Beijing: Since Britain passed a new law last year to protect investments and purchases in sensitive industries like defence and technology, dozens of companies—from a French billionaire to a Dutch semiconductor maker—have found themselves in the crosshairs.

In order to improve Britain's approach to national security reviews of foreign investments, the 2021 National Security Investment Act (NSIA) went into effect last January. The Act grants the government authority comparable to that of the Committee on Foreign Investment in the United States (CFIUS), enabling Westminster to obstruct foreign takeovers and revoke such agreements in the past.

It comes amid growing worries in the West about state-backed firms – specifically companies from China – gaining control over cutting-edge technology. It followed similar moves by the European Union (EU), Japan, and the US in recent years to strengthen their investment laws.

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Legal experts claim that the regulatory change in Britain has turned out to be much more extensive than some had initially thought, leading to hundreds of mandatory notifications for review and oversight of deals by domestic investors in Britain and businesses connected to traditional allies like France and the US.

In a white paper this month, Jones Day attorneys Mark Jones and Jason Beer stated that there has been a noticeable increase in state intervention in and review of business transactions in the United Kingdom, including for international transactions involving targets with limited activities there.

According to the Jones Day attorneys, the law does not only apply to transactions involving foreign entities or direct investments; filings for some licencing agreements, financing arrangements, or insolvency proceedings may also result in a mandatory review. They continued, "The NSIA regime is a comprehensive investment control regulation.

The legislation, which took effect on January 4, 2022, replaced the Enterprise Act's national security clauses and gave British officials greater authority to examine a variety of business dealings, such as minority investments, the acquisition of voting rights, and the purchase of assets, such as intellectual property.

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According to the regulations, acquirers in 17 sensitive economic sectors, such as advanced robotics, artificial intelligence, and data infrastructure, must inform the government about significant transactions so that it can be reviewed. Failure to do so could lead to legal action, civil fines, and the cancellation of the transaction up to five years later.

The government has only made data available for the first three months of 2022, and it is not anticipated to file its next update until later this year, so it is unclear exactly how many transactions were reviewed overall in the law's first year.

In the first three months following the law’s enactment last year, the British government received 222 notifications, with 17 called in for additional review, according to a government report last June. 

The government had previously estimated it could receive between 1,000 and 1,830 notifications annually.
 Since July, the government has issued 17 public decisions regarding its reviews, blocking five transactions and restricting information sharing or adding other caveats in another eight deals. 

Companies with links to China, Hong Kong and Russia have all seen deals blocked by the British government since the law took effect.
 The application of the law has been a broad one.

The deal by billionaire Patrick Drahi's Altice Group to increase its stake in BT Group, formerly known as British Telecom, from 12.1% to 18% was the subject of a so-called call-in notice from the government in May.

Drahi, who has dual citizenship with France, Israel, and Portugal, has amassed a telecommunications empire through debt-ridden acquisitions in France, Portugal, and the US.

In the end, Altice, which first acquired a stake in BT in 2021, was permitted to keep the greater interest in the telecom company, but the review raised concerns among lawyers and investors regarding the legal system's broad powers.

The move by Czech billionaire Daniel Kretinsky to increase his investment vehicle's stake in the publicly listed parent of Royal Mail, which runs the country's postal service, was also looked into by the government for reasons of national security, but no action was taken in October.

Nikki Blair and Wendy Saunders of the law firm Lewis Silkin recently stated in a client note that the regime "is not limited in scope to perceived 'hostile' states, as investors from the UK and US as well as China, Hong Kong, and UAE [United Arab Emirates] have been caught by the legislation."

For instance, the British government gave its approval in July to London private equity firm Epiris' purchase of Cambridge-based digital radio systems provider Sepura.

However, Epiris and Sepura were required to implement improved controls to protect sensitive data and technology, as well as guarantee British capabilities in repairing, servicing, and maintaining devices used by emergency services in Britain, as part of a final order in the matter.

Sepura claims to be the market leader in Britain, the Netherlands, and Germany and has more than 2 million devices in use across more than 100 nations. China Power International Holding's 90% purchase of the Hong Kong parent of XRE Alpha, a shell company with connections to the British electricity industry, was another transaction in which the British government intervened in December.

On December 5, the government imposed a number of restrictions, such as limitations on information sharing with China Power and a restriction on who could manage power sales.

Jones Day claimed in its white paper that investors are hesitant to proceed if there is even a remote possibility of an NSIA notification being triggered, making it more difficult for private equity funds and other investment managers to market and secure funding.

According to Jones and Beer of Jones Day, "In some instances, investors purchased less equity or voting rights than they otherwise would have had to ensure they fall below the mandatory 25% notification threshold."

The government must be notified upon direct or indirect acquisition of ownership stakes of more than 25%, more than 50%, or more than 75% interest or voting rights in any of the 17 sectors.

According to a British government spokesperson, "The National Security and Investment Act has strengthened the UK's ability to investigate and intervene in mergers, acquisitions, and other types of deals that could threaten our national security." Our system keeps the UK firmly open for business while protecting national security and remaining both proportionate and transparent.

The value of deals has dropped to its lowest level since 2019 and transaction volumes are declining among US, but it appears that the new rules have had an impact on deal activity in Britain.

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Following a surge in activity following the coronavirus pandemic in 2021, the total value of inbound deals in Britain decreased by 56% last year to US$147.1 billion, according to Refinitiv, the data provider owned by the London Stock Exchange Group.

According to Refinitiv, the value of deals dropped from US$3.3 billion to US$774.7 million, further reducing the volume of Chinese transactions. It was the slowest time since 2015 for Chinese acquirer deals in Britain, save for the peak of the Covid-19 pandemic in 2020. The law, which has been in effect for a year, was approved by parliament as Beijing and London's relations grew more tense.

In his first significant foreign policy speech in November, Rishi Sunak, who took office as prime minister in October, referred to China as a "systemic challenge" and declared that the "golden era" of cooperation between the two countries had come to an end. He urged Britain to "evolve" its approach to China in terms of foreign policy.

Members of Sunak's Conservative Party want him to go further in a new integrated review of defence and diplomatic strategy for 2021 and classify China as a "threat." Later this year, the refresh's results are anticipated to be made public.

Meanwhile, Britain wants to increase its influence in the Indo-Pacific region. Foreign Secretary James Cleverly stated last month that the nation needs to forge closer ties with historically non-aligned nations.

In this regard, Britain this month agreed to a new defence agreement with Japan and sought to strengthen its investment and security ties with Southeast Asia.

With the British government buying out a Chinese company's investment in a new nuclear project and banning Chinese-made security cameras from "sensitive" government sites, the rising tensions have also permeated the business world. In August, the British Parliament closed its TikTok account after MPs voiced their concerns.

The sharing of motion camera technology between the University of Manchester and a Beijing company, as well as a deal where a Hong Kong company would acquire a Bristol electronic design software maker, were all stopped by the British government since the start of last year.