The NSIA one year on: spotlight on remedies and prohibitions

Just over one year has passed since the UK’s National Security and Investment Act 2021 (NSIA) took effect, which inaugurated a marked shift in the UK’s approach to investment screening.

A key element of the new regime is the power of the Chancellor of the Duchy of Lancaster (CDL) to “call in” and scrutinise transactions in certain key sectors. Until 7 February 2023, the Secretary of State (SoS) for Business, Energy and Industrial Strategy (BEIS) held this responsibility but, as part of the recently announced government reshuffle, the CDL has now assumed this role. The outcome of this review can range from the unconditional clearance of an investment to its outright prohibition. In between these two extremes, the CDL also has a wide discretion to impose remedies on the parties, as a condition for allowing a deal to proceed. 

In the first instalment of our mini-series to mark the first anniversary of the NSIA, we considered the substantive assessment by the Investment Security Unit (ISU) - i.e. what transactions have been thought to threaten the “national security” of the UK. Here, we provide the key takeaways from our experience on the UK’s approach to remedies and prohibitions, and learnings for investors.

The rhetoric is reality: Chinese inbound investment has been in the cross-hairs, but deal conditions have been imposed upon a broad range of acquirers and transaction types

In the NSIA’s first year of operation, 14 final orders were issued, comprising 5 prohibitions and 9 conditional clearance decisions. 

NSIA guidance does not specify particular sovereign actors as being hostile to the UK’s national security when considering “acquirer risk”. However, it is clear from enforcement during the first year of the regime that investment from China (and in some cases, Hong Kong, where there has been a perceived linkage to China) and Russia is a particular risk factor. Indeed, 4 out of the 5 prohibition decisions issued to date involve investors with a nexus to China (University of Manchester/Beijing Infinite Vision; Super Orange/Pulsic; Newport Wafer Fab/Nexperia; and SiLight/HiLight). The final prohibition decision, Upp Corporation/L1T FM Holdings UK, involved an acquirer co-founded by Russian investors. A similar pattern can be seen in continental Europe. In Germany, for example, while there is a long list of “countries of concern”, all prohibitions to date had a China nexus.

However, there are deals with a China nexus which have been cleared (sometimes with conditions – e.g. XRE Alpha/China Power; Ligeance/Sichuan; Electricity North West/Redrock; Stonehill project asset development rights/Stonehill Energy).

The transaction behind the first NSIA prohibition (University of Manchester/Beijing Infinite Vision) notably involved a licence of intellectual property by the UK entity, rather than a traditional corporate investment by the Chinese entity. This demonstrates the breadth of the NSIA: pure IP licences are currently outside the remit of CFIUS and several EU authorities, but the UK’s approach to IP transfers may encourage the United States and Europe to expand the scope of their respective regimes (e.g. the German regime is currently under review).

While all prohibition decisions have involved Chinese and Russian parties - with semiconductors being a particular target - conditional clearance cases have affected a broader spectrum of acquirers (the NSIA is acquirer-agnostic from a jurisdictional perspective, applying, at least in principle, to acquisitions by UK investors). In Viasat/Inmarsat, the UK government imposed conditions on a deal involving a US acquirer of a UK target. Several cases involving Western acquirers have been “called in” for a detailed review, some ultimately avoiding a final order. For instance, the UK government very publicly investigated the acquisition of an incremental 6% stake in BT by Altice UK (taking the total stake to 18%), which is owned by French-based telecoms tycoon Patrick Drahi. 

Remedies are similar to those imposed under the previous Public Interest Intervention Notice (PIIN) regime 

The ISU discloses limited information about its analysis in its final orders and does not publicly explain the reasoning behind its conclusions. Nonetheless, the information published on remedies imposed to date suggests certain trends. 

In sharp contrast to the remedies imposed by the Competition and Markets Authority (CMA) following reviews of acquisitions on competition grounds, remedies imposed under the NSIA tend to be behavioural rather than structural. 

The remedies imposed to date fall broadly within three categories: “information safeguards” (to protect sensitive information and technology from unauthorised access); “capability preservation” remedies (to preserve UK-based manufacturing and R&D operations); and “security” remedies (to retain British citizens/nationals in leadership positions, especially in companies active in the military and dual-use sector).

• Restrictions on information sharing and staff appointments: In Electricity North West/Redrock, the final order required the ring-fencing of sensitive information and restricted the ability of the acquirer to influence the appointment of key staff members within the target (note that this final order was revoked when the parties abandoned the acquisition). Similarly, in Truphone/TP Global, the final order required information security measures to be put in place (including a security audit, to be undertaken by a government-approved auditor). Information safeguards were also imposed in XRE Alpha/China Power; Ligeance/Sichuan; Viasat/Inmarsat; and Sepura/Epiris, among others.
• Maintaining UK-based R&D/strategic capabilities: In CPI/Iceman, the final order required that the acquirer maintain the target’s R&D and manufacturing capabilities in the UK. In Viasat/Inmarsat, the final order required that strategic capabilities continue to be provided by the parties to the UK government.
• Restrictions on board composition: In Ligeance/Sichuan, the final order required (i) the removal of representatives of the target and the acquirer from the board of the target’s subsidiary, Gardner; and (ii) the appointment of a government observer to Gardner’s board.

• Additional sector-specific restrictions:

• Military/Dual Use sector: In Ligeance/Sichuan, the final order specified security measures with which the target’s subsidiary companies must comply. The final order further required a notification to be made to the UK government, if any assets were transferred out of the subsidiary companies. In Germany, we have seen similar reporting obligations introduced.
• Energy: In XRE Alpha/China Power, the final order restricted the management of power offtake and ancillary service provision to the National Grid to government-approved operators. Similarly, in Stonehill/Stonehill, the final order imposed a requirement on the acquirer to obtain government approval before appointing a power offtake operator.
• Suppliers to the emergency services: In Sepura/Epiris, the final order included a requirement to ensure the maintenance of UK capabilities in repairing, servicing and maintaining the devices used in the TETRA Airwave network and Emergency Services Network used by emergency services in the UK. An obligation to supply is similarly becoming a remedy commonly imposed by the German regulator.

There is significant overlap between the types of remedies being imposed under the NSIA and equivalent regimes in continental Europe. However, we have recently seen the introduction of other types of restrictions in Germany, including (i) restricting follow-on sales by the target company to foreign investors from certain countries; (ii) limiting the influence of investors (enacted through the limitation of veto rights); and (iii) restricting the ownership percentage a foreign investor is allowed to acquire in the target company (e.g. in COSCO/Hamburg Harbour Terminal, the investor was permitted to acquire a 24.9% stake, with restricted governance rights, instead of the 35% stake originally intended).

The UK government has published guidance clearly stating that remedies should address “national security” concerns rather than industrial policy concerns. However, the “capability preservation” remedies geared towards retaining the presence of certain industries in the UK, as previously seen under the PIIN regime, may continue to be imposed under the NSIA. Under the PIIN regime, similar interventions were not unprecedented, with the UK government having accepted remedies serving more political aims in a number of cases, such as Cobham/Ultra Electronics or Parker/Meggitt. In Cobham/Advent and Parker/Meggitt, wide-ranging commitments were announced publicly and ultimately given outside of the formal PIIN process. We would anticipate similar economic commitments (e.g. those intended to preserve key personnel or R&D capabilities in the UK) to be given by companies to the CDL, outside the formal investment screening mechanism of the NSIA.

The first annual report on the NSIA emphasised that it “focuses solely on national security, meaning it cannot be used for economic or political purposes”. While the new regime has enabled the UK government to review an increased number of transactions on national security grounds, where such security concerns are identified, the way these are remedied is remarkably similar to the previous PIIN regime. This suggests that behavioural commitments are likely to remain a common feature of the NSIA framework.

Additionally, it remains to be seen how the CDL will respond to political pressures. In Newport Wafer Fab/Nexperia, the government reversed its initial decision not to investigate the transaction. This followed significant national and international pressure, including a letter from nine members of the US Congress which urged President Biden to “employ all necessary tools” to prevent the NWF transaction, including “engaging in direct diplomacy with the UK government” and even reconsidering the UK’s “whitelist” status as an exempted foreign state by CFIUS, were the UK to clear the acquisition (as we discussed in our previous posts).

Practical lessons to be drawn from the early NSIA remedies cases 

The limited publicity of cases to date allows only directional conclusions to be drawn. There are, however, a number of learnings for parties to transactions to bear in mind: 

• Parties are typically informed of the result of the investigation and the final remedies (without prior dialogue): There is no automatic right for the parties to offer remedies at certain stages in the process or negotiate such remedies. As it has been the case in some EU jurisdictions, parties have occasionally been surprised by the lack of iterative dialogue as might occur in other processes (e.g. discussions in merger control or antitrust investigations), with remedies sometimes being “tabled” rather than discussed or negotiated. Consequently, remedy proffers by the parties may be more effective if discussed with the likely stakeholder agencies (e.g. the Ministry of Defence for a transaction involving military technology) prior to submission of the NSIA filing. 
• The remedies process is nascent and there is no one size fits all: Given the NSIA’s silence on this issue, neither the timing nor the process for developing remedies is clear (unlike, for example, the reasonably well-trodden path in CFIUS). 
• Expect limited feedback on the UK government’s substantive thinking: Compared with the CMA merger control regime, the review process and remedies imposed in NSIA reviews are opaque. The government has sought to justify this by referring to the need to protect national security interests, which, in its eyes, limits the scope for public consultation on potential remedies or the need for detailed decisions setting out the reasoning behind final orders. However, merging parties dissatisfied with the process and outcome could seek to challenge this approach by bringing a judicial review claim on the basis of procedural fairness (e.g. failure to consult or give reasons). It has been reported that Nexperia has filed a judicial review with the High Court to challenge the decision to block the £63 million takeover of Newport (which was originally announced in 2021) and we would expect procedural challenges to be part of the appeal. Moreover, limited publicity makes it difficult for transaction parties and practitioners to develop a clear understanding on how they can, in practice, alleviate the government's concerns, or indeed for third parties to contribute to the shaping of potential remedies. Considering that details of remedies under the PIIN regime have tended to be more public, there is scope for a more comprehensive version of the conditions imposed to be made available, even in redacted form. For example, the publicly available versions of the NSIA final orders do not include any details about how remedies will be practically implemented and monitored. Conversely, under the PIIN regime, the full order was published in an unredacted form. 
• Be prepared for the possibility of politically driven remedies: This is not just a UK trend - investment regimes are increasingly alert to a broader set of national security concerns, which often extend to more economic or political considerations. A number of conditions imposed so far seek to protect the UK’s continued access to certain key services or capabilities. 
• How to anticipate potential remedies in practice: Despite the limited publicity, parties to transactions can rely on the pool of remedies that have been published (and described above) – and the key concerns raised by the ISU in those cases – to come forward with potential remedy suggestions. As with CFIUS, this body of learning will be increasingly valuable over time and will be instructive in helping parties anticipate remedies that could materially reduce or even eliminate the anticipated strategic and financial benefits of a transaction. 

Going forward, we can expect certain trends from other jurisdictions to have an influence on the remedies process under the NSIA. A CFIUS practice that we should expect to migrate to the UK is government reliance on third-party, approved monitors to provide real-time assurance that the parties to a transaction are complying with remedies imposed under the NSIA. Similarly, in continental Europe, some authorities are expanding the extent and scope of remedies packages with, for example, detailed remedies on certain contractual relationships or obligations for board members. There has also been a move towards imposing remedies through decisions, rather than other means such as public law agreements, which had been the prevailing mechanism - and meant that no judicial review was available to transaction parties.