As at 20 December 2020, the UK government had issued 15 final orders on whether to prohibit or allow a transaction to take place (subject to suitable remedies). Of these, it has blocked or unwound five transactions, cleared nine subject to remedies and one order has been revoked as the acquirer did not proceed with the transaction. In relation to one of the blocked transactions, it has been reported that the Dutch subsidiary of a Shanghai-listed parent applied for a judicial review of the UK government’s decision to unwind its acquisition of Newport Wafer Fab, the UK’s largest semiconductor plant. We will be watching this closely and provide a more detailed report at a future time.
What are the key themes emerging from the UK government’s decisions over the past 12 months?
- There is no doubt that, relative to the predecessor regime (which was effectively an adjunct to competition law), the UK government is adopting a far more active approach – it has now blocked five deals, whereas under the previous regime no transactions ended up being blocked on national security grounds. This is a clear indication that the new legislation is working as intended.
- The interventionist approach of the UK government is also reflected in the nature of the conditions it has applied to clearances, such as the appointment of a government observer on the board and imposing restrictions on an acquirer’s ability to undertake certain activities outside of the UK.
- Although many of the acquirers subject to UK government orders under NSIA are based overseas, some of the orders also concern UK buyers. This reflects the UK government’s intention that the legislation is nationality-blind (in contrast, for example, to the CFIUS regime in the US, which concerns any “foreign person” acquiring control of a US business).
- The UK government has exercised its retrospective call-in powers (which apply to transactions that completed on or after November 2020, i.e., before NSIA came into force) in respect of the Newport Wafer Fab transaction. This retrospective element of NSIA has been the subject of much commentary. To temper these concerns, the UK government has stated that the call-in power can only be used for the purpose of dealing with national security risks, not to interfere arbitrarily with investment.
- Similarly, even though non-share transactions currently fall outside the scope of the mandatory notification regime under NSIA (and hence inherently pose a lower-order national security risk than share transactions), the UK government has indeed blocked an asset deal (the licensing of IP relating to SCAMP-5 and SCAMP-7 vision-sensing technology). In this case, the UK government was particularly concerned about the potential dual-use applications of the IP.
- In terms of the sectors of the UK economy implicated by the UK government’s orders, these have been primarily military, defence and dual-use (items which can be used for both civil and military purposes). This is perhaps not surprising, given that transactions involving these sectors arguably pose the greatest risk to national security. However, one sector that is also featuring in the UK government’s decision-making is artificial intelligence. As previously reported, this sector is defined extremely widely in the legislation (with no materiality qualifications), thereby bringing within its scope many transactions that might not present an obvious national security risk.
Given that the UK government does not publish the detail of its decision-making, it is inherently difficult to discern the emergence of an intellectual framework underpinning its decisions. However, based on what we have seen so far, it can be said that:
- The UK government is adopting an expansive approach to what constitutes “national security” – the fact that national security is not specifically defined in NSIA is obviously helpful to the UK government in this respect.
- It is not just deals in the “traditional” sectors (such as military and defence) that are vulnerable; M&A and investments in the tech sector, particularly involving data or AI/machine learning are also susceptible to UK government scrutiny.
- The UK government is clearly prepared to block deals that don’t involve the acquisition of a qualifying interest in entities and hence fall outside the scope of the mandatory regime under NSIA – this serves as a warning to parties that may seek to “structure” their transaction to fall outside NSIA.
- There may be a concern that the UK government is using the legislation as an instrument of economic or industrial policy – the recent judicial review application may well shed light on this thesis.
All in all, it is clear that NSIA has real teeth, and the UK government is willing and able to block deals entirely or clear them subject to detailed and potentially restrictive conditions. It would therefore be highly remiss of deal parties and their advisors to ignore the potential impact of NSIA on their transaction, regardless of size, sector or structure.
Author: Glafkos Tombolis, Partner – Deloitte Legal