When the UK’s National Security and Investment Act came into force in January 2022, many feared sponsors might be put off bidding for UK assets and that deals would start being blocked for political reasons rather than on genuine national security grounds.
Over a year in, this fear has proved ill-founded. The new laws have thrown up few real surprises, with the UK government apparently acting judiciously and proportionately to protect national security. Investors coming from so-called allied countries have so far found government measures limited to mitigation where concerns arose, and where non-allied countries are involved there have been very few blocking or divestment orders.
Generally, it will be a source of reassurance to private equity firms looking at UK assets that the government has called in fewer than 10 percent of all the transactions notified since the start of last year. From data published by the Department for Business, Energy and Industry Strategy (BEIS) in June 2022, we can see it called in 17 trigger events for a full national security assessment in the first three months of the legislation, with 14 being mandatory notifications and three voluntary.
Out of the 16 final orders issued to date, only five have blocked trigger events from completing or a stake being divested, and in every case bar one Chinese-backed buyers were involved. The proposed acquisition of vision-sensing IP technology from the University of Manchester by Beijing Infinite Vision Technology was blocked, as was Super Orange HK’s acquisition of Pulsic, and the acquisition of HiLight Research Ltd by SiLight (Shanghai) Semiconductors Ltd. Another Chinese-backed company, Nexperia, was required to divest its 86 percent stake in the UK’s only semiconductor chipmaker Newport Wafer Fab, leaving it with no more than a 14 percent share. The final order was the required divestment by apparently Russian backed L1T FM Holdings UK Ltd of Upp Corporation Ltd.
Given the current perceived national security threat from China and Russia, these are not unexpected outcomes. In the case of China at least they do not mean that investments made by China-backed buyers are no longer possible, even in the 17 sensitive sectors outlined in the Act. Sichuan Development’s acquisition of Ligeance was permitted to proceed subject to mitigating measures, which included the removal of Sichuan directors from the board of Ligeance and restrictions on asset transfers and information sharing. Likewise, China Power’s proposed acquisition of 90 percent of XRE Alpha has been permitted subject to mitigation around electricity offtake and information sharing. It is not clear at this stage if other Russian-backed investments will be allowed to proceed if mitigating measures are put in place.
Perhaps the biggest surprise according to recent press reports is that the UK government recently waived through the takeover of tech company Aveva by France’s Schneider without mitigation, despite the fact that Schneider apparently has a Chinese joint venture partner within its structure. That deal aside, Chinese and Russian backers are clearly in the spotlight, even if the transaction was sanctions compliant where Russian investors are involved.
Nuances for private equity
For the vast majority of private equity buyers considering UK deals, the new regime looks substantively similar to other foreign investment regimes around the world, with the biggest challenge being the additional time and cost requirements associated with assessing whether or not a mandatory filing is required or a voluntary filing is advisable. Many PE firms are choosing to informally brief the BEIS to better understand their risk of post-acquisition call-in.
There are some nuances that PE firms need to remember. First, the rules do not differentiate between overseas and domestic investors, so a UK private equity fund can be subject to a mandatory notification obligation just like an overseas acquirer. In addition, the only UK nexus required is that the target is active in the UK or provides goods or services to the UK, and internal reorganisations can also be in scope. If a sponsor restructures a portfolio company within the scope of the mandatory regime, this can require a notification even without a change of ownership.
Furthermore, while the focus may be on China and Russia-based investors, there is still some uncertainty as to how the rules will be applied to fund structures, so sponsors with Chinese and/or Russian LPs will need to give careful consideration to structuring and LP governance rights and, of course, sanctions (where applicable). Likewise, where an acquisition is being made by a consortium, careful diligence of co-investors will be necessary to assess exposures to the new regime.
Still, so far at least, if you are an investor from the US, UK, EU or other allied countries, your transaction seems less likely to be blocked and more likely to result in mitigation measures if it is felt to pose a national security threat. For China and Russian-based investors, the Act may have a more chilling effect based on recent outcomes, but each investment will turn on its own facts, and for now UK assets remain as attractive as ever to most investors.
Tom Whelan is a partner and is London head of private equity at law firm McDermott Will and Emery. He advises private equity sponsors, multi-strategy funds, other private capital investors and corporates on buyouts, including secondary buyouts and secondaries, take privates and co-investments, general M&A, bolt-ons, management incentive plans, restructurings and refinancings through to exits.