On 16 November, the UK's Secretary of State for Business, Energy and Industrial Strategy (BEIS) blocked Nexperia BV's (Nexperia) acquisition of Newport Wafer Fab on national security grounds.1 This is the latest in a still relatively small set of prohibition decisions under the National Security and Investment Act 2021 (NSIA). As we approach the first year anniversary of the UK's investment screening regime, we take stock of the most salient early trends which are emerging as more decisions are published and consider what it means for the year ahead.2
This is the first time the UK Government used its retrospective powers to order a divestment of a completed corporate acquisition under the NSIA. The acquisition completed in July 2021, before the NSIA came into force, when Nexperia increased its stake from 14 percent to 100 percent. BEIS called in the acquisition using its retrospective review powers. Although the purchaser was a company incorporated in the Netherlands, it is ultimately controlled by the Chinese group Wingtech. The target, Newport Wafer Fab, is a UK wafer maker and exports wafers to Asia to be made into chips.
The UK Government called in the transaction for review in May 2022 and, after six months' review, ordered Nexperia to reduce its shareholding in the target to at least its original, non-controlling holding of 14 percent.
It is not surprising that the UK Government is reviewing Chinese investments in sensitive areas and that it is making use of its powers to order divestment. Indeed, the ability to review, and ultimately block, transactions in certain sensitive sectors was the purpose behind the new legislation, and we are now seeing the UK Government applying those powers. All three transactions the UK Government has blocked to date have had Chinese acquirers (respectively, Beijing Infinite Vision Technology Company Ltd.3 and Super Orange HK Holding Ltd) or acquirers that were owned by Chinese entities (as is the case with Nexperia).
This is not out of kilter with the trend in other countries around the world, many of which are increasingly seeking to claw back control of strategically important industries. It is also about the particular industry sector and many other factors besides the nationality of the acquirer-for example, under the previous UK regime the acquisition of UK-based chip design company Arm by US-based Nvidia was abandoned after it faced significant concerns.
The UK national security review process is very much a black box process without much interaction with the notifying parties. The written decision itself-as was the case for the previous transactions that have been blocked or required remedies-is also extremely brief and simply refers to national security risks related to:
i. technology and know-how that could result from a potential reintroduction of compound semiconductor activities at the Newport site, and the potential for those activities to undermine UK capabilities; and
ii. the location of the site could facilitate access to technological expertise and know-how in the South Wales Cluster ("the Cluster"), and the links between the site and the Cluster may prevent the Cluster being engaged in future projects relevant to national security.
The opacity of the review extends beyond the initial examination and the decision-making process to the negotiation (or, more accurately, imposition) of remedies. In this case, it is unclear how much interaction there was between the parties and the UK Government on the remedies before the order was issued. For its part, Nexperia expressed surprise at the decision and reported having offered wide-ranging remedies including a pledge "not to conduct the compound semiconductor activities of potential concern and to provide the UK Government with direct control and participation in the management of Newport." The extent to which the UK Government considered the proposed remedies is likely to be tested on appeal.
What does this mean for the regime in the future?
Nexperia has indicated that it will appeal the decision. Strictly speaking, this is not a full appeal on the merits but is a judicial review of the decision-making process. This means the judge will not decide whether they would take the same decision on the facts, but will decide only whether the UK Government acted irrationally, illegally or with procedural impropriety.
Although the judicial review will be relatively narrow, it will still be the first serious stress test of the new regime. One of the points that is likely to come under scrutiny is whether the parties have been given sufficient reasoning. If that is not the case, it is likely that the decision-maker will be able to re-adopt the decision and rectify the procedural errors. What will be interesting to see is how the court approaches the decision-maker's margin of discretion when considering national security issues under the NSIA. It seems likely that the decision-maker has a very wide margin of discretion before a decision and/or the imposition of potential remedies becomes irrational.
Finally, this highlights the strategic considerations that parties have to evaluate when contemplating transactions in high-risk and not so high-risk areas. It adds a further layer of complexity, risk and possible delay into corporate dealmaking, including the possibility that BEIS may call in deals that have already closed without prior notification under the NSIA.
Please refer to our previous Advisory, available here, for an overview of emerging trends in the regime.
Please refer to our previous Advisory, available here.
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.