Happy First Birthday to the NSIA? – A review of BEIS’ substantive assessment of cases in the first year

The National Security and Investment Act 2021 (NSIA) came into force on 4 January 2022. Over the last 12 months, the UK Government has exercised its new far-reaching powers to investigate, impose remedies upon - and, in some cases, prohibit outright - transactions that could raise UK national security concerns. To mark this first anniversary, we are publishing a mini-series on our ForeignInvestmentLinks blog, highlighting key developments and learnings from year one. In this first post, we consider the substantive assessment of transactions undertaken by the Secretary of State (SoS) for Business, Energy and Industrial Strategy (BEIS). 

One of the principal criticisms levelled at the NSIA regime is that the newly-created Investment Security Unit (ISU) operates as something of a “closed book” and provides limited insight into the nature of its substantive appraisal of a case. Accordingly, the final orders published in respect of the acquisitions BEIS has prohibited or conditionally cleared – while lacking in detailed analysis or explanation – provide the best insight into BEIS’ approach to substantively assessing acquisitions to date.

We see four main trends:

Whilst military/dual use is the mainstay for remedies cases, there has been a particular target of prohibitions: semiconductors

During the NSIA’s first year of operation, BEIS has issued 14 final orders, comprising 5 prohibitions and 9 conditional clearance decisions. The final orders published to date indicate that transactions across a broad spectrum of mandatory sectors have attracted attention from BEIS. Sectors of particular interest include 

• Military and Dual-Use: 6 cases – University of Manchester/Beijing Infinite, Super Orange/Pulsic, Reaction Engines/Tawazun, Newport Wafer Fab/Nexperia, SiLight/HiLight, Ligeance/Sichuan

• Energy: 3 cases - Stonehill/Stonehill, Electricity North West/Redrock (since revoked as the parties decided not to proceed), XRE Alpha/China Power
• Communications: 2 cases - Truphone/TP Global, Upp Corporation/L1T FM Holdings
• Critical Suppliers to Government: 1 case - Viasat/Inmarsat
• Suppliers to the UK Emergency Services: 1 case, Sepura/Epiris; and
• Quantum Technology: 1 case, CPI/Iceman.

Advanced technologies have been a particular area of focus. It is notable that 3 out of the 5 prohibited transactions concerned parties active in the UK’s semiconductor supply chain (Super Orange/Pulsic; Newport Wafer Fab/Nexperia; and SiLight/HiLight).

BEIS’ heightened interest in the semiconductor industry is unsurprising, given increased global geopolitical tensions with China, greater international competition for products which use semiconductors, Covid-induced supply chain issues and political pressures imposed by a global semiconductor shortage. BEIS’ scrutiny of the sector is also in keeping with global trends: Following its prohibition of Newport Wafer Fab/Nexperia (see below), the sale of a German semiconductor plant to China-owned Silex Microsystems was similarly prohibited by the German foreign investment regulator.

National security appraisals cannot be divorced from domestic industrial strategy 

During the parliamentary passage of the National Security and Investment Bill, the Foreign Affairs Select Committee and cross-bench ministers had raised concerns that the absence of a definition of “national security” may lead to broader industrial policy concerns becoming interwoven with national security concerns. BEIS, however, has consistently maintained that appraisals under the NSIA will be narrowly focused on national security concerns.

The SoS’ high profile prohibition of the Newport Wafer Fab/Nexperia transaction, in November 2022, rekindled these concerns. Whilst the transaction related to an acquisition in an area of higher risk (the semiconductor space) by Chinese-backed Nexperia, an original review by the then National Security Adviser (Stephen Lovegrove) had concluded that there were insufficient reasons to launch a review of the transaction on national security grounds. Following an abrupt volte-face in April 2022, however, the transaction was reviewed and ultimately prohibited. Nexperia has reportedly filed a judicial review challenging the final order.

While the activities of the target did not involve cutting-edge technology (it is understood that the chips produced are commonly found in products such as charging cables and hair dryers), the reasoning in the final order prohibiting the transaction cited forward-looking concerns that (i) the technology and know-how resulting from a potential reintroduction of compound semiconductor activities at the Newport site could undermine UK capabilities; and (ii) the location of the Newport site could facilitate access to technological expertise in the South Wales “cluster” (the recipient of significant central government funding) and prevent that area being engaged in future projects relevant to national security.

In addition, the case is also notable due to the impact of political pressures on the substantive review process: the consideration of the transaction spanned three UK Prime Ministers, three SoSs and provoked US political interest, with members of the US Congress petitioning President Biden to engage in direct diplomacy with the UK Government to prevent the transaction. As such, Newport Wafer Fab/Nexperia indicates that it may be unrealistic to expect BEIS to review transactions on the purely national security-orientated grounds set out in the NSIA, in isolation from broader domestic and international political headwinds and policy concerns.

Impact has been felt beyond traditional M&A

The first prohibition imposed by BEIS fell outside the confines of traditional M&A activity, as it related to a licence agreement between the University of Manchester and Beijing Infinite Vision Technology Company Limited, which would have enabled Beijing Infinite Vision Technology to use intellectual property related to the University’s SCAMP-5 and SCAMP-7 vision sensing technology. The transaction was not subject to a mandatory notification requirement (as it did not entail the acquisition of shares or voting rights). Instead, the notification was made on a voluntary basis. Had it not been, the transaction could have been subject to a call-in review for up to five years post-completion.

This prohibition indicates that – particularly in the advanced technology space – the UK Government will be willing to scrutinise licensing arrangements as well as more traditional M&A. This is further evidenced by the extended guidance published by BEIS on the application of the NSIA to work undertaken in the higher education and research-intensive sectors (updated on 9 January 2023 to provide detailed examples of arrangements, common in these sectors, which could be qualifying acquisitions). 

The regime has not yet been put to the test in a very complex global or domestic multi-agency deal

Given the different objectives of merger control and the NSIA, the possibility of inconsistent outcomes or conflicting remedies is a risk for parties to transactions. The NSIA seeks to tackle situations where a transaction for which a final order imposing remedies is in force (or a final notification has been given that no further action will be taken) is also subject to consideration by the Competition and Markets Authority (CMA) under the merger control regime. In such a scenario, the SoS has the power to issue directions to the CMA to do, or not to do, anything in relation to the transaction. This power is subject to the requirements of necessity and proportionality that underpin the NSIA regime, as well as to prior consultation with the CMA (and with other parties, where appropriate). As set out in the Explanatory Notes, this power was introduced “to ensure that, when a risk to national security has been addressed … the CMA does not inadvertently undermine this through any action it takes”. 

The memorandum of understanding on the operation of the NSIA also makes it clear that the CMA and BEIS will keep each other informed and consult prior to imposing remedies and, where appropriate, align their review processes. Where multiple remedies are available to mitigate national security risks, BEIS will consider representations from the CMA as to their relative impact on any competition concerns identified by the CMA. 

The SoS retains the additional power under the Public Interest Intervention Notice regime to intervene in cases of mergers giving rise to considerations such as media plurality, financial stability, and public health emergencies. This could result in multiple reviews with the consequent impact on transaction timetables and, in a limited number of cases, deal certainty. 

However, based on publicly available information, it appears that, in the majority of remedies cases so far, the risk of separate reviews/remedies has not yet materialised. We therefore await a real-world test case to observe the interplay between the substantive assessment and remedy considerations undertaken under these different regimes when operating in parallel.