Clifford Chance

In the first 12 months of the UK's new national security regime, 14 transactions have been subject to Final Orders, including 5 prohibitions, 9 conditional clearances and 8 deals with a connection to China.

The UK's enforcement record under the National Security and Investment Act 2021 (NSIA)

Under the NSIA, which came into effect a year ago on 4 January 2022, the Secretary of State (SoS) for Business, Enterprise and Industrial Strategy (BEIS) can impose any condition (in the form of a Final Order) on any transaction within scope of the regime to mitigate national security concerns. The SoS may also impose a Final Order prohibiting a transaction for national security reasons.

To date, the SoS has issued 14 Final Orders, 9 of which were approvals subject to conditions, with the remaining 5 being outright prohibitions. 8 of the total 14 Final Orders imposed, including 4 of the prohibited transactions, pertain to acquirers with a connection to China.

4 out of 5 prohibition decisions relating to China

It is notable that 3 out of 5 prohibited transactions concerned investments in the semiconductor industry, and all 3 of these transactions involved investors connected to China (Super Orange HK Holding Limited/Pulsic Limited; Nexperia BV/Newport Wafer Fab; and SiLight (Shanghai) Semiconductors/HiLight Research). Beijing Infinite Vision Technology's acquisition of a licence in respect of vision sensing technology from the University of Manchester is the fourth transaction by an investor connected to China that has been prohibited to date. All 4 of these prohibition decisions to date, however, concern entities or assets that fall within the 17 sensitive areas of the economy as defined under the NSIA.

9 conditional approvals, with 4 related to China¹

While the details remain confidential, the conditions imposed in the 9 conditional approvals broadly fall within four main categories:

1. Restrictions on the target's board membership and/or management/staff/personnel. For example:

• In Sichuan Development Holding Co/Gardner Aerospace, the SoS required the (i) removal of representatives of the target and acquirer from the board of Gardner (the target's subsidiary which is directly engaged in the sensitive sector); and (ii) appointment of a Government observer to Gardener's board.
  
• In Redrock Investment/Electricity North West Limited, the SoS imposed restrictions on the influence of the acquirer over appointments of "some" staff members within the target (the Final Order was subsequently revoked as the transaction has been abandoned).

2. Maintenance of strategic capabilities (e.g., R&D and manufacturing) in the UK and continuity of supply to the UK Government. For example:

• In Iceman/CPI, the SoS required that the acquirer maintain in the UK the target's R&D and manufacturing capabilities in relation to atomic clocks.
  
• In Epiris/Sepura, the SoS imposed a requirement to maintain UK capabilities in repairing, servicing and maintaining the devices used by emergency services (effectively the extension of a similar requirement imposed by the SoS under the Enterprise Act 2002 (EA) when control over Sepura was last acquired).

3. Obligation to notify or obtain consent for disposals/transfers of significant assets.

4. Information security measures (e.g., restrictions on information sharing between target and acquirer).

These categories of conditions generally align with the main types of undertakings accepted under the previous EA public interest regime.

Implications for risk allocation in M&A

The possible imposition of conditions to clearance under the NSIA regime creates difficulties in allocating risk between parties to M&A deals:

• the conditions imposed can be wide-ranging, and not limited to the target;
  
• their impact can often be difficult to quantify (e.g., the acquirer's inability to appoint members of the target's board or not having access to target's operational information); and
  
• there is no scope to negotiate with the SoS (unlike under the previous EA regime).

As potential acquirers may be averse to unquantifiable risks, different approaches to conditions precedent are emerging in the market – ranging from the seller taking all of the risk as the buyer refuses to accept any conditions, to attempts at articulating conditions which are acceptable to the buyer, and, finally, to a full hell-or-high-water obligation on the buyer. This will need to be considered and negotiated on a case by case basis on every deal.

Regarding the origin of investors, although China-related transactions currently account for more than half of the 14 Final Orders, the NSIA regime is agnostic to the nationality of the relevant parties. Nonetheless, it appears that deals by investors with connections to China in sensitive sectors attracted substantial attention from the UK Government last year. In the short to medium term, Chinese investors should ensure that they are well-prepared in advance for national security scrutiny of potential investments in sensitive sectors in the UK.

¹ The 4 China-related transactions subject to conditions were: Sichuan Development Holding Co/Gardner Aerospace, Redrock Investment/Electricity North West Limited, Stonehill Energy Storage/Stonehill project asset development rights, and China Power International Holdings Limited/XRE Alpha Limited.