First Prohibition Order under U.K. NSI Act 2021 Targets Licence of IP Rights (2023)

In July 2022, the U.K. Government used its powers under the National Security and Investment Act 2021 (NSI Act), the U.K. version of the Committee on Foreign Investment in the United States, to block a transaction for the first time. What is surprising is that it would choose the grant of know-how licence rather than the acquisition of a company for its first prohibition decision (referred to as a “Final Order”).

On 17 August 2022, the U.K. Government proved its more interventionist credentials by passing another Final Order prohibiting the acquisition of an English company by a Hong Kong-based acquirer on the basis that the target company held intellectual property (IP) and know-how in certain dual-use technology.

In the current uncertain geopolitical and economic climate, these decisions signal the importance the U.K. Government attaches to the transfer of sensitive IP and technology, and why it is important to carefully review technology licences and asset acquisitions under the NSI Act.

University Vision-Sensing Technology Licence

This case involved the grant of a proposed licence of IP rights from the University of Manchester (University) to Beijing Infinite Vision Technology Company Ltd. (Beijing Infinite) in respect of the University’s SCAMP-5 and SCAMP-7 vision-sensing technology. The NSI Act does not require the mandatory notification of the acquisition of assets or technology licences. Mandatory notification is only required for the acquisition of certain trigger thresholds of equity investment in qualifying entities. However, the parties can decide to voluntarily send notification of the transaction. It is believed that the University decided to notify voluntarily, and the Government called in the transaction for a full national security review. On 20 July 2022, following its review of the transaction, the Secretary of State for the Department for Business, Energy, and Industrial Strategy (BEIS) published a Final Order blocking the proposed licensing arrangement.

Public details about the case are few, but according to public reports, the University and Beijing Infinite entered into the licence agreement under which Beijing Infinite would use certain IP related to vision-sensing technology to develop, test and verify, manufacture, use and sell the relevant technology in connection with children’s toys. However, BEIS took the view that the SCAMP-5 and SCAMP-7 vision-sensing technology was not only capable of being used for commercial applications, but could potentially also be used for military purposes. Therefore, they concluded that the technology could be used to build defence or technological capabilities which could pose a national security risk to the U.K. The licence agreement was therefore prohibited.

So, what lessons can be drawn from this case for future transactions?

IP Rights Subject to Review: Although IP licences are not subject to mandatory notification under the NSI Act, this case emphasises that their acquisition can hold similar national security risks as those attached to equity investments in qualifying entities. Therefore, parties should, in the case of all IP licences or assignments, review whether there are underlying national security risks which would make it prudent to notify. The Government has the power under the NSI Act to call in an IP licence or acquisition of an asset for up to five years from its grant or acquisition. So, this Final Order suggests that acquiring companies with U.K. assets or licensing U.K. technology can present significant risk with respect to legal/deal certainty.

Chinese Involvement in U.K. Higher Education Sector: There has been a large increase in the acquisition of U.K. technology by Chinese companies in recent years. This has been seen primarily through the acquisition of companies. However, there has been a growth in Chinese involvement and investment in academia. There have been concerns about technology transfer through this source, and this is what may have spurred on the University to make a voluntary notification. The NSI Act notification obligations apply equally to U.K. and foreign investors, but where the nationality of the investor or the licensee is from a country which could be interpreted as a potential hostile foreign actor, the acquisition risk is substantially enhanced, as in this case.

Was the Final Order A Surprise?The fact an IP licence was the subject of the first prohibition decision under the NSI Act caught most people by surprise. Mature consideration of the facts behind the case demonstrates that the issue of a Final Order in this case was likely to be expected. The Secretary of State’s Final Order is consistent with BEIS’s Guidance for the Higher Education and Research Intensive Sectors published in January 2022 (Guidance).

This also reflects the trends seen in foreign direct investment regimes in other European countries. It is also significant that the recipient of the technology was a Chinese party. The licence agreement in this case involved technology linked to several of the 17 high-risk sectors set out under the Annex to The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 including advanced robotics and dual-use items. Under the Guidance, the Government has indicated that transactions involving these high-risk sectors are most likely to present significant national security risk.

Acquisition of Pulsic Limited Prohibited

On 17 August, the U.K. Government passed another Final Order blocking Super Orange HK Holding Limited (Super Orange), a Hong Kong firm, from acquiring the entire share capital of a U.K. electronic design company Pulsic Limited (Pulsic) because of concerns over risks to national security. This move is the latest attempt to limit Chinese involvement in British businesses and technology.

Pulsic, which has offices in Bristol, Newcastle, Tokyo and San Jose, owns IP and know-how relating to the development of software used in the production of electronic design automation (EDA) products. This technology could be used to facilitate the building of cutting-edge integrated circuits which could be used in civilian or military applications.

It was the dual-use application of these tools which gave the Government concern. It feared that the EDA technology could be exploited to introduce features into the design, including automatically and/or without the knowledge of the user, that could be used to build defence or technological capabilities. The Secretary of State therefore considered that the acquisition of Pulsic by Super Orange could pose a risk to national security. The transaction was therefore prohibited.

How does the Pulsic order differ from the Beijing Infinite order, and what lessons can we draw from the Government’s latest blocking decision? There are many similarities between the Pulsic and Beijing Infinite cases. Both involve China/Hong Kong-based companies. They both relate to the acquisition of advanced technology which can be used potentially for defence or military applications

The difference in the Pulsic case was that it related to an equity investment rather than an IP licence. However, in both cases, the importance lay in the underlying capability of the technology owned or licensed and the potential defence or military applications.

The above cases demonstrate that the review of the acquisition of technology under the NSI Act is a priority for the U.K. Government. This scrutiny can take the shape of reviewing standalone IP licences or assignments, or could be in the context of an equity investment in a target company. These decisions heighten deal risk for those investors acquiring U.K. companies having technology assets or just licensing the technology itself.

The Beijing Infinite case demonstrates that, although not subject to mandatory notification, the Government will not hesitate to call in and prohibit the licensing or assignment of sensitive technology which poses a threat to national security.

Both the Pulsic and Beijing Infinite decisions also highlight that it is not only mainstream military/defence-based technology that it is covered by the NSI Act’s scrutiny. It can also extend to technology with commercial applications which may have a dual military use.

Therefore, parties acquiring an equity stake in a target owning IP rights or licensing technology independently are recommended to review these transactions carefully with particular focus on the underlying nature of the technology acquired or licensed and the uses to which it may be put. In the case of a corporate acquisition, the transaction may be subject to mandatory notification. But in cases which relate to the standalone licensing of IP rights (which do not fall within the NSI Act’s mandatory notification provisions), it may be prudent, like the University in this case, to make a precautionary voluntary notification.

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