Last week saw the first publicly disclosed uses by the UK Government of its new and expansive powers to investigate deals on national security grounds under the National Security and Investment Act (“NSIA”), which came into full effect in January 2022. These developments show the far-reaching implications of the UK Government’s new powers to investigate transactions on national security grounds, as well as continued heightened scrutiny of attempts by foreign investors to invest in strategic UK assets.
1. Recent developments
On 25 May, the UK Secretary of State for Business Energy and Industrial Strategy (the “Secretary of State”) “called in” the acquisition of Newport Wafer Fab by Nexperia (which is ultimately controlled by Chinese computer and telecoms equipment manufacturer Wingtech) for review under the NSIA. That transaction had closed in July 2021.
On 26 May, the Secretary of State also “called in” the acquisition of an 18% stake in BT by French telecommunications company, Altice. Altice had first acquired a stake of 12.1% in BT in June 2021, which they increased to 18% in December of last year.
Separately, on 27 May, the UK Competition and Markets Authority (the “CMA”) announced that its investigation into the proposed acquisition of a controlling stake in Welsh advanced materials producer Perpetuus by an individual associated with Shanghai Kington Technology was cancelled following the parties’ decision to abandon the transaction[1], which had been referred for an in-depth review on national security grounds by the Secretary of State on 12 May.
2. What is the basis for these investigations?
Under the NSIA, the UK Government has the power to “call in” for investigation on national security grounds a wide range of transactions, including the acquisition of minority stakes and transactions that have closed.
Any transaction that completed after November 2020 but before the NSIA came into full effect on 4 January 2022 can also be called in for review for up to six months after this date, as long as the Secretary of State was aware of the transaction before January 2022. If the Secretary of State only becomes aware of a transaction after January 2022, then it can be called in any time up to six months after the date they became aware of it, but no later than January 2027. It is on this basis that the UK Government will examine the closed acquisition of Newport Wafer Fab.
As for BT, minority investments do not require mandatory pre-clearance (this only applies to acquisitions of 25%, 50%, or 75% of entities active in certain high-risk sectors). However, where the Government considers that there has been an acquisition of “material influence”, this is sufficient to trigger the call-in power if there are also national security concerns. Material influence is a concept borrowed from the UK merger control regime and can be triggered with a minority shareholding where the holder of the shares nevertheless has the ability to influence the commercial policy of the company. Material influence can be triggered in a number of ways, including through an ability to block strategic decisions (e.g., where the shareholding gives the practical ability to block resolutions at meetings, due to low shareholder turnout, for instance), or where the shareholder has industry standing, such that it is considered likely to be able to influence other investors. There are several precedents of the CMA concluding that a party had material influence despite having a shareholding below 20%[2].
Finally, the proposed investment in Perpetuus was being investigated under the old Enterprise Act regime[3], as the Secretary of State had intervened in that deal using a public interest intervention notice before the NSIA came into full effect[4].
3. What happens next in relation to the NSIA investigations?
The Government now has 30 working days to conduct its in-depth investigations (the “Assessment Period”), but this can be extended by 45 working days at the Government’s discretion and by an additional 45 working days with the parties’ agreement. The Assessment Period can also be extended following requests for information (which will “stop the clock”). In practice, in-depth reviews are likely to take several months.
4. What powers does the Government have?
The concept of national security is deliberately not defined under the NSIA to give maximum flexibility. Where concerns are identified, the UK Government has wide powers to require remedies, including, in the extreme, unwinding the deal.
In the case of BT, the Government is likely to focus on the preservation of critical infrastructure operated by BT (which is one of the main fibre optic broadband network providers in the UK), as well as preserving the security of information relating to certain government contracts. This may result in behavioural commitments, of the kind that have been seen in previous cases[5]. A decision to unwind would likely mean requiring Altice to reduce its stake to a lower level, which would not confer material influence[6].
The Newport Wafer Fab case will be a true test of the Government’s stated resolve to protect and preserve strategic industries in the UK. There is certainly precedent for investments involving Chinese acquirers attracting close scrutiny, with a number of transactions being abandoned or prevented following government intervention[7], the most recent example of this being the Perpetuus/Shanghai Kington Technology deal.
The fact that the Newport Wafer Fab deal has closed will make any intervention particularly controversial (especially if the deal is blocked), but the Government may be inclined to follow the lead of the CMA, which does not hesitate to require divestments or unwinding of transactions that have not been notified. In doing so, the CMA emphasises that parties have the ability to engage up-front and seek clearance in order to avoid such risks. In this regard, the Government may take account of the fact that it would have been open to the acquirers to consult the Government in advance of closing the deal in circumstances where: (i) it has been known since November 2020 that Government would have retrospective powers to intervene in deals closing before January 2022, once the Act came into full effect; and (ii) the Investment Security Unit (the Government department responsible for administering the new regime) was operating in shadow form and was willing to provide guidance on the Government’s future appetite for intervention using its retrospective powers.
5. Importance of strategic planning and risk assessment
Most notifications under the NSIA are not expected to be called in and are unlikely to raise issues, so these first exercises of the new call-in power will be key to understanding how the Government plans to balance conflicting imperatives of protectionism with showing that the UK remains an attractive place for investment. Recent activity suggests that close scrutiny can be expected in the short term while the new regime beds down.
These cases also underscore the importance of strategic planning and risk assessment before embarking on investments, because even where filings aren’t legally required, there are real risks of intervention, with potentially deal-destroying consequences. In these circumstances, careful consideration of whether – and if so, how – to engage with the Government is critical in order to maximise chances of a smooth path to clearance as well as informing appropriate risk allocation between parties.
MoFo’s Global National Security Practice group has extensive first-hand experience of navigating foreign investment regimes all over the world and in particular the United States, Germany, and the UK (both in relation to the new NSIA and under the old Enterprise Act regime).
For further background, see our previous Client Alerts on the NSIA here:
8 April 2022 – The National Security Investment Act 2021 and its Implications for Distressed Investments and Restructuring
20 August 2021 – The UK’s National Security and Investment Act to Commence in January 2022
5 May 2021 – National Security and Investment Act Receives Royal Assent
Julia Kotamäki, London trainee solicitor, contributed to the drafting of this alert.
[1] See Notice of cancellation of inquiry under section 48(1) of the Enterprise Act 2002.
[2] E.g., which involved the acquisition of a 16.67% stake.
[3] Two other transactions remain subject to review under the old regime: Cobham/Ultra Electronics and Parker-Hannifin Corporation/Meggitt plc.
[4] The Secretary of State had issued a public interest intervention notice and order preventing closing on 5 September 2021.
[5] For example, when a consortium of financial investors acquired control over Inmarsat plc in October 2019, the Department for Digital, Culture, Media, and Sport required remedies including commitments to maintain Inmarsat’s ability to service strategic contracts with the Ministry of Defence and protect certain classified information in order to address national security concerns. This was a transaction reviewed under the Enterprise Act.
[6] In BSkyB/ITV (2007), following competition concerns in relation to the acquisition of a 17.9% stake in ITV, Sky was ordered to divest its stake down to 7.5% in order to avoid any prospect of material influence.
[7] For example, two deals involving Chinese investors in the advanced materials/aerospace sectors were abandoned/blocked following Government intervention in 2019 (Mettis Aerospace/Aerostar and Gardner Aerospace/Impcross).
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