CN05 - UK National Security and Investment Act shows teeth - deals blocked and guidance issued

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.

UK blocks acquisitions by Chinese technology companies 

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. 

Super Orange HK/Pulsic 

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. 

Beijing Infinite/University of Manchester 

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. 

NSIA Updated and New Guidance 

BEIS has updated one of its guidance notes and has published two new guidance notes.

New Market Guidance Note

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. 

Definition of control 

The guidance seeks to clarify events which will lead to an acquiring companying gaining "control". The key points are as follows:

• In relation to the third category of control under section 8 of the NSIA (acquisitions of voting rights that enable a person to secure or prevent the passage of any class of resolution governing the affairs of an entity), the guidance indicates that contractual rights that may have this effect would not ordinarily be covered. However, such rights may amount to material influence and therefore make the grant of such rights subject to a call-in (albeit not a mandatory notification).
• Granting of security over shares where title to the shares is not transferred to the secured lender will not be subject to mandatory notification. Rather, the mandatory regime would be triggered once the event that would provide the grantee with control over relevant shares occurs, i.e. at the enforcement stage. However, care is required with forms of security where title to the shares is transferred, and also in the context of automatic enforcement provisions.
• Investors can acquire control over qualifying entities indirectly where there is an unbroken chain of majority stakes.
• Temporary acquisitions of control – the appointment of a liquidator or receiver (but not an administrator) may constitute a qualifying acquisition.
• The guidance confirms that internal reorganisations may constitute qualifying acquisitions where they result in an acquisition of control over a qualifying entity (even if the ultimate beneficial owner of the entity does not change).

Publication of information related to the NSIA 

• The following information will not be published: the receipt/acceptance/rejection of a notification or the contents of any interim order made following a call-in notice.
• The Government is obliged to publish a notice summarising any final order it publishes (final orders are made where any remedies, including prohibitions, are imposed).
• In addition, the Government may choose to publish information regarding call-in notices or clearances, for example, if the parties disclose such information, or the acquisition is in the public domain and the SoS considers it to be in the public interest.

New guidance on new build downstream gas and electricity infrastructure

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:

• new transmission infrastructure
• new electricity generation infrastructure
• new distribution infrastructure
• new gas processing infrastructure
• new gas import or export facilities
• new energy storage infrastructure

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. 

Amendment to guidance on 17 types of notifiable acquisitions 

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:

• the target supplies petroleum-based road, aviation or heating fuels (including liquefied petroleum gas) to entities or individuals in the UK, whether or not the qualifying entity is based in the UK;
• the target carries out one or more types of downstream oil activity, i.e., importation, storage, production, distribution or delivery of oil or certain oil products; and
• the target has carried out any downstream oil activity in the UK in relation to 500,000 tonnes or more of oil in at least one of the three calendar years before the acquisition or owns a facility in the UK that was used for any downstream oil activity in relation to at least 50,000 tonnes of oil in at least one of the three calendar years before the acquisition.

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.