On 18 November 2022, the UK government announced a decision to require the divestment of an 86% stake in one of the UK's largest semiconductor plants, Newport Wafer Fab (NWF), held by Dutch-incorporated, but ultimately Chinese-owned, Nexperia Holding BV ("Nexperia"). Nexperia, reportedly backed by the Chinese Communist Party (CCP), first acquired a 14% stake and installed two directors on the NWF board in March 2021. In July 2021, it acquired the remaining stake in the company. The decision to unwind the deal comes after a drawn-out review process, with the delay exacerbated by the multiple changes in the UK government's administration in recent months. Following the divestment, Nexperia will be left with the 14% stake it originally held in NWF. Nexperia has announced an intention to appeal the decision.
The Government's Concerns
A key challenge being felt by all those navigating the National Security and Investment Act 2021 ("NSIA") is the lack of clarity as to what will constitute a "national security" concern. The legislation deliberately provides the Secretary of State with a wide margin of discretion, and the NWF case demonstrates the extent to which this involves a political balancing act in practice. In the NWF case, it was clear that even within government, there was no consensus as to whether or not the deal presented a threat - as evidenced by previous decision-makers and advisers (including both the Secretaries of State for Business Energy and Industrial Strategy (BEIS) and the Prime Minister's National Security Adviser) having decided either not to investigate or to delay investigation. A call-in for assessment under the NSIA would have been possible from at least January 2022, and even at the time of the acquisition in July 2021, under the old Enterprise Act legislation.1
Repeated calls to intervene on national security grounds throughout 2021 and early 2022, including concerns around the CCP's explicit strategy of "forcing technology transfer", were initially met with resistance. The government stated, in October 2021, that it "does not and will not prioritise short-term commercial interests over national security considerations" and noted that it was "monitoring the situation closely" and would use its powers "if appropriate".2 The UK government may also have faced pressure from the U.S. government to take action, following calls from members of U.S. Congress in April 2022 for the president of the United States to exert diplomatic pressure on the UK government in order to secure intervention.3 The transaction was finally called in on 21 May 2022, around six weeks before the applicable six-month deadline to do so under the NSIA.
The final order published on 16 November 2022 (the "Order") provides little colour on the national security concerns which ultimately led to the decision to block the transaction. At face value, these concerns appear to relate to the risk of technology transfers out of the UK in the future (in the event of a potential reintroduction of compound semiconductor activities at the Newport site),4 as well as concerns that NWF's location as part of the Welsh semiconductor cluster "could facilitate access to technological expertise and know-how", which might prevent businesses and R&D operations in the area from being engaged in future UK national security projects. While not made clear, there may also have been concerns related to access to existing semiconductor related R&D.
In justifying the Order before the Houses of Parliament, the UK Secretary of State also appeared to suggest that NWF's role being reduced to manufacturing exclusively "in-house" for Nexperia was undesirable, and that maintaining the "the entire supply chain" (including, presumably, broadening NWF's supply base) may be taken into account as an objective when working through the remedy implementation. If Nexperia is indeed NWF's sole customer, reducing this dependence will likely need to be addressed as part of the remedy process.
As outlined above, there is a distinct and deliberate lack of guidance as to what national security really means. This case demonstrates why it is unlikely to be possible to ever pin this down: what constitutes a national security concern will be subject to change depending on political factors, both national and global, and this can evolve live, even during the life of the case. It is not surprising therefore that there is a clear reluctance to provide meaningful guidance on the meaning of "national security" - and there are no signs of this changing.
Judicial guidance is also unlikely to be forthcoming. If there is an appeal of the case to the UK High Court, this will be on based on standard judicial review grounds, meaning that the Court will only be able to consider whether the government has acted illegally, irrationally, or with procedural irregularity in taking its decision. In other words, the substance (or "merits") of the decision will not be the subject of judicial scrutiny. This is also the case in the merger control space, with the CMA being afforded a wide margin of discretion in its substantive decision-making (see also our previous client alert discussing the CMA's broad discretion in the context of the Cargotec and Konecranes merger). Other key takeaways:
- Critical technologies - any transaction involving the semiconductor supply chain will obviously face detailed scrutiny, as governments around the world are responding to geopolitical concerns around security of supply of these critical inputs. The UK government is expected to publish a long-awaited strategy in relation to this sector in the coming months. Meanwhile, any transaction involving a player that is active at any level of the semiconductor supply chain that has material links to the UK is likely to be called in, regardless of the nationality of the acquirer.
- "Hostile" states - the NSIA is agnostic as to the nationality of investors: even acquirers from "friendly" countries can raise concerns when the assets are critically important. However, it is abundantly clear based on interventions to date that investors with links to China will be subject to close scrutiny. Of the ten final orders that are in the public domain to date, three (including this case) involve prohibitions, and all three of these involve Chinese investors. This is in line with broader national security concerns that have been articulated in relation to China, including the risk of transferring knowhow and intellectual property out of the country, which increasingly forms part of government rhetoric, in the UK and beyond. In line with this trend, MI5 and the FBI jointly issued a warning in July 2022 about the threat posed by China "extracting advantage", including through technology transfers.5 In addition to maintaining strategic advantage and competitiveness vis-à-vis China, there are also hints of wider concerns related to influence and values. As Sir Jeremy Fleming, head of the UK Government Communications Headquarters (GCHQ), recently stated: "Without the collective action of like-minded allies, the divergent values of the Chinese state will be exported through technology".6 What does this mean for Chinese investors? The limited publicly available record on NSIA interventions may appear alarming, although there are many cases which have been cleared since the NSIA came into force, a least some of which may have included Chinese investors. There have also been a few transactions involving Chinese owners which have been cleared subject to remedies.7 In any event, the lack of publicly available information on clearance decisions leaves much to the imagination. Without further guidance, or published decisions, there is a risk that the track record to date could deter investment - including in less sensitive sectors - from legitimate Chinese investors with no links to the Chinese State.
- Transparency issues - Nexperia has publicly expressed frustration at the lack of dialogue with the UK government throughout the process, which is a consistent theme in relation to the operation of the regime to date. The extent to which the government should be required to engage with parties facing intervention could be addressed in Nexperia's appeal, which may well bring challenges on procedural grounds on the basis that Nexperia has not been given an opportunity to defend itself in the case against it, or that remedies have not been given due consideration.
- Discretion on remedies - the UK government retains extensive discretion in relation to remedies under the legislation, with a power to require remedies which it "reasonably considers [.] necessary and proportionate for the purpose of preventing, remedying or mitigating the risk [to national security]".8 Nexperia claims to have offered extensive remedies to mitigate any national security risks, including offers "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 NWF, and that these offers were ignored.9 The requirement of proportionality under the legislation means that the UK Secretary of State will have had to satisfy himself that such remedies would not have been effective, and that divestment of the stake was the only way to proportionately address the identified concerns. Again, this may be tested under appeal, although it is unlikely that the Court will second-guess this aspect of the decision. Meanwhile, the NWF case confirms the breadth of remedies available to the UK government, including unwinding completed transactions. While this case is relatively unique in that it was completed before the NSIA came into full effect, the government has powers to call in transactions that are not subject to mandatory notification (e.g., if they fall below the control threshold or involve asset deals) and, as such, there is scope for future interventions of this kind.
- Open-ended timing - it has taken sixteen months for the UK government to make a decision in this case. However, this is a function of the unique timing of the acquisition, which effectively gave the government two "bites of the cherry" and the opportunity to wait and see before intervening after the entry into force of the NSIA. Under the old regime, the government's ability to intervene would have been time-barred after four months of becoming aware of the deal following its closing. That being said, it is well known that the review process can be quite open-ended following a call-in, given the government's powers to stop the clock once a review is underway. We can therefore expect to see similarly drawn-out processes in future cases where the stakes are high and the government's view is unsettled.
The NSIA has now been in effect for almost a year. The second half of the year has seen a period of acute political turmoil in the UK, with several changes of Cabinet and Prime Minister. This has had an inevitable effect on decision-making and been responsible for further drawing out the review in this particular case. The unique timing of this acquisition also meant that the government was able to take its time in making a delicate decision which has clearly had to balance the competing objectives of encouraging investment while protecting critical industries in the UK. It is clear that in this case, the balance was in favour of the latter, and the government has used the full force of the legislation to achieve this imperative.
Julia Kotamäki, London trainee solicitor, contributed to the drafting of this alert.
1. The UK Secretary of State at the time would likely have been able to issue a public interest intervention notice under the Enterprise Act, assuming the UK Competition and Markets Authority (CMA) had jurisdiction to review the merger. This would have been possible under the lower thresholds which were in place at the time to review transactions involving enterprises active in sensitive sectors, including those related to computer processing units.
7. See, for example, the final orders relating to: (i) Stonehill Energy Storage Limited's acquisition of development rights for the Stonehill Project; (ii) Redrock Investment Limited's acquisition of an interest in Electricity North West Limited; and (iii) Sichuan Development Holding Co. Ltd's acquisition of interests in Ligeance Aerospace Technology Co. Ltd.
8. See section 26(3) NSIA.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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