By Sharon Foster
Law Student Editor
On January 4, 2022, the United Kingdom’s National Security and Investment Act 2021 (NSI Act) went into effect. The NSI Act empowers the Department for Business, Energy & Industrial Strategy, through its new Investment Security Unit (ISU), to review transactions implicating national security. The NSI Act covers 17 “high-risk” sectors that the United Kingdom deems essential to its national security.
The NSI Act employs a framework analogous to the Exon-Florio provisions of the Defense Production Act of 1950, administered by the Committee on Foreign Investment in the United States (CFIUS). CFIUS’s role is to oversee mergers and acquisitions with foreign investment components for national security purposes, subject to the President’s ultimate discretion. For example, in 2016, President Obama blocked Fujian Grand Chip Investment Fund LP, a partially government-owned Chinese company, from acquiring German technology firm Aixtron SE, based on a CFIUS recommendation. President Obama indicated in a press statement that “[t]he national security risk posed by the transaction relates, among other things, to the military applications of the overall technical body of knowledge and experience of Aixtron, a producer and innovator of semiconductor manufacturing equipment and technology.” While most foreign acquisitions allow the parties to decide to voluntarily disclose the intended acquisition, Exon-Florio does require mandatory disclosure of some kinds of transactions. Failure to disclose these can lead to harsh penalties, as can failure to comply with a mitigation agreement on which CFIUS has conditioned its non-opposition. For example, in 2018, CFIUS levied a civil monetary penalty of $1 million under its monitoring and enforcement powers. CFIUS issued the penalty against an undisclosed company for repeated breaches of a CFIUS mitigation agreement.
Acknowledging the success of the Exon-Florio procedure, the United Kingdom followed suit in enacting the NSI Act. The NSI Act allows the United Kingdom to block acquisitions of UK business firms and assets by non-UK persons when such acquisition implicates national security concerns. The British ISU, like CFIUS, primarily operates on a voluntary disclosure basis. However, the government can also “call-in” non-disclosed transactions if there is a “triggering event.” A triggering event includes when “a person gains control of a qualifying entity [under] section 8 or a person gains control of a qualifying asset [under] section 9.” Section 8 provides that a person gains control of a qualifying entity if that person’s shares or voting rights increase by 25, 50, or 75 percent of the person’s initial holdings. Section 9 states “a person gains control of a qualifying asset if [that person] acquires a right or interest in . . . the asset and . . . is able to use the asset” or “direct and control how the asset is used.” Qualifying assets include “land, tangible moveable property, and ideas, information or techniques which have industrial, commercial or other economic value.” Examples of “ideas, information or techniques” include: “trade secrets, databases, source code, algorithms, formulae, designs, . . . [and] software.” The NSI Act also includes commensurately high penalties for non-disclosure of transactions. Failing to disclose a transaction carries prison term from 1 to 5 years or monetary penalties of 10 million pounds (and potentially more for businesses).
The NSI Act requires disclosures in 17 sensitive areas, termed “notifiable acquisitions,” including advanced materials, artificial intelligence, communications, data infrastructure, energy, military and dual-use items, among others. Some of the regulated sectors are high-growth industries. As a result, many transactions could require disclosure to ISU. The United Kingdom has issued detailed guidance relating to each sector.