Blocked: UK Government uses new powers to block deal raising national security concerns

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Blocked: UK Government uses new powers to block deal raising national security concerns

25 July 2022

The UK Government this week prohibited the acquisition of intellectual property owned by the University of Manchester by a Chinese company – marking the first time the UK Government has exercised its powers to block a transaction under new national security rules.

On 20 July 2022, the UK’s Secretary of State for Business, Energy and Industrial Strategy, Kwasi Kwarteng, announced he has issued a final order under the National Security and Investment Act 2021 (NSIA), blocking the purchase by Beijing Infinite Vision Technology Company Ltd (BIVT) of know-how related to certain vision sensing technology, known as SCAMP-5 and SCAMP-7, developed and owned by the University of Manchester.

The decision represents the first time the UK Government has exercised its powers to block a transaction under the recently implemented NSIA regime, which gives the Government powers to scrutinise certain acquisitions and investments from a national security perspective.

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 Secretary of State considers that the final order prohibiting the acquisition of intellectual property is necessary and proportionate to mitigate the risk to UK national security.

This notable development comes in the same week that the Secretary of State announced that he will permit another scrutinised transaction to proceed, having accepted undertakings from the parties to mitigate national security risks and competition concerns. Although this review was conducted under the regime that existed prior to the NSIA regime coming into force, the outcomes in the two cases suggests that the Government is willing to take more of an interventionist approach than has previously been the case.

Another notable aspect of this first use of the Government’s blocking power is that the transaction was filed on a voluntary basis. One of the significant aspects of the NSIA regime is that, although transactions where the target is active in certain qualifying sectors are subject to mandatory notification requirements, other potentially sensitive transactions are not. It is therefore interesting to note that of the transactions that are either currently subject to an in-depth national security assessment or that have now been blocked, none were the subject of a mandatory filing. This again emphasises that the Government is willing to take an interventionist approach that is not confined to the qualifying sectors.

The UK Government also this week published the following:

National Security and Investment: market guidance notes July 2022 – complementing the guidance already published on the NSIA by answering questions and providing advice based on the first six months of the NSIA’s operation and feedback received from stakeholders. In particular, it focuses on whether certain commonly raised scenarios require mandatory notification.
National Security and Investment Act: details of the 17 types of notifiable acquisitions – providing updated guidance on the 17 types of notifiable acquisitions under the NSIA.

How we can help

Our advice to clients is to factor in the NSIA regime at the outset of their due diligence when considering how it will impact their acquisitions and investments. The question is to determine what impact the regime has or will have, and to understand whether a notification will be required or is advisable.

Please get in touch with us to discuss the impact that the NSIA regime could have on your business. Hogan Lovells practises law at the intersection between business and government and is particularly well placed to help – having a deep understanding of the regulatory landscape and the detail of the NSIA regime. We also have extensive experience of working inside government, and advising corporations on the machinery of government and its policy priorities. Let us help you navigate the new regime and, if necessary, engage with government and relevant stakeholders.

Authored by Christopher Peacock, Christopher Hutton, Matt Giles, and Mez Azizi.