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UK's national security screening regime avoids overreach but prompts other concerns
16 August 2022 15:19
Dealmakers anxious that the UK’s tough new national-security investment screening regime would be vulnerable to overreach are likely still reserving judgment, given that it only came into force in January.
The government is expected to publish figures next month giving a snapshot of the National Security and Investment Act's first six months up to the end of June. What's already known, though, is that they'll show that no deals were blocked over that period — the first to be caught was in the middle of July.
In it, the government blocked a licensing agreement between Manchester University and Chinese firm Beijing Infinite Vision Technology Company over vision-sensing technology, on grounds of "potential that the technology could be used to build defense or technological capabilities" that could be a national security risk to the UK, according to Kwasi Kwarteng, business minister at the time.
The veto will have been a reminder for companies considering mergers or investments of the power of the NSI Act, and of concern expressed before it entered force that it could chill foreign investment into the UK, including by adding uncertainty and delay to M&A or joint venture deals.
But for only one deal to be blocked out of hundreds notified in the regime's first seven months should mute some of those concerns. That's not to say that the regime is perfect: Worries will persist, especially over a need to improve its process transparency.
The NSIA greatly expanded the types of deals in scope for national security reviews in the UK. It gave the business minister the power to scrutinize acquisitions across 17 different areas of the economy and block them if necessary.
The Department for Business, Energy and Industrial Strategy's Investment Security Unit, or ISU, operates the regime separately from the Competition and Markets Authority's merger control function. A merger may qualify for review under both regimes.
The government's initial update on the NSI Act regime, covering the first three months from January to March, stressed that it was working well. It recorded that there were 222 deals notified, of which only 17 were called in for further review. Of those 17, three had been cleared and 14 were still under assessment at the report's cut-off.
Publishing the report in June, Kwarteng said they showed the regime was “simple and quick," stressing that "the new system is more efficient as government has to call in a deal for further assessment within 30 working days of accepting a notification, while under the previous system the government had had up to four months to intervene following the completion of a deal."
It is certainly quick: In the first three months, it took on average only three working days to inform parties of notification acceptance, which the government said compared favorably to five days in the US. Where a deal was called in for further assessment, on average it took 24 working days to decide that after notification acceptance.
The six-month figures due soon will likely flesh out a picture of a regime that is efficient and not overly intrusive. Given that the government will, in essence, be marking its own homework, it may not dwell on a key drawback: the regime's lack of transparency.
This is seen primarily in the lack of information available on what transactions are currently under review, which have sticking points and what those are, or how a notification is progressing toward a final decision.
The government has said deals called in for further assessment during the first three months were from areas including artificial intelligence, advanced materials, and satellite and space technologies, but little beyond that.
Only two of the 17 call-ins known about so far are in the public domain: the acquisition of semiconductor maker Newport Wafer Fab by Nexperia, a Dutch unit of Chinese company Wingtech, and French telecom group Altice’s purchase of a 6 percent stake in BT Group. Both are retrospective call-ins.
Compare this to the merger control regime under the CMA, which engages with companies every step of the process. The difference is stark.
The government published guidance last month reiterating that it is not required to publish information about individual deals prior to a final order being made, so it's unlikely that there'll be any significant change from its current opaque approach.
The government has said keeping details of the deals it is examining under wraps helps "minimize the potential for the NSI system to create commercial distortions in the market." But it has also said this could change in certain situations, particularly those involving public companies that have statutory obligations to inform the market of price-sensitive information.
Additionally, announcements may be made where a company wishes to communicate a decision publicly for business or reputational reasons, or where a party is seeking to raise external awareness of the government's consideration of a deal.
Another difficulty for dealmakers under the screening regime are the definitions used to determine what activities fall under the NSI Act's scope and that therefore require notification.
The law requires a notification if there is a trigger event and the deal involves a target entity that falls under the 17 qualifying sectors. These sector definitions are detailed and technical, but they are not straightforward to apply.
A report by consultancy DRD Partnership, which canvassed feedback from law firms, found many struggled to work out whether deals applied under certain categories of the act. Definitions relating to defense, computer hardware, pharmaceuticals and artificial intelligence were found to be most difficult to apply.
The government's updated guidance has placed the burden on companies to explain what their firm does, and how its activities relate to the relevant sector to which they believe it belongs.
"Notifiers … should describe the activities of the qualifying entity or entities, or the use of the asset or
assets," the guidance states, stressing the more information, the better: "Answers should provide as much detail as possible about the activities of the qualifying entity or asset, should be explained clearly, and should avoid the use of technical language."
Interaction with the CMA
Further, there are still questions about the extent to which the regime could affect competition probes into mergers.
A recent memorandum of understanding between the CMA and the government's business department, BEIS, has tried to shed light on how the two currently interact.
It noted that the CMA engages with BEIS on an informal basis in relation to notified mergers or mergers it believes might have national security relevance. The merger watchdog is also informed when BEIS's ISU calls in a deal.
The CMA has said it will seek to provide advance notice to the ISU of the status of mergers, such as whether its merger intelligence committee called a deal in or when it intends to start a phase I probe.
This kind of cooperation, while looking like a good example of joined-up thinking, also raises concerns about the level of influence that could flow between the two authorities. It is crucial that the regimes they oversee remain separate and that problems raised in either do not automatically result in a trickier time with the other.
Treatment of national-security public interest matters has changed because of the NSI Act, but public-interest intervention grounds relating to media plurality, financial stability and public health are still under the CMA’s remit. There is wide scope for future overlaps, and how this is handled will be keenly watched.
The NSI Act is still in its early days, and while government intervention hasn't been seen to be heavy-handed thus far, dealmaking companies don't have enough information yet to make long-term assessments.
That may take another year or more as the regime beds down into a routine, as the ISU's relationship with the CMA develops and stabilizes, and the government calibrates how tolerant it is of remedies in deals where it identifies national security concerns.
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