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The UK’s new law to scrutinize deals on national security grounds is widely seen as a way to monitor Chinese investment and limit the country’s control over key UK assets.
it is. But almost a year after the operation, it is much more.
The government on Tuesday ordered that Upp, a broadband company, be sold by oligarch-backed LetterOne – the first deal in which a Chinese party is not blocked or unwound. Before that, a security law that took effect in January was used to thwart two small acquisitions by Chinese buyers of technology with potential military applications and to order the sale of Welsh chipmaker Newport’s wafer fab. 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, the secretary of state deemed a national security threat arising from its ownership. One lesson from the first year of the new system, practitioners say, is that you shouldn’t expect to know what on Earth is going on.
The National Security Unit, focused on 17 “high-risk” areas, has been able to quickly clear direct cases, aided by an automated system. But predicting which deals might draw more scrutiny or why is largely impossible, as is tracking their progress. “Cfius is a black box,” says one advocate of equivalent governance in the US. “You can’t appeal. You don’t get a lot of insight. But it’s a more transparent process than in the UK and that’s saying something.
Wading through other deals approved by the UK this year also teaches other lessons with the measures imposed.
First, it’s not all about Chinese buyers (or even UK targets). Cases prompting government action include buyers from Abu Dhabi, the US and the UK. The German entrepreneur’s purchase of Roman Abramovich-backed telecom company Truphone was approved but with the requirement of a government-approved security chief and security auditor. In one case a Chinese company bought another in the aerospace industry: the UK stepped in to demand specific safeguards to change the board, including a local subsidiary and a government watchdog.
Second, any deal can provide openings. British private equity group Epiris was hit with remedies when it bought the UK-based radio communications group from Chinese owner Hyterra Communications. Sounds like a win for national security. But the sensitivity of the business, whose products are used by the emergency services, means the government wants a commitment to those devices, regardless of the UK’s capabilities, and to protect information and technology.
Third, remedies can be many and varied. “The types of interventions are more diverse than one might think,” says Stephen Whitfield, partner at Travers Smith. In two deals involving the electricity grid, the government appears to want a say in the satellite, or sale, arrangement — a move that moves it into the realm of commercial counterparts.
and (fourth) they are not necessarily about national security. The US The acquisition of satellite communications group InmerSat by buyer ViaSat was approved subject to conditions around strategic capabilities: these included expanding jobs, increasing UK research and development spending and commitments to use the country’s supply chain.
Whitfield says that when starting a transaction, companies have to think about “what range of solutions they’re willing to accept,” “these kinds of [economic] Commitments have a more direct link to the evaluation of targets than continuity of supply or information measures.”
It was entirely predictable that this regime would be used to extract concessions that had as much to do with industrial strategy as with national security (despite government protests). Indeed, in cases like the Newport Wafer, a clearer and more coherent industrial policy would have helped manage the two sets of concerns.
But the full breadth of powers under the Act is being exercised, even in a year that has been – at best – modest for dealmaking. The number of government interventions far exceeds its own expectations for law. The scale of the intervention is half the number of mitigation measures implemented by Cfius last year in the US, which has an economy four times the size of Britain.
The government recently ruled out streamlining the process, which fast-tracks 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
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