The long, long reach of the UK’s national security laws

The UK’s new law to scrutinise deals on national security grounds was widely seen as a way of monitoring investment from China and limiting the country’s control over key UK assets. 

It is. But after nearly a year of operation, it is also much more.

The government on Tuesday ordered that Upp, a broadband company, must be sold by oligarch-backed LetterOne — the first deal not involving a Chinese party to be blocked or unwound. Before then, the security laws that came into force in January had been used to thwart two small acquisitions by Chinese buyers of technology with possible military applications, and to order the unwinding of the sale of Newport Wafer Fab, a Welsh chipmaker. The government on Tuesday blocked another small Chinese semiconductor deal for good measure.

Typically, the one-page order to sell Upp came with few details: simply, that the secretary of state considered a national security risk to arise from its ownership. One lesson, say practitioners, from the new system’s first year is that you shouldn’t expect to know what on earth is going on. 

The National Security Unit, focused on 17 “high risk” sectors, has succeeded in clearing straightforward cases quickly, helped by an automated system. But predicting which deals might draw further scrutiny or why is largely impossible, as is tracking their progress. “Cfius is a black box,” says one lawyer of the equivalent regime in the US. “You can’t appeal. You don’t get many insights. But it is a more transparent process than the UK and that’s saying something.”

Wading through the other deals approved by the UK this year but with remedies imposed throws up other lessons.

First, it is not all about Chinese buyers (or even about UK targets). Cases prompting government action included buyers from Abu Dhabi, from the US and even from the UK itself. The purchase of Roman Abramovich-backed telecoms company Truphone by a German entrepreneur was allowed but with a requirement for a government-approved security chief and security auditor. One case involved one Chinese company buying another in the aerospace industry: the UK stepped in to demand specific security measures at a domestic subsidiary and board changes including a government observer.

Second, any deal can provide an opening. British private equity group Epiris was hit with remedies when buying a UK-based radio communications group from a Chinese owner, Hytera Communications. Sounds like a win for national security. But the sensitivity of the business, whose products are used by the emergency services, meant the government wanted commitments around UK capabilities for those devices regardless, and on protecting information and technology. 

Third, remedies can be many and various. “The range of types of interventions is more diverse than one might have thought,” says Stephen Whitfield, partner at Travers Smith. In two deals related to the electricity grid, the government seems to want a say in offtake, or sales, arrangements — a move that takes it into the realm of commercial counterparties.

And (fourth) they aren’t necessarily about national security. The acquisition of satellite communications group Inmarsat by ViaSat, a US buyer, was approved subject to conditions around strategic capabilities: those included commitments to expand jobs, increase UK research and development spending and use the country’s supply chain. 

When embarking on a transaction, companies will have to consider “what range of remedies they would be willing to accept,” says Whitfield. “These types of [economic] commitments have a much more direct link to the valuation of the target than continuity of supply or informational remedies.”

It was entirely predictable that this regime would be used to extract concessions that have as much to do with industrial strategy as national security (despite government protestations to the contrary). Indeed, in cases like Newport Wafer, a clearer and more consistent industrial policy would have helped manage the two sets of concerns. 

But the full breadth of powers under the act are being used, even in a year that was — at best — a modest one for dealmaking. The number of government interventions is well ahead of its own expectations for the legislation. The volume of interventions is running at about half the number of mitigation measures made by Cfius last year in the US, an economy four times the size of Britain’s. 

The government recently rejected streamlining the process, a fast track for certain types of deals. As the M&A market picks up, buyers will find themselves facing an interesting new challenge.

helen.thomas@ft.com
@helentbiz