BEIS blocked the first transaction under the UK’s National Security and Investments Act

On 20 July 2022, the UK Government’s Secretary of State for Business, Energy and Industrial Strategy (BEIS) published a final order blocking a proposed licensing 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 planned transaction under the National Security and Investment Act of 2021 (NSI Act). (You can find our previous alerts under the NSI Act here and here.)

The University of Manchester and Beijing Infinite have entered into a license agreement under which Beijing Infinite will use certain intellectual property related to visual surveillance technology. The technology in question is dual-use (ie it is sold commercially but has potential military applications.

According to public reports, Beijing Infinite allegedly plans to develop, test and verify, manufacture, use and sell the relevant technology in connection with children’s toys. However, the Secretary of State blocked the deal on national security grounds, concluding that “the technology could be used to build defense or technological capabilities that could pose a risk to the UK’s national security”.

Given the limited public information available, it is difficult to draw many conclusions from the Secretary of State’s actions. However, the final order presents some interesting findings about BEIS’s approach to reviewing transactions under the NSI Act:

  • The license agreement did not result in a mandatory notification: The parties’ license agreement constitutes a triggering event for purposes of the NSI Act because Beijing Infinite would obtain control of an eligible asset (ie, the licensed technology). But the NSI Act only requires acquirers to submit mandatory notifications to BEIS for a subset of trigger events involving capital investments in qualifying entities. The University of Manchester has apparently chosen to submit a voluntary notification to BEIS regarding the proposed licensing agreement. BEIS subsequently asked the deal for a comprehensive 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 triggering events most likely to be considered are capital investments in qualifying entities operating in high-risk sectors that 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 in relation to a license agreement that did not require either party to notify BEIS of the transaction. Therefore, this final order suggests that for higher risk investors (see next bullet) the acquisition of companies with UK assets or the licensing of UK technology may pose a significant risk to the security of the transaction, even if the transactions do not are subject to mandatory filing requirements.
  • The Secretary of State’s final order was expected in other ways: The Secretary of State’s final order is consistent with BEIS guidance and FDI trends in other Western countries. The parties’ agreement includes technology that is related to several of the high-risk sectors under the NSI Act, including advanced robotics and dual-use items. BEIS indicated that transactions involving these high-risk sectors are most likely to pose a significant risk to national security. Moreover, the Secretary of State’s decision to block a transaction involving a Chinese party hardly comes as a surprise. BEIS has taken the position that it does not subject investors to increased scrutiny simply because they are based in a particular country. In reality, however, Western governments have scrutinized covered transactions involving Chinese buyers.
  • BEIS has been active this summer: In addition to the publication of this final order, BEIS announced that it allowed the American company Parker-Hannifin to acquire the British aerospace company Meggitt, subject to various commitments made by the parties. BEIS also published its first annual report on the NSI Act, Market guidelines notes and updated manual in relation to the risk sectors specified in regulations to the NSI Act.

For more information on the NSI Act, please contact Wilson Sonsini partners Mike Casey, Stephen Heifetz, Joshua Gruenspecht, Daniel Glaser or A beautiful buffer.

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