In line with the increasing emergence of Foreign Direct Investment (FDI) regimes around the world (as well as the strengthening of the existing ones), a reform to the UK national security regime has recently been introduced with the UK National Security and Investment Act 2021 (NSIA), which entered into force and became operational on 4 January 2022.

The NSIA represents a radical overhaul to the foreign investment screening in the UK: not only does it introduce for the first time a requirement (or, depending on the case, the possibility) to proactively notify deals with potential national security implications, but it also creates a standalone regime—which is mandatory and suspensory for deals involving 17 particularly sensitive areas of the economy—for transactions that may give rise to national security concerns. The new regime has significant implications for M&A deals and investments with a UK angle and has the potential to increase burden, costs and uncertainty for deals with some (even loose) UK nexus.

While a decisional practice under the NSIA is still nascent, on 20 July, the UK government prohibited for the first time a transaction under the new NSIA. 

The prohibited transaction involved the acquisition by Chinese company Beijing Infinite Vision Technology of IP developed and owned by the University of Manchester. Interestingly, this did not involve a share acquisition of a company (which would have required a mandatory pre-notification), but a licensing arrangement concerning sensitive technology which was notified voluntarily. The decision was adopted in the same week that BEIS accepted undertakings by US-listed Parker-Hannifinin respect of its acquisition of Meggitt.  

In other cases where the government has intervened so far enforcement action involved imposing conditions on the acquirer. 

A feature of the new UK FDI regime is that publication of decisions is limited to final orders imposing conditions, unwinding, or blocking a transaction, whereas clearances and other procedural decisions are not published. Also, compared to merger control decisions, final decisions that are published are scant as the government provides no reasoning  for its decision. All of this somewhat limits predictability and certainty. 

Nevertheless, as the body of published cases expands and some insight on current and recent cases becomes available in the legal press, we have taken stock of the emerging practice and outlined below the key takeaways of the enforcement under the new regime for businesses, including US transaction parties, involved in M&A activities with a UK potential dimension: 

• Nationality does not determine outcome. Although, somewhat unsurprisingly, the only deal having been blocked so far concerned a Chinese acquirer, transactions undertaken by acquirers headquartered in countries that are close allies of the UK are not immune from close scrutiny. Experience shows that acquirers from close allies such as the US, France or Israel may still give rise to a UK national security issue where the target business is engaged in sensitive activities – examples of deals closely scrutinised under the NSIA include Altice/BT (where the acquirer was a French Telecom group owned by French-Israeli billionaire Patrick Drahi), and HakanKoc/Truphone(where the acquirer was German entrepreneur HakanKoc).Importantly, even a UK-to-UK deal may trigger a filing – the acquisition over UK-based Sepura by UK private equity firm Epiris, cleared subject to conditions on 14 July 2022, is a clear example.
• US(as well as other non-UK)transaction parties should carefully consider the potential UK nexus of their transaction. There are many examples of transactions involving US buyers which have recently been called in and/or closely scrutinised by BEIS. Notable examples include WindAcre/Nielsen, as well as a number of recent deals initiated under the NSIA’ predecessor regime, namely Parker-Hannifin/Meggitt, Cobham/Ultra Electronics, and Nvidia/Arm.It is worth highlighting that the NSIA has a broad extraterritorial reach: although UK target companies and UK-based target assets are a priority, the UK regime also captures international transactions where the target, despite not being either based in the UK or having UK subsidiaries, (i) has activities (e.g., an R&D facility) in the UK, (ii) supplies goods or services in the UK (e.g., through distributors to UK customers), or (iii) is or has an asset used in connection with activities carried out in the UK and/or in connection with the supply of goods or services to people in the UK. As such, US (and other non-UK) investors and, more generally, US (and other non-UK) transaction participants, should be live to the implications of this regime when entering into international transactions with a potential UK angle, particularly if these fall within one of the 17 sensitive sectors that require a mandatory pre-notification for share acquisitions.
• Defence is just one of the many sectors. As mentioned, there are 17 sectors that the NSIA identifies as requiring a mandatory pre-notification of any share acquisition. Those sectors are also highly relevant where the acquisition involves assets and hence may not require a mandatory pre-notification. According to the UK government’s first report on the operation of the NSIA, and consistent with the cases we have seen so far, alongside the defence sector, military and dual use, critical supplies to the government, data infrastructure and AI rank among the top sectors which have been more often and more closely scrutinised under the NSIA.This confirms the intention behind the regime to tackle modern threats involving sensitive and cutting-edge technology.
• Transaction parties should be aware of the timing and other implications impacting closing. The statutory review period for the vast majority of deals is one to three months, and statistics so far show that the majority of deals are cleared within 30days.  However, where substantive issues emerge the review will take much longer as the government has the power to stop-the-clock in certain circumstances. For example, the UK government has recently used its extension powers in each of Nexperia/Newport Wafer Fab and Altice/BT (called in on 25 and 26 May 2022, respectively, and still pending for review). Deal documentation may also need to cater for both UK merger control and the NSIA processes, allowing appropriate long-stop dates for regulatory reviews, as well as including risk mitigation and appropriate conditionality clauses.
• ISU decision-making is opaque. Unlike merger control processes which involve a very iterative pre-notification process with the relevant case team, NSIA notifications are made very much into a “black box”, the process is less iterative in the initial stages and any dialogue is very limited. Parties should also not expect the ISU to provide regular status updates during its reviews on timing or whether it has identified any potential national security concerns and/or is considering a particular set of remedies.
• Filingsare still a piece of advocacy. Unlike merger control filings, an NSIA filing is a relatively short form, submitted through an online portal. Nevertheless, it is a piece of advocacy albeit constrained by the straightjacket of the online form. This is reflected in the UK government’s recent guidance that explicitly calls on the parties to use all available opportunities in the form to be as descriptive and as detailed as possible -e.g., highlighting any circumstance as to why the case should not raise any concern or by adding relevant information and explanations in the “additional information” sections included throughout the form. This can assist in limiting the risk of receiving extensive questions from the UK government, potentially at a late stage in the review process, and can help achieve a prompt clearance.
• Overall problematic cases are still rare.  Government statistics from the first three months of operation of the NSIA (i.e. January-March 2022) show that out of a large number of filings (222) only a very small number (17) was called-in for further review.  The vast majority of these (196) were mandatory notifications which means that it is too early to draw conclusions on enforcement practices for non-notified transactions involving asset or IP acquisitions.
• “Behavioural” commitments seem to be playing an important role in securing clearance. In a relatively high number of cases, parties have secured clearances by providing behavioural undertakings such as ensuring supplies (see e.g. the decision in Parker-Hannifin/Meggitt) or implementing enhanced controls to protect sensitive data (see e.g. the decision in Epiris/Sepura). This marks a stark contrast with the decisional practice in merger cases, where structural remedies are by far more commonly accepted. In view of the first prohibition, we will need to see how this practice further unfolds and whether we will see further prohibitions or disposals.

Ludovica Pizzetti is Counsel at law firm Arnold & Porter, advising clients on all aspects of UK and EU competition law, including complex competition conduct issues as well as merger control. She is dual-qualified in the UK and in the EU.