CN05 - UK National Security and Investment Act shows teeth - deals blocked and guidance issued
03 October 2022
03 October 2022
The UK Government has issued its first two prohibitions under the National Security and Investment Act ("NSIA"): both were tech deals involving Chinese-owned acquirers. Against the background of a looming energy crisis further guidance on acquisitions in the gas, electricity and oil sectors has been issued. The Government has also published market guidance following the first six months of the NSIA being in force.
Key takeaways
- The UK Government has blocked two deals in the tech sector. Both involved Chinese owned acquirers.
- Parties may have to consider submitting a voluntary application at an early stage in relation to certain new energy sector infrastructure.
- The government has clarified when acquisitions in the downstream oil sector will qualify as acquisitions of control.
- The market guidance notes provide practical advice on completing notification forms and contain a number of clarifications in relation to acquisitions of control under the NSIA.
The former Secretary of State for Business, Energy and Industrial Strategy ("BEIS"), Kwasi Kwarteng ("SoS") has recently blocked two deals under the NSIA involving Chinese acquirers.
On 17 August 2022, the SoS blocked the proposed takeover of UK technology company, Pulsic, by Super Orange HK. Pulsic is a Bristol-based electronic design automation company which develops software used to build electrical circuits. Super Orange HK is based in Hong Kong, but is reported to be controlled by a Shanghai-based entity which has Chinese state backing and develops chip design software.
In the published notice of his order, the SoS referred to risks to national security arising from the use of Pulisic's IP, knowledge, processes, techniques and software to build "cutting-edge integrated circuits" with Pulsic's electronic design automation products that could be used in a civilian or military supply chain. These products could potentially be exploited to build defence or technological capabilities.
On 20 July 2022, the SoS published a notice of an order which prevented a transaction between the University of Manchester and Beijing Infinite Vision Technology Company Ltd., a Chinese technology company which is understood to specialise in 3G rendering technologies.
According to the notice, the parties had entered into a licence agreement which allowed the Chinese company to use intellectual property relating to certain vision sensing technology (SCAMP-5 and SCAMP-7) to develop, test and verify, manufacture, use, and sell licenced products. The SCAMP technology has been described by the University of Manchester as a cutting edge approach which allows the pixilation of data to happen in a faster and more efficient way on a sensor chip.
The grant of a licence was considered to be a trigger event under the NSIA. Since it was not a corporate acquisition, the transaction was not subject to mandatory notification under the NSIA.
The SoS blocked the transaction on the ground that the technology had dual-use applications and could potentially be used to build defence or technological capabilities which may present a national security risk to the UK.
The decisions suggest that the UK government will carefully examine all deals, including asset deals, where there is considered to be a potential risk to national security and will consider all possible functions of technology developed by a target entity.
BEIS has updated one of its guidance notes and has published two new guidance notes.
The market guidance reflects the Investment Security Unit's experience of the first six months following the NSIA coming into force on 4 January 2022.
The guidance contains practical tips on how to correctly complete a notification form including on structure charts, declarations and submitting single notifications for multiple acquisitions, as well as some further substantive guidance, key points of which are set out below.
The guidance seeks to clarify events which will lead to an acquiring companying gaining "control". The key points are as follows:
The Government has stressed that this guidance applies to new build infrastructure only and therefore excludes both the acquisition of entities and the acquisition of existing assets.
The examples of qualifying assets in the downstream gas and electricity sectors which are covered in the guidance are:
The concept of acquiring control over such assets is interpreted broadly in the guidance, which states that it includes the right to operate the asset and/or connect it to the network. The guidance indicates that a right to operate a relevant asset could be acquired through (among other things) the grant of an operating licence, a licence modification, an operating contract or a network connection agreement.
Acquiring these rights does not trigger a mandatory notification right (as the acquisition of control over qualifying assets does not have to be notified). However, the Government may be able to "call in" the contemplated acquisition for assessment if it reasonably suspects the acquisition may give rise to a risk to national security. Parties may therefore consider submitting a voluntary notification.
BEIS has updated its guidance to clarify when an acquisition in the downstream oil sector will be subject to the mandatory notification regime.
According to the updated guidance, a mandatory notification will be required if the target over which control is being acquired meets all of the following criteria:
For further information on the NSIA please visit our previous February 2022 newsletter and Quickguide.
With thanks to Nadja Waksman of Ashurst for her contribution.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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