights over the combined entity, including a range of national security rights, such as over security standards of the OneWeb network and use of the OneWeb network for national security purposes, as well as the UK remaining the entity's headquarters and preferred location for future OneWeb launches. The deal seems to be still under NSIA review, however, given the UK government's rights under the contemplated arrangements, a timely clearance would seem likely.17
Acquirer: Hakan Koç

Target: Truphone Ltd

This case concerns the proposed acquisition of UK-based mobile network operator Truphone, currently owned by sanctioned Russian businessman Roman Abramovich and other Russian investors, by German entrepreneur Hakan Koç .

The deal was called in by BEIS by way of an interim order issued in early July (reportedly, the date before its closing). Interestingly, the deal is said to be an attempt to avoid Truphone becoming insolvent and, as such, the interim order would increase the chances of it going into administration. Delaying the deal also means that Truphone will prolong its ownership under sanctioned Russian individuals. The reasons for the government halting the deal are not entirely clear-possibly, existing contracts with BT to supply remote SIMs which requires access to BT data and which may have led to concerns about the sale to Koç.
Acquirer: A private consortium led by the Macquarie Group

Target: National Grid plc

This case concerns the proposed acquisition of a 60% stake in the National Grid's gas transmission business by Australian financial services firm Macquarie, in consortium with Canadian investment firm British Columbia Investment Management Corporation. The deal was announced in March for £4.2 billion and as such is one of the largest transactions to be reviewed under the NSIA so far.

The deal is currently under BEIS' scrutiny given the critical role played by the infrastructure in the UK energy landscape - particularly in the current climate of soaring fuel prices which have focused the attention on who controls energy infrastructure and sources of supply.

Macquarie is already a significant investor in the UK and in 2017 it was already involved in the acquisition of much of National Grid' UK local gas distribution networks. This would arguably make it less likely that BEIS may find it not to be an acceptable buyer from a national security perspective.

Although it is unclear when the review began, this was announced in the legal press on 7 August 2022.

Acquirer: Epiris LLP, Epiris GP and Sword Bidco GP

Target: Sepura Ltd

This case concerned the acquisition by UK private equity firm Epiris over Sepura, a UK manufacturer of voice and digital solutions for businesses and emergency services.

The case was cleared on 14 July 2022 subject to assurance by the parties to (i) implement enhanced controls to protect sensitive information and technology from unauthorised access and (ii) maintain UK capabilities in repairing, servicing, and maintaining the devices used by emergency services in the UK.18

Although the deal was ultimately approved, this is clear evidence that acquisitions by UK investors may still be subject to extensive review under the NSIA.

Acquirer: Optum Health Solutions Ltd

Target: EMIS Group plc

This case concerned the acquisition of UK health software company EMIS by US-owned Optum Health Solutions. Through the acquisition, Optum gains access to EMIS' patient data management software which is used by the majority of pharmacies throughout the UK.

The deal was announced in June and its clearance was reported in the legal press on 10 August. Optum is owned by the US giant UnitedHealth Group, a long-standing NHS partner. It seems likely that this existing partnership may have helped securing BEIS' clearance.

Transactions recently investigated by BEIS by issuing a PIIN under the Enterprise Act19

Acquirer: Parker-Hannifin Corporation

Target: Meggitt plc

This case concerned the proposed acquisition by US-listed precision engineering conglomerate Parker-Hannifin over UK-based Meggitt, a producer of components and sub-systems for the aerospace, defence, and energy industries.

After an extensive investigation which lasted nine months, on 19 July 2022 BEIS approved the transaction subject to Parker's commitments to, among others, honour existing supply contracts with the UK Ministry of Defence and to reinforce security arrangements protecting sensitive government information in Meggitt, including a requirement to retain a majority of UK nationals resident in the UK on the Board of Directors of Meggitt.20

Acquirer: Cobham Group

Target: Ultra Electronics Holdings plc

This case concerned the proposed acquisition by US-based and US-owned defence, aerospace, and communications firm Cobham of UK defence company Ultra Electronics.

After an almost nine-month investigation, on 6 July 2022 BEIS approved the transaction subject to Cobham's commitments to create two separate UK legal entities encompassing Ultra's facilities that deliver sensitive capabilities to the UK government and to grant the UK government, among others, (i) board appointment rights over the new entities, (ii) rights of approval over the new entities' Articles of Association and strategic objectives, and (iii) step-in rights enabling the UK government to direct the transfer of ownership of the two entities on national security grounds.21

Acquirer: Shanghai Kington Technologies

Target: Perpetuus Group

This case concerned the proposed acquisition by Chinese Shanghai Kington Technologies of UK group Perpetuus, active in the functionalisation of nanomaterials which have a range of strategic applications. According to the CMA's investigations, Perpetuus supplies at least one quarter of all graphene plasma goods and/or services in the UK.

After an eight-month investigation, which saw the deal being referred by BEIS to the CMA for a Phase 2 investigation on national security grounds, the deal was abandoned on 27 May 2022. Although the CMA concluded that the deal would not lead to a substantial lessening of competition, it highlighted a number of public interest representations it had received. Amongst those were concerns as to the connection between the buyer and the Chinese state apparatus.22
Acquirer: Nvidia Corporation

Target: Arm

This case concerned the anticipated acquisition by US-based graphic processor Nvidia over UK-based Arm, a chip designer whose products are used in smartphones and other electronic devices.

Following concerns raised by a number of antitrust regulators, including the FTC and the CMA, around possible vertical foreclosure of Nvidia's rivals who also use Arm's chip designs in their semiconductors, as well as a referral by BEIS to the CMA for a Phase 2 investigation on national security grounds, the deal was abandoned in February 2022.

Footnotes

  1. For more details on the operation of the regime introduced by the NSIA, please refer to our previous Advisory.
  2. Since IP licensing forms an integral part of the university business model, this case also makes clear that universities will need to re-evaluate their risk assessment processes and ensure compliance with the obligations under the NSIA. In this respect, please note that specific guidance for Higher Education Institutions and other research organisations and investors to understand the scope of the NSIA was already published by BEIS in January 2022.
  3. Most recently in its National Security and Investment: market guidance notes July 2022, BEIS expressly stated that it will not publish information regarding the receipt and the acceptance or rejection of individual notifications; however, it may choose to publish limited information concerning the fact that a call-in notice or an interim order have been issued; a clearance has been granted, where the parties disclose such information; or the acquisition is otherwise in the public domain and BEIS considers it is in the public interest to do so.
  4. Examples of deals which have been recently called in by BEIS and/or closely scrutinised include Altice/BT-a deal retrospectively called in by BEIS where the acquirer was a French Telecom group owned by French-Israeli billionaire Patrick Drahi, and Hakan Koc/Truphone-a deal which was called in for in-depth review by BEIS by way of an interim order and where the acquirer was German entrepreneur Hakan Koc.
  5. The acquisition over UK-based Sepura by UK private equity firm Epiris, cleared subject to conditions on 14 July 2022, is a clear example.
  6. Most notably, US buyers, but also other transaction participants such as financial investors, sellers, etc.
  7. See Appendix III of our previous Advisory for a list of the 17 mandatory sectors.
  8. See https://www.gov.uk/government/publications/national-security-and-investment-act-2021-annual-report-2022, page 14 and page 18.
  9. For example, review of the WindAcre/Nielsen deal, called in around 22 April based on public information, is still pending with BEIS. BEIS has also more recently used its extension powers in each of Nexperia/Newport Wafer Fab and Altice/BT (called in on 25 and 26 May 2022, respectively, and still pending for review). Cases called in under the previous regime and only very recently decided, although not subject to the statutory review period under the NSIA, also seem to suggest that several months might be necessary in certain cases before the UK government may be able to reach a conclusion.
  10. Specifically, by adding relevant information and explanations in the "additional information" sections included throughout the form-e.g., in relation to the description of the relevant sector or the relevant "trigger events".
  11. See, for example, the decision in Parker-Hannifin/Meggitt (albeit formally decided, very recently, under the previous regime).
  12. See, for example, the decision in Epiris/Sepura.
  13. The tracker is non-exhaustive and does not include every case having been reviewed to date. This is because, under the NSIA, information concerning past deals will only be made public where BEIS issues a final order either imposing conditions, clearing, unwinding, or blocking a transaction. We have also generally not included all transactions we are aware of as having been reviewed by BEIS, where these were relatively straightforward cases.
  14. Please refer to the BEIS final order notice.
  15. Please refer to the BEIS press release.
  16. Please refer to the BEIS press release.
  17. Please refer to the BEIS news story.
  18. Please refer to BEIS.
  19. I.e. the regime in force prior to the NSIA becoming operational and which entitled BEIS to issue a Public Interest Intervention Notice (PIIN) on national security grounds in the context of cases subject to merger control review by the CMA.
  20. Please refer to the national security undertakings annex to the decision notice.
  21. Please refer to the national security undertakings annex to the decision notice.
  22. Please refer to the BEIS news story, which contains a link to the Phase 1 report.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.