The new National Security and Investment (NSI) Act 2021 came into force on 4 January 2022, and will bring crucial M&A activity concerning national security under scrutiny in the UK. The Act captures 17 sectors, many of which bring the technology sector within the realm of the legislation. Some of the sectors that capture technology transactions include advanced robotics, artificial intelligence, computing hardware, cryptographic authentication, data infrastructure, quantum technologies, and satellite and space technologies.
Background to the NSI
Before the NSI, some tech-related transactions were already subject to a voluntary regime under the Enterprise Act 2002. Under the Enterprise Act, the Secretary of State (SoS) has the discretion to issue an intervention notice based on one or more statutory public interests. Following an intervention, a transaction may be prohibited or a remedy, such as an obligation to keep production facilities in the UK, may be imposed.
The aim of the new National Security and Investment Act is to offer protection against opportunistic acquisitions that would concern national security. It allows the government to scrutinize and intervene in certain acquisitions made by anyone, including businesses and investors, that could harm the UK’s national security. The new Act enforces a mandatory notification system whereby you are legally required to inform the government about acquisitions of certain entities in the 17 sensitive sectors. Failing to comply with a mandatory notification will render the transaction legally void and penalties may be imposed.
M&A activity in the tech sector
However, the broad catchment of transactions covering 17 sectors raises concerns that it may adversely affect M&A activity. In particular, the impact of the Act on tech will be key as M&A activity in the sector has grown significantly over the last 12–24 months. According to GlobalData, global M&A activity in the TMT sector grew by 22% from $1,039 billion in 2020 to $1,270 billion in 2021. This can be attributed to increased competition in the technology sector as the Covid-19 pandemic accelerated digitalization globally. M&A activity has been a common solution to addressing competition.
While creating additional hurdles for overseas transactions risks discouraging foreign investment, the legislation aims to address key concerns regarding tech transactions: tech falling into the hands of a hostile state and the protection of sensitive information generated by technologies. The Secretary of State will have the power to impose remedies such as restricted access to sensitive sites, confidential information, and intellectual property transfers. However, technology does not recognize jurisdictional borders and it will be difficult to effectively police these.
Impact of the NSI on semiconductor chips
In the UK, many chip-related M&A transactions will be scrutinized by the government for national security risks under the new NSI Act. The UK identifies semiconductor products as key to its national security, as seen through the government’s scrutiny of the Nvidia-Arm deal, and the powers of the new regime will be used to inspect takeovers that raise competition concerns.
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At a time when there is a global shortage of chips and many countries are aiming to reduce reliance on foreign suppliers and strengthen their own competitive position in manufacturing chips, the NSI will play a key role in scrutinizing anti-competitive global transactions. The impact of the new regime on tech transactions will be key and businesses and investors will need to consider the obligations of the Act at the outset of all M&A transactions that fall within its scope.