Over the summer, the UK Secretary of State for Business, Energy and Industrial Strategy (“BEIS”) delivered the first decisions, in the form of final orders, under the National Security and Investment Act 2021 (“NSIA”).  We consider these decisions and other cases in the context of the first nine months of the UK’s new (quasi) Foreign Direct Investment (“FDI”) regime.

Key takeaways:

  • The NSIA has broad reach, and BEIS has shown willingness to exercise the powers to review transactions that can stretch beyond mergers and acquisitions, for example, to licensing agreements.
  • NSIA review involves the weighing of a number of factors relating to the target, the acquirer and the level of control being obtained.  Early decisions suggest that target’s products/services and activities are just as important a factor as the acquirer’s identity, among the cases that have engaged the attention of the Investment Security Unit (“ISU”).
  • “Behavioural” undertakings, e.g. involving implementation of security controls or granting of audit rights to regulators appear to be a continuation of trends seen in the predecessor UK ‘public interest’ regime, and similar to other EU FDI procedures.

First prohibition under the NSIA: a licence agreement

On 20 July 2022, the Secretary of State issued the first blocking order under the NSIA to prohibit a licence agreement that would have enabled Beijing Infinite Vision Technology Company Ltd. to use and develop intellectual property relating to SCAMP-5 and SCAMP-7 vision sensing technology that had been originally fostered by the University of Manchester.  Following an NSIA review conducted by the ISU, the Minister concluded that the technology in question had dual-use applications (i.e. civilian and military) and could be used to build defence or technological capabilities that could present national security risks to the UK.  It appears notable that the first prohibition order under the NSIA was issued in relation to a licence agreement that was subject of a voluntary filing, and not in relation to a merger or acquisition that would have triggered a mandatory notification. For businesses in research intensive sectors such as technology and life sciences, this decision will be relevant in weighing the potential for NSIA review in range of business and growth scenarios.

Second prohibition under the NSIA: part of a dual-use supply chain

A month later, on 17 August, a second blocking order was made in relation to a proposed acquisition of Pulsic Limited, a UK company specialising in electronic design automation (EDA) products, by Super Orange HK Holding Limited, a Chinese chip manufacturer.  BEIS concluded that Pulsic’s EDA products could be exploited to introduce (automatically and/or without the knowledge of the user) features that could be used to build defence or technological capabilities.  Within the decision, the Minister noted that it had found that Pulsic’s EDA tools could “facilitate the building of cutting-edge integrated circuits that could be used in the civilian or military supply chain”.  While the exercise of FDI powers in relation to semiconductor assets is now somewhat common, what stands out from this decision is that the NSIA regime can capture a target whose products/services form part of a supply chain in areas of national security focus.

Focus on the target and its activities, as well as the investor

These developments provide practical examples of the scope of the NSIA, under which certain transactions in 17 core sectors require mandatory clearance, but BEIS also has powers to reach to a range of other transactions and actions.  Moreover, the range of transactions with a publicly reported connection to the NSIA suggest that BEIS is not solely interested in acquirers based in countries considered “unfriendly” to the UK: cases recently reviewed or pending review include acquirers based in the United States, Australia, Canada, and France.  For example, the ISU is reported to be reviewing the proposed acquisition of certain gas transmission assets of National Grid plc (regarded as a part of critical energy infrastructure in the UK) by a consortium including Macquarie Group (an Australian firm) and British Columbia Investment Management Corporation (a Canadian pension fund).  UK-based acquirers are also subject to the same obligations as other investors under the NSIA and, it appears, are also not safe from NSIA scrutiny.  Sepura Ltd is a UK company providing critical support to the functioning of Airwave public safety communications network used by the UK emergency services and has been the subject of FDI undertakings since 2017 when it was acquired by Hytera Communications Corporate Limited (a Chinese investor).  The sale of Sepura to Epiris Group (a UK-based private equity firm) this year has involved a follow-on review under NSIA in which, by a final order made on 15 July 2022, similar on-going conditions have been applied to the operation of Sepura within the ownership of Epiris.  

Behavioural undertakings – a continuation of existing regulatory practice within NSIA order-making

In the Epiris/Sepura case, the undertakings required of the investors reflect the types of “behavioural remedies” that tend to be favoured by regulators in the FDI context.  Such “behavioural” commitments – including in relation to matters such as  the maintenance of strategic capabilities (e.g. continuity of supply), governance (e.g. British nationals’ presence on the Board of Directors post-transaction); and the protection of information (e.g. limited access to sensitive data and other security controls) – were also used in the UK under the Enterprise Act 2002 (“EA 2002”) ‘public interest intervention’ regime that foreran the NSIA. (The public interest regime also remains in place in relation to transactions affecting media plurality, financial services and the response to health emergencies.)    

On 6 September, a further NSIA final order was published, permitting with undertakings an investment by UAE-investor Tawazun Strategic Development Fund LLC in Reaction Engines Limited, a UK-based company with activities in the UK and the United States relating to propulsion and thermal management technologies. The details of the NSIA conditions applied have not been disclosed by BEIS.

Looking ahead, it seems likely that more examples will emerge of transactions in which national security mitigation is required as condition of clearance under the NSIA – and for which UK’s national security stakeholders may be able to draw on their prior experience of the ‘public interest intervention’ regime. The use of behavioural commitments is an important tool in the context of FDI regulation and the protection of national security interests. Such behavioural remedies are often imposed as a solution to balance the need to protect essential national security interests while ensuring that economies remain open to investment – as well as predictable and transparent.  In the context of EU FDI, the European Commission has recently reported that mitigation has been required in approximately 20 – 25% of the transactions reviewed by EU Member States pursuant to FDI powers in 2021 (rising from 10 -15% in a previous report for 2020/21).

Photo of James Marshall James Marshall

James Marshall advises on all aspects of competition law and sector regulation and regularly counsels clients on merger control, investigations and enforcement, commercial deals, abuse of dominance, sector regulation, and compliance. Earlier in his career, Mr. Marshall worked with the UK Competition and…

James Marshall advises on all aspects of competition law and sector regulation and regularly counsels clients on merger control, investigations and enforcement, commercial deals, abuse of dominance, sector regulation, and compliance. Earlier in his career, Mr. Marshall worked with the UK Competition and Markets Authority (CMA), where he helped develop the UK’s antitrust and regulated sector enforcement regimes. Clients turn to Mr. Marshall to help them find innovative solutions to complex antitrust enforcement, merger and counselling matters, particularly in regulated sectors.

Mr. Marshall represents clients before UK, EU, and global regulators across a number of industries and has particular expertise in the infrastructure, energy, transport and utilities sectors. He has also advised on numerous complex global financial services cases, and has strong experience advising in the consumer, digital, communications, and sports sectors.

Mr. Marshall practiced for several years in the Asia-Pacific region. He has experience advising on competition, regulatory, and public policy issues in Asia and the Middle East.

Photo of Peter Camesasca Peter Camesasca

Peter D. Camesasca is a partner in Covington’s Brussels and London offices, with 25 years of experience in all major aspects of EU competition law. Peter also co-chairs the firm’s Foreign Direct Investment Regulation initiative, and, has a particular focus on in-…

Peter D. Camesasca is a partner in Covington’s Brussels and London offices, with 25 years of experience in all major aspects of EU competition law. Peter also co-chairs the firm’s Foreign Direct Investment Regulation initiative, and, has a particular focus on in- and outbound aspects of the Asia/Europe interface.

Peter’s experience includes cases under Articles 101, 102 and 106 TFEU, national and multijurisdictional merger and joint venture notifications (including FDI assessments), investigations by multiple enforcement authorities and global antitrust litigation and monopolization issues (including IP cross-over issues). In addition, he advises and litigates on horizontal and vertical cooperation issues, prepares and executes various compliance and dawn raid programs and participates in the installation of in-house training programs, and heads a vibrant private enforcement practice.

Peter has acted before the European Commission, the European courts, the German Bundeskartellamt, the UK Office of Fair Trading and the Competition and Markets Authority, the Belgian Competition Council, and various national courts.

Photo of Katherine Kingsbury Katherine Kingsbury

Katherine has experience advising on a broad range of corporate matters, including joint ventures, private M&A, takeovers, other significant transactions for public companies, venture capital, restructurings, and general advisory work. She has over 13 years’ experience in corporate practice, including responsibility for knowledge…

Katherine has experience advising on a broad range of corporate matters, including joint ventures, private M&A, takeovers, other significant transactions for public companies, venture capital, restructurings, and general advisory work. She has over 13 years’ experience in corporate practice, including responsibility for knowledge management and training.

In addition, Katherine has particular interest in UK corporate governance and its application to listed companies, larger private companies, and private equity.