Be careful what you wish for. To take the political heat out of sensitive deals involving the sale of UK companies, the idea of having a ‘clear’ set of rules had long been mooted. The National Security and Investment Act (NSIA) aimed to provide exactly such rules when it came into effect in January 2022, setting out when and how the UK government would intervene in such transactions. But during the 12 months since it came into force, the willingness of ministers to use its powers has taken some advisers by surprise. 

There was, of course, a not-insignificant amount of trepidation as to what the NSIA might mean for M&A. When Corporate Financier covered the drafting of this legislation, the faculty was hosting a series of round-table events to advise the drafting of the bill – ICAEW and other commentators hoped ministers would be circumspect. The faculty, among others, urged the government to use the NSIA to intervene in genuinely sensitive transactions and to avoid a heavy-handed approach that could gum up the M&A market or deter inward investment.  

Early signs are not entirely encouraging, warns Lord Clement-Jones, Liberal Democrat peer and former partner at DLA Piper. “The government does seem to be going wider than the legislation was supposedly designed for, with a number of decisions that push at the boundaries,” he says. “In 20 years, we did not have a single intervention under the Enterprise Act. Suddenly, under the NSIA, the floodgates have opened.” Some might argue there should have been interventions under the Enterprise Act. 

Certainly, the volume of NSIA interventions appears to be running well ahead of the government’s own expectations. The Secretary of State for Business has already issued more than a dozen ‘final orders’, prohibiting or restricting transactions (see Government action?, below). That’s roughly half the number of interventions made by the US over the same period, even though the American economy is four times the size of the UK’s. 

Widening the net 

But it’s not only the abundance of NSIA interventions that is unnerving advisers – the nature of the government’s decisions has also been raising eyebrows. Ministers appear to be using legislation billed as addressing a specific concern – protecting national security during transactions – much more widely. 

“The net is potentially wide and it’s early days in terms of implementation,” says James Wild, partner and head of M&A at RSM UK. “It isn’t only the most high-profile national security cases that may be caught by this legislation. Anecdotally, we’re seeing more buy-side lawyers refer deals for review pre-completion, even if the significant majority won’t be called in.” 

Newport Wafer Fab, a Welsh semiconductor manufacturer bought by Nexperia (a Dutch subsidiary of China’s Wingtech) in 2021, is one example. In November 2022, the government ordered the retrospective unwinding of the deal – Nexperia must sell its shares in Newport. Ministers suggested that while the company isn’t currently involved in sensitive work, it might be in the future – and further, it is part of a cluster of semiconductor businesses in South Wales that might also end up doing such work. 

Such a proposition feels like something of a stretch to many observers. Are ministers simply interested in ensuring the UK retains domestic ownership of a business in a marketplace where global demand has soared? Semiconductors, after all, power the global economy. Of course, some will argue that strategically this is useful for the UK economy. 

Such suspicions are hardly allayed by the government’s decision to impose conditions on the acquisition of satellite communications specialist Inmarsat by ViaSat of the US. The deal was allowed to go ahead, so long as the parties promised to support job creation in the UK and to invest in R&D here. That certainly looks like an economic intervention rather than a security one. 

“Our expectation was that we would need to think about the NSIA in a wide range of transactions and that is proving to be the case,” says Selina Sagayam, senior counsel at Gibson Dunn & Crutcher and member of the Corporate Finance Faculty board. “It is probably a consideration in the majority of deals we advise on, even if we then decide we need to formally notify the Investment Security Unit (ISU) in a much smaller proportion of cases following analysis and assessment.” 

Chinese threat? 

Many of the interventions so far have focused on Chinese bidders. This should not come as a surprise, as Chinese investment in the UK has particularly worried politicians in recent years. But other foreign buyers – from the US, the Middle East and even the EU – have also faced objections. The purchase of Truphone by German businessman and tech entrepreneur Hakan Koç and former telecoms executive and private equity investor Pyrros Koussios was only allowed if the companies promised to appoint a government-approved chief information security officer. 

There are also deals involving Chinese parties where interventions have sometimes surprised observers. When UK private equity group Epiris bought the UK business of Sepura from its Chinese owner – the opposite of a foreign takeover – the government insisted on commitments about its work with the UK’s emergency services. In another case, ministers demanded the appointment of a government observer at Ligeance Aerospace, which was sold from one Chinese company to another – Sichuan Development Holdings. Ligeance had acquired the UK business Gardner Aerospace in 2016, for £326m (which went unchallenged at the time). 

In theory, the NSIA is supposed to provide certainty. In 17 specific industries that the government deems sensitive – including nuclear, communications, data infrastructure, artificial intelligence and computing hardware – acquirers of British businesses must notify the ISU of their intentions. It then decides whether such deals merit further investigation – and ultimately, whether they should be blocked or allowed to proceed with certain remedies. In practice, some advisers say almost any deal involving a foreign buyer can end up being deemed as sensitive – and they point out that transactions don’t have to be full-on acquisitions: even licensing deals have been scrutinised. Potential remedies in interventions, moreover, are proving to be wide-ranging. 

One big concern is that reasons for the decisions are in short supply, making it difficult to learn lessons ahead of future deals. “The government does need to explain itself, with market guidance informed by previous decisions,” says Lord Clement-Jones. “The worry is that otherwise you begin to deter inward investment.” 

In the meantime, dealmakers and their advisers must be prepared. The bottom line, says Gibson Dunn’s Sagayam, is that “you must have in-house expertise on NSIA issues”. It is vital to assess at the earliest possible stage whether a deal needs to be referred because doing so will make a significant difference to the transaction’s timelines – and, in the end, to the risk of it not making it to completion. And of course the value obtained can be impacted, too. 

“This is something you need to start building into the architecture of deal processes,” says Rick Thompson, managing director of investment banking at Singer Capital Markets. “It becomes a consideration at the planning stage and during diligence; you may also need to think about dual timelines, so that there is provision to build in delays caused by a referral.” 

A watched clock 

The good news is that the legislation does provide some guidance on timing. Once a deal has been submitted to the ISU, it has 30 working days to decide whether to call in a transaction for a full-scale assessment – and, if that is the decision, a further 30 working days to complete the assessment, although there are some limited powers to extend the deadlines. 

Nevertheless, those delays – even if they don’t result in an adverse final order from the Secretary of State – will be a concern for buyers and sellers alike. The former may become more circumspect about deals in the UK; the latter may become more picky about the suitors they are prepared to deal with. “The parties will need to factor in the process for getting clearance into deal timelines,” adds RSM’s Wild. “It makes sense for an acquirer to refer where there is perceived risk.” 

Potential delays in achieving clearance don’t have to derail the deal process; it is possible to build in contractual protections, says Sagayam, and potentially in selected cases, contingent risk liability insurance may be a viable option to manage this regulatory risk exposure. “Clarity about satisfaction of conditions is paramount. Is it the buyer or the seller who calls the shots in determining whether an NSI- or FDI-related condition is satisfied?”  

Buyers will look for the right to walk away if the government imposes conditions they feel they can’t live with, she points out. Sellers will want to limit the circumstances in which that is a possibility – or impose break fees in the event of a deal collapse. Reaching agreement on these issues is therefore crucial. 

The other question is price. “Sellers may need to manage their expectations because the imposition of substantive conditions could lead to value leakage,” adds Sagayam. Where a buyer is unable to maximise its extraction of intellectual property, for example, or is ordered to continue providing services in a particular way, that will affect its valuation of the business.  

“These are issues you must be alive to when managing the deal process,” warns Thompson. “It has to become a normal part of deal execution.” 

Legislation originally proposed amid rising concern about a small number of deals is turning out to have a wider impact. 

Government action? 

One criticism of the NSIA regime concerns the opacity of the decision-making process. Where the Secretary of State for Business intervenes, the legislation requires only that the government publishes a ‘final order’ prohibiting a transaction or allowing it subject to remedies (see final orders as at end of January 2023, below). No explanation of the decision need be given.  

Acquisition Prohibited

• SiLight (Shanghai) Semiconductors’ acquisition of HiLight Research Limited  
• Beijing Infinite Vision Technology’s acquisition of SCAMP-5 and SCAMP-7 technology from the University of Manchester  
• Super Orange HK Holding’ acquisition of Pulsic  
• L1T FM Holdings UK’s acquisition of Upp Corporation  
• Previous acquisition retrospectively prohibited; L1T required to sell 100% of business.
• Nexperia’s acquisition of Newport Limited - Previous acquisition retrospectively prohibited; Nexperia required to sell at least 86% of business.  

Acquisition Allowed 

• Epiris’ acquisition of Sepura  
  Allowed subject to enhanced controls to protect sensitive information and technology. 
• Tawazun Strategic Development’s acquisition of a stake in Reaction Engines  
  Allowed subject to provisions to mitigate risk to national security. 
• Stonehill Energy Storage’s acquisition of development rights for the Stonehill electricity project  
  Allowed subject to government controls. 
• Viasat’s acquisition of Inmarsat parent Connect Topco  
  Allowed subject to controls to protect sensitive information and continuity of supply to the UK government. 
• Redrock Investment’s acquisition of Electricity North West  
  Allowed subject to controls on information sharing and key appointments. 
• Iceman Acquisition Corporation’s acquisition of CPI Intermediate Holdings  
  Allowed subject to requirement to retain work connected to atomic clocks in the UK. 
• Sichuan Development’s acquisition of Ligeance Aerospace Technology  
  Allowed subject to controls on information sharing and board representation, as well as a requirement for the appointment of a government observer. 
• TP Global Operations’ acquisition of Truphone Limited  
  Allowed subject to provisions to mitigate risk to national security. 
• China Power’s acquisition of XRE Alpha  
  Allowed subject to provisions to mitigate risk to national security.