What Just Happened?

The UK has blocked a Chinese company from purchasing intellectual property from the University of Manchester using its powers under the National Security and Investment Act.

What Does This Mean?

On 4 January 2022, the UK entered into force the National Security and Investment Act 2021. This expanded the Government’s powers and enabled them to block or apply conditions to certain investments and acquisitions deemed to be a threat to national security.

For the first time since the Act came into force the Government has utilised its powers with relation to a foreign buyer. ‘Beijing Infinite Vision Technology (BVIT) was prevented from buying vision sensing technology from the University of Manchester’. The government stated that the decision was made as ‘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’.

The Government has estimated that they may be notified of up to 1,800 transactions each year, with up to 95 subsequently called in for a full assessment

Interestingly, the Act does not set a minimum value to the acquisitions it can intervene in, and, it enables the government to intervene with businesses and investors alike.

Subject to certain criteria the act places an obligation on businesses to notify the government of any acquisitions which fall within 17 ‘high risk’ sectors including; artificial intelligence, communications, computing hardware, data infrastructure, energy and synthetic biology.

How Does This Affect The Legal Sector?

‘In this case, the University of Manchester and BIVT entered into a licence agreement that would enable BIVT to use intellectual property to develop, test and verify, manufacture, use and sell licensed products. However, the Secretary of State concluded that the grant of a licence constitutes a ‘trigger event’ under Section 9(1) NSIA and has blocked the transaction on the basis that:

the technology in question has dual-use applications;

there is potential that the technology could be used to build defence or technological capabilities which may present national security risk to the UK; and
those risks would arise on the transfer of the intellectual property to the purchaser in question.’

The block came about after the university voluntarily referred the sales agreement to the Government for scrutiny. ‘Likely due to the acquirer having been regarded as higher risk under the NSI Act.’ Moreover, whilst the Secretary of State for Business, Energy and Industrial Strategy (BEIS) ‘has been careful to stress that it “will not make judgements based solely on an acquirer’s country of origin” when assessing "acquirer risk". Given the increasing political and security tension between Western governments and China, it is fair to assume that BEIS will continue to closely scrutinise UK acquisitions by Chinese acquirers.’
The case can therefore act as an indicator to businesses as to the types of items which may fall prey to the new powers issued under the Act, as well as those countries whose acquisitions may be more closely scrutinised.

Moving forward, more generally the question for businesses is to determine what impact the regime has or will have, and to understand whether a notification will be required or is advisable. It would be advisable for businesses to incorporate consideration of the act into their due diligence and where relevant updating their due diligence exercises and questionnaires. This would then establish if there has been a historic failing to comply with the act.

Consulting with legal representatives to establish whether notification is required or advisable is essential to ensure compliance with the act and avoid pre-penalty action. These include:

reminders or warning letters.
requiring remedial action to secure compliance, immediately or within a specified time period.
implementing an improvement plan, which provides you with the opportunity to demonstrate compliance.

Where parties fail to adequately respond to pre-penalty actions, they risk financial penalties which the government described as applicable to individuals, businesses, or both.

‘The ISU will communicate to parties that they may be subject to a monetary penalty and will ask for information to help determine the penalty amount. For businesses the maximum penalty is 5% of turnover or an amount up to £10 million (whichever the higher).

For individuals the penalty will be based on a percentage of income, subject to the maximum levels set in the Act. Where an individual does not disclose the requested information, the Secretary of State may assume a level of income he/she considers reasonable to allow an appropriate penalty to be determined.’

For further information and guidance on the scope and application of the ‘high risk’ categories please visit: https://www.gov.uk/government/publications/national-security-and-investment-act-guidance-on-notifiable-acquisitions/national-security-and-investment-act-guidance-on-notifiable-acquisitions

Assessing firms

#Baker McKenzie #DLA Piper #Fieldfisher #Gowling WLG #Herbert Smith Freehills LLP #Osborne Clarke LLP #Simmons & Simmons #Wiggin LLP

This Article was Written Using the Following Sources:

[1] Hogan Lovells ‘Blocked: UK Government uses new powers to block deal raising national security concerns’ (Hogan Lovells, 25 July 2022)

<https://www.engage.hoganlovells.com/knowledgeservices/news/blocked-uk-government-uses-new-powers-to-block-deal-raising-national-security-concerns> Accessed 7 August 2022

[2] Sky news ‘Government blocks Chinese tech deal on national security grounds’ (Sky News, 20 July 2022)

<https://news.sky.com/story/government-blocks-chinese-tech-deal-on-national-security-grounds-12655842> Accessed 7 August 2022

[3] Farrer ‘Could the UK’s National Security and Investment Act affect your business?’ (Farrer, 5 April 2022)

<https://www.farrer.co.uk/news-and-insights/national-security-and-investment-act-a-summary-of-the-recent-developments-and-what-you-need-to-do-now/> Accessed 7 August 2022

[4] UK Government ‘Guidance: National Security and Investment Act: details of the 17 types of notifiable acquisitions’ (UK Government, 20 July 2022)

<https://www.gov.uk/government/publications/national-security-and-investment-act-guidance-on-notifiable-acquisitions/national-security-and-investment-act-guidance-on-notifiable-acquisitions> Accessed 7 August 2022

[5] UK Government ‘Guidance: National Security and Investment Act: details of the 17 types of notifiable acquisitions’ (UK Government, 20 July 2022)

[6] Ibid n1

[7] Stevens and Bolton LLP ‘FIRST BLOCKING OF ASSET DEAL UNDER NSI ACT’ (Stevens and Bolton LLP, 3 August 2022) <https://viewpoints.stevens-bolton.com/post/102hu8a/first-blocking-of-asset-deal-under-nsi-act#page=1> Accessed 7 August 2022

[8] Simon Ward ‘Could the UK’s National Security and Investment Act affect your business?’ (Farrer & co, 05 April 2022) < https://www.farrer.co.uk/news-and-insights/national-security-and-investment-act-a-summary-of-the-recent-developments-and-what-you-need-to-do-now/> Accessed 7 August 2022

[9] UK Government ‘Guidance National Security and Investment Act 2021: guidance on compliance and enforcement’ (UK Government, 11 April 2022) <https://www.gov.uk/government/publications/national-security-and-investment-act-2021-guidance-on-compliance-and-enforcement/national-security-and-investment-act-2021-guidance-on-compliance-and-enforcement> Accessed 7 August 2022

Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.