Early Thoughts from Geldards on the National Security & Investment Act

The UK government recently announced that the National Security and Investment Act, which introduces mandatory filings for certain investments raising national security concerns, will come into force on 4 January 2022.

This act grants the UK government extensive call-in powers for up to five years for completed transactions and has retrospective application for transactions closing between November 2020 and January 2022.

There are 17 sectors that come under the Act, which could potentially have implications not only for businesses within those areas but also for investors.

The sectors affected are Advanced Materials; Advanced Robotics; Artificial Intelligence; Civil Nuclear; Communications; Computing Hardware; Critical Suppliers to Government; Critical Suppliers to the Emergency Services; Cryptographic Authentication; Data infrastructure; Defence; Energy; Military and Dual-Use; Quantum Technologies; Satellite and Space Technologies; Synthetic Biology; and Transport.

Our legal friends from Geldards have provided us with some early thoughts for both founders and investors, following a recent case example.

National Security and Investment Act 2021: a case example?
by Debra Martin, Partner Geldards Law Firm

A prime example of the type of deal the Government may be interested in has taken place in the context of the newly enacted National Security and Investment Act (“NSIA”).

This example has arisen in the form of the sale of Welsh based semiconductor producer Newport Wafer Fab (“NWF”) to Chinese-owned Nexperia for a reported sum of £65 million. The sale was widely reported in news outlets on 5 July 2021. Boris Johnson has since confirmed he has requested his national security adviser to inspect the deal following criticism by MPs.

Could inspection lead to action?

The Act applies to deals taking place from 12 November 2020, so would catch the NWF sale, but a series of legislative and policy decisions need to be made before the ‘commencement day’ of the NSIA which is expected to be 4 January 2022. The key is the power for the Government to issue call-in notices and the retrospective reach which would begin from the commencement day of the NSIA.

Let’s look at the detail of these powers to see whether inspection, in this case, could lead to action despite the deal being in the interim period before the commencement day of the Act.

The simple answer is that it could – the NSIA tackles deals completed in the interim period head on. It states that in relation to a trigger event, see what this means in our previous insight, taking place during the period beginning with 12 November 2020 and ending with the day before commencement day, a call-in notice:

(a) may not be given after the end of the period of 6 months beginning with commencement day, in cases where the Government are aware of the deal in question in the interim period, and

(b) where the Government became aware of the trigger event on or after commencement day, may not be given after the end of the period of 6 months beginning with the day on which the Government became aware of the trigger event and may not be given after the end of the period of 5 years beginning with the commencement day.

In the example we are looking at here, the Government were aware of the deal in the interim period and therefore would have the ability to formally call-in the deal within 6 months from the commencement day of the Act to scrutinise and, potentially, intervene. If the case were that the Government were not already aware of the deal, there is a 5 year window from the commencement day of the NSIA for the Government to become aware and call the deal in.

Why are the Government interested in this?

Firstly, NWF operate in ‘sensitive sectors’, particularly computing hardware. Secondly, it is due to the nature of the investor and the investment. Nexperia are owned by the Chinese company Wingtech Technology who, amongst other things, produce smartphone parts for Huawei. Wingtech, via Nexperia, will own the entirety of the UK-based NWF.

These characteristics align with the Government’s statement of policy intent on how they intend to use the powers under the NSIA, which we looked at in our last insight. This stated that the focus will be on the: target company risk; the ‘trigger event’ risk; and the acquirer risk. The Prime Minister said in this case, “we have to judge whether the stuff that they are making is of real intellectual property value and interest to China and whether there are real security implications”.

This example has also shown us how other investors are reacting to Government critique on national security grounds – it is being reported that a consortium of investors are preparing an alternative plan to be submitted to the UK Government, which could involve a workaround to the provisions of the NSIA (see here).

It will be interesting to see whether the review order by Boris Johnson was simply to respond to criticism of the Government’s previous non-action, or whether this deal will receive a call-in notice under the NSIA and what that will mean for NWF.

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