BEIS blocks first transaction under UK national security and investment law

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On July 20, 2022, the Secretary of State in the UK Government’s Department for Business, Energy and Industrial Strategy (BEIS) issued a final order blocking a proposed license agreement between the University of Manchester and Beijing Infinite Vision Technology Company Ltd. (Beijing Infinite). This final order is the first time the Secretary of State has halted a contemplated transaction under the National Security and Investment Act of 2021 (the NSI Act). (Our previous alerts regarding the NSI Act can be found here and here.)

The University of Manchester and Beijing Infinite have entered into a license agreement under which Beijing Infinite would use certain intellectual properties related to visual sensing technology. The relevant technology is dual-use in nature (i.e. it is sold commercially but has potential military applications.

According public reports, Beijing Infinite reportedly plans to develop, test and verify, manufacture, use and sell relevant technology related to children’s toys. Nevertheless, the Secretary of State blocked the transaction on national security grounds, concluding that “the technology could be used to build defense or technological capabilities which could pose a risk to the national security of the United Kingdom”.

Given the limited public information available, it is difficult to draw many conclusions from the action of the Secretary of State. Nonetheless, the Final Order presents a few interesting points regarding BEIS’s approach to reviewing transactions under the NSI Act:

  • Licensing did not result in mandatory notification: The parties’ licensing agreement constituted a triggering event for the purposes of the NSI Act because Beijing Infinite allegedly took control of a qualifying asset (i.e. the licensed technology). But the NSI Act only requires acquirers to submit mandatory notifications to BEIS for a subset of trigger events involving equity investments in qualifying entities. The University of Manchester apparently chose submit a self-declaration to BEIS regarding the proposed license agreement. BEIS then called the transaction for a full national security review before the Secretary of State issued a final order.
  • The Secretary of State’s final order was surprising in some ways: The trigger events most likely to be reviewed are equity investments in eligible entities operating in high-risk sectors, which are subject to mandatory notification requirements under the NSI Act. It is therefore somewhat unexpected that the UK government first blocked a trigger event under the NSI Act as part of a license agreement which did not require either party to notify BEIS of the transaction. This final order therefore suggests that for high-risk investors (see next point), the acquisition of companies with UK assets or the licensing of UK technology may present a significant risk in relation to the certainty of transaction, even if the transactions are not subject to mandatory deposit requirements.
  • The Secretary of State’s final order was awaited by other means: The Secretary of State’s final order is in line with BEIS guidance and FDI trends in other Western countries. The parties’ contract involved technology related to several of the high-risk sectors under the NSI Act, including advanced robotics and dual-use items. BEIS said transactions involving these high-risk sectors are most likely to pose a significant national security risk. Moreover, the Secretary of State’s decision to block a transaction involving a Chinese party is hardly a surprise. BEIS has taken the position that it does not subject investors to scrutiny simply because they are based in a particular country. However, in reality, Western governments have scrutinized covered transactions involving Chinese acquirers.
  • BEIS has been active this summer: In addition to publishing this final decree, BEIS announcement that it had authorized the American company Parker-Hannifin to acquire the British aerospace company Meggitt, subject to various commitments made by the parties. BEIS also released its first Annual Report on the NSI law, Market direction notes, and updated tips regarding the high-risk sectors specified in the regulations of the NSI Act.

For more information on the NSI Act, please contact Wilson Sonsini Partners Mike Casey, Stephane Heifetz, Joshua Gruenspecht, Daniel Glazer, or Handsome Buffer.

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