The UK's National Security and Investment Act 2021 (NSIA) – the UK equivalent of CFIUS – entered into force on January 4, 2022 and established a regime to review foreign direct investment in “sensitive” sectors.
In 2022, the Government blocked five transactions:
- Beijing Infinite Vision Technology Co.'s acquisition of intellectual property through a license agreement with the University of Manchester relating to certain vision-sensing technology.
- Hong Kong-based Super Orange HK Holding Limited's acquisition of Pulsic Ltd., a producer of electronic design automation products.
- The acquisition of Newport Wafer Fab, the UK's largest semiconductor plant, by Chinese-owned semiconductor manufacturer, Nexperia.
- Russian-backed investment company, LetterOne's acquisition of regional broadband provider, Upp Corporation.
- SiLight (Shanghai) Semiconductor Limited's acquisition of HiLight Research Limited, a supplier of integrated circuits for optical communication.
US and European investors may take comfort that each prohibition involved Chinese or Russian investors, but the regime remains far reaching and unpredictable.
As we await the annual report from the Government containing the latest NSIA statistics, we reflect on our experiences of the regime in 2022 – the good, the bad, and the ugly.
Most transactions are dealt with swiftly and cleared unconditionally: The Investment Security Unit (ISU) tends to process “no issue” notifications within 30 working days and, if considered necessary, “call-in” a transaction for formal review ahead of that deadline. Based on the latest statistics published last year, on average, the ISU takes three-to-five working days to deem notifications complete, and 24 working days to “call in” transactions for detailed review. If a transaction does not warrant a call in, it tends to receive clearance on working day 30.
Limited interaction with the Competition and Markets Authority: While we understand that the ISU and the UK's merger control agency, the Competition and Markets Authority, have an arrangement to alert one another to potentially relevant transactions, we understand that neither agency used this referral mechanism in 2022.
Broad scope of the regime: The UK regime is one of the broadest foreign direct investment regimes globally. Unlike many other foreign direct investment regimes, the NSIA can technically require notifications in the absence of a UK subsidiary or assets and can even catch investments by UK acquirers.
The NSIA also gives rise to some counter-intuitive outcomes. For example:
- Intra-group reorganisations can trigger a mandatory notification, even where there is no ultimate change of control.
- The appointment of liquidators or receivers can trigger a mandatory notification in certain situations.
- The NSIA captures asset acquisitions and may include contracts or IP rights connected to sensitive activities. Indeed, the UK's first prohibition decision under NSIA related to a licence agreement for certain vision sensing technology between the University of Manchester and a Chinese company, Beijing Infinite Vision Technology Company Ltd.
- Contractual rights, such as those found in a shareholders' agreement, are not considered voting rights if they do not enable the acquirer to pass or block all resolutions of a particular class. This is contrary to how veto rights over strategic decisions held by minority investors are viewed under separate regimes like UK merger control law.
- Indirect acquisitions through an intermediate holding company do not constitute trigger events if there is no acquisition of control through an unbroken chain of majority stakes.
Retrospective call-in powers: While the NSIA came into force on January 4, 2022, it still applies to transactions that completed between November 12, 2020 and January 2, 2022. Two of the ISU's five prohibitions make use of these retrospective call-in powers.
The ISU's third prohibition in 2022 concerning Nexperia's acquisition of Newport Wafer Fab, was the first time the UK Government reviewed a transaction that closed before the NSIA entered into force (Nexperia closed the acquisition in July 2021). It took the ISU until May 25 (five months after the NSIA came into force) to formally call in the transaction, and then until November 16 to reach a prohibition decision (i.e., far beyond the statutory review periods available to the ISU).
The ISU's latest prohibition concerned Russian-backed LetterOne's acquisition of Upp (formerly Fibre Me) in January 2021 as part of a £1 billion investment plan to build a regional broadband network reaching one million homes in Eastern England by 2025. On December 19, 2022, the government published an order requiring LetterOne to sell 100% of its shareholding in Upp “within a specified period” and requiring Upp to complete a security audit of its network prior to sale.
More interventionist than expected and expansive remedies: The Government has been far more interventionist under the NSIA than under the Enterprise Act 2002. The government did not block a single transaction on national security grounds under the old regime, compared to its five prohibitions under the NSIA in 2022 alone.
In addition, while all five of the prohibitions concerned Chinese or Russian-backed acquirers, there have been nine cases where fairly extensive commitments have been imposed, some of which on “friendly” investors such as those from the US and Europe. This level of interventions is roughly half the number of mitigation measures made by CFIUS in the US last year, an economy that is nearly seven times larger than the UK's.
These commitments have included the UK government requiring parties to, among other things:
- Appoint a government observer to the board of a target's UK subsidiary.
- Restrict certain activities outside of the UK or to influence board appointments within the target company.
- Accept some form of control over, or restriction on, access to information, either to prevent companies from sharing information within the same group or to protect sensitive information from external disclosure.
- Continue supply to government customers.
In addition, some remedies have gone beyond the scope of national security and included economic commitments such as the in the Viasat / Inmarsat case where the parties were required to commit to “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”.
Interestingly, a number of these transactions that have been blocked or subject to conditions did not trigger a mandatory filing requirement (i.e., transactions involving the acquisition of intellectual property and licences). This reinforces the scope and flexibility of the regime and the ISU's willingness to enforce it.
Practical challenges: Submitting notifications through the Government's cumbersome online system is challenging. The system does not allow for punctuation and applies strict word limits that make complex restructurings or more substantive issues challenging to describe. The form is also designed for corporate structures and fails to reflect the reality of private equity and investment funds.
In addition, the ISU tends to copy all parties to a notification (target and acquirer) when making an announcement or communication. This means that clients can often hear about NSIA decisions before their advisors.
Penalties for failure to file: A few months after the regime came into force, the general view was that parties were over-filing rather than under-filing and as a result, the ISU was not pursuing parties for failure to file, nor did it have any separate unit (similar to the CMA's Mergers Intelligence Unit) to trace missed filings. While we are not aware of any public penalties for failing to file or any criminal prosecutions, we understand that the ISU has started to contact parties in connection with filings that it considers may have been missed.
Lack of transparency: Perhaps the biggest issue with the NSIA to date is the lack of transparency and accountability in ISU reviews. Unlike most merger control and foreign direct investment processes, the ISU does not appoint a specific case handler, inform parties of the progress of their case, or give the parties an opportunity to engage the ISU until it formally calls in a case for detailed review. The ISU does not provide an email address or phone number for parties to request feedback on the status of the ISU's review, and in some instances, the ISU has implemented decisions imposing conditions without prior consultation with the parties.
When the ISU does engage with parties, it often reads from a script and does not provide parties with a real opportunity to engage on the substance of the case. This contrasts with almost all other jurisdictions where parties can have meaningful discussions with case teams on the transaction, substance, and the scope of any commitments to ensure that they are practical and achievable.
The ISU has also stopped issuing feedback with respect to borderline cases, which is leading parties to notify a large number of deals to the ISU as a precautionary measure.
Finally, the ISU does not generally publish decisions, and only makes remedy orders available once heavily redacted, which makes it challenging for advisors to understand the ISU's rationale and make recommendations or draw analogies in subsequent cases.
Overall, the regime seems to be working well for straightforward, “no issue” cases. Various procedural changes would, however, improve the ISU's efficacy going forward, including requiring the ISU to appoint case officers to specific cases and engage in meaningful discussions with parties on the substance of a transaction.
Practitioners are also encouraging the ISU to be more open and transparent in its industry engagement, to implement greater flexibility in the notification form, and to provide updated guidance on sectoral definitions to ensure that they only receive notifications in connection with transactions with real national security implications.
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.