On January 4 2022, the UK government implemented the National Security and Investment (NSI) Act, which allows the government to scrutinise and intervene in certain acquisitions that could harm the UK’s national security. The NSI Act applies to business acquisitions or dealings in intellectual property in sensitive areas such as AI, robotics and data infrastructure and could make transactions in IP, such as patents, subject to government approval.

In a move that will be of interest to universities and others, an IP licensing deal between the University of Manchester and a Chinese company, Beijing Infinite Vision Technology Company Ltd, has been blocked by the UK government.

The University of Manchester and Beijing Infinite Vision Technology Company Ltd had entered into a licence agreement to enable the latter to use IP relating to SCAMP-5 and SCAMP-7 vision sensing technology to develop, test and verify, manufacture, use, and sell licensed products. The technology is seen as having applications in embedded vision applications such as robotics, VR, automotive industries, toys, and surveillance. On its website, the Chinese company describes itself as providing “the cutting-edge 3D rendering technologies to deliver realistic still image, animation and virtual reality for residential cultural and commercial projects”.

A final order to block the licence agreement from proceeding was made by the Secretary of State for Business, Energy and Industrial Strategy (BEIS), Kwasi Kwarteng, pursuant to Section 26 of the Act.  It was considered that “there is potential that the technology could be used to build defence or technological capabilities which may present a national security risk to the United Kingdom” and that “those risks would arise on the transfer of the intellectual property to the Acquirer.”

As we wrote previously, the NSI Act is actor-agnostic and pre-dates the end of the UK-China ‘Golden Era’, so should not be interpreted as the government seeking to make the UK less attractive to Chinese investors. Nevertheless, since IP licensing forms an integral part of the university business model, universities will need to re-evaluate their risk assessment processes and voluntary notification procedures.

As of March 2022, the government had received 22 notifications under the Act, of which 17 had been called-in for assessment. BEIS recently published a set of market guidance notes providing practical advice in making notifications, information about whether certain types of acquisitions are qualifying acquisitions, and help for higher education institutions to decide whether to notify the UK government under the Act.

Entering China is a key decision for businesses of all sizes. Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC can provide you with the platform to unlock your potential in a rapidly changing market.

Jason Teng is a partner with Potter Clarkson LLP, a full-service intellectual property law firm.

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The National Security Investment Act has received Royal Assent and been in force since January 2022. Long before the NSI Act became a topic for debate in Parliament, as the NSI Bill, the regime had attracted the attention of those working in UK-China trade, not least because in 2018 the British government brought a draft of the legislation to China for consultations with stakeholders in the market. The new legislation creates an independent investment screening mechanism on UK national security comparable to the US’ CFIUS regime. The NSI Act is broad in its scope and powers, and companies and investors in both the UK and China should ensure they are familiar with its requirements to ensure compliance when considering deals between the two countries. 

Be advised that the NSI Act is actor-agnostic; it is not orientated explicitly towards Chinese companies, nor is it expected to be a significant barrier to Chinese firms looking to invest in the UK.

Background

The bill became law on 4 January 2022, and expands significantly the UK government’s existing powers to screen investments on national security grounds. The NSI Act is implemented through a mandatory notification system that is in force for acquisitions in seventeen specific sectors – similar to that used in the US CFIUS regime. In addition to this, the UK government now has the power to ‘call in’ suspect transactions for an in-depth review where it has reason to suspect that the deal presents a risk to national security. Under both circumstances, the UK government can now impose conditions and unwind or block the acquisition of a UK entity or its intellectual property. That said, analysts do not anticipate the NSI Act to be a particularly intrusive piece of legislation – what will and will not trigger an investigation is relatively intuitive. 

The UK is not alone in having introduced a national security investment regime. CBBC members should already be familiar with China’s 2019 Foreign Investment Law, while the European Union and Australia both introduced similar frameworks back in 2020 – all modelled on the aforementioned CFIUS regime.

The NSI Act has nothing to do with China. Indeed, its legislative history predates today’s tensions by several years; when it was first aired in China on its 2018 world tour, the UK and China were in the midst of their ‘Golden Era’. Rather, when passing through Parliament, the bill attracted the attention of MPs with a more hawkish disposition toward China and who saw it as a way of reducing the attractiveness of the UK as an investment destination to Chinese investors whom they considered a threat.

What changes under the NSI Act?

Foreign investors looking to buy British companies and intellectual property, or other assets within seventeen industries, now have to alert a new team of regulators within the Department for Business, Energy and Industrial Strategy (BEIS) called the Investment Security Unit. This team will consider prospective investments within 30 days and then either clear the transaction or impose conditions.

Sectors requiring investigation:

• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• Civil Nuclear
• Communications
• Computing Hardware
• Critical Suppliers to Government
• Cryptographic Authentication
• Data Infrastructure
• Defence
• Energy
• Military and Dual-use
• Quantum Technologies
• Satellite and Space Technologies
• Suppliers to the Emergency Services
• Synthetic Biology
• Transport

If company directors fail to alert BEIS of any transactions triggering an investigation, they could face jail time and fines of up to 5% of annual turnover or a single fine of £10 million. What is more, if the Investment Security Unit does not clear a transaction, they can render it “legally void.” Finally, BEIS has the power to review transactions up to five years after they took place. 

Events triggering an investigation in these industries include: 

• The acquisition of shares or voting rights: (a) from 25% or less to more than 25%, (b) from 50% or less to more than 50%, (c) from less than 75% to more than 75%;
• If the acquisition of voting rights enables the acquirer to secure or prevent motions passing the board or executive committee of the target company;
• The acquisition enables the acquirer to materially influence the behaviour of the target company;
• The acquisition enables the acquirer to use or control the asset in a way that presents as a threat to national security.

Has anything actually changed? 

No, not really. 

The NSI Act replaces the Enterprise Act of 2002, under which there were only 12 instances where the government intervened in a proposed transaction. But that goes a long way toward explaining why companies are so concerned about its replacement – there is a lack of case law providing a precedent. 

That said, CBBC understands from conversations with member law firms that Chinese multinationals have changed how they approach mergers and acquisitions involving British targets. Now, Chinese companies looking to invest in the UK will reportedly consult firms’ anti-trust lawyers to get a sense of whether their proposal will get caught up in the investment screening regime before deciding whether to proceed with the deal. Previously, a consultation with the anti-trust team would be a later step in the acquisition process. 

It is also worth remembering that no one really wants the NSI Act to swing into action. Indeed, the main reason that the government has only intervened in 12 transactions to date is that companies will usually consult the regulators first should they suspect that a transaction will trigger an investigation. 

The CBBC View 

Concerns that the NSI Act will deter Chinese investors are overblown. While press coverage of the debate in the House of Lords surrounding the bill’s passage into law often sought to consider its application in the context of Chinese investment into the UK, the legislation was on the cards long before the ‘Golden Era’ ceased to be. While CBBC has heard from law firms in the China market that Mainland investors are reevaluating how they approach M&A deals involving the UK, just as with the 2002 Enterprise Act which the new Act replaces, communication remains key – something has to have gone really wrong for a deal to be declared “legally void” by BEIS, and a company would need to have been very poorly advised for a deal to get that far.

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