National security plans put tech and infra deals at risk

Whilst doing deals and raising finance for technology and infrastructure is arguably easier than it once was, new UK government plans have the potential to throw a spanner in the works.   

Proposals set out in the National Security and Investment consultation, appear to capture a very much wider range of businesses and assets; from communications and transport infrastructure, to manufacturers of simple household items. Deals caught include: acquisitions, disposals, private equity buy-outs, IPOs, restructuring deals and also start-up and follow on finance raising of both debt and equity.  Companies and their advisors will be expected to notify the Government ahead of any deal involving investment of more than £1m that is likely to lead to security concerns, allowing ministers to judge whether they should be “called in”. The consultation suggests that BEIS expects to receive c.200 notifications per year, c.100 of which will “called in” and up to 50 will subject to some form of intervention or remedy - up from just one last year. 

There are already strict export controls on military technology under the Export Control Act 2002. Section 58 of the Enterprise Act 2002 currently permits the Secretary of State for Business, Energy & Industrial Strategy to intervene on grounds of national security and financial stability. The Secretary of State for Digital, Culture, Media & Sport can intervene on grounds of media quality, plurality and standards. Also, under competition law, deals must not facilitate the control of more than 25% of supply. In June 2018 the turnover threshold for intervention in deals with companies producing military and so called “dual use” goods subject to export control, computer processing units and quantum technology was lowered from £70m to £1m. 

However, the scope of companies and infrastructure regarded as essential to National Security, as set out in a 59 page annex to the 122 page draft regulation implies that a call in might be triggered by a deal involving both a very wide range of companies and potential acquirors. The policy statement includes so called “non-exhaustive lists” and sets out “core areas” identified as being essential for the maintenance of national security. 

The following advanced technologies fall within the proposed “core areas”: advanced materials and manufacturing science; artificial intelligence and machine learning; autonomous robotic systems; computing hardware; cryptographic technology; nanotechnologies; networking and data communication; quantum technology; and synthetic biology. In infrastructure the list includes: civil nuclear; communications; defence; energy; and transport. In other words, most new technologies currently attracting significant investment as well as a large chunk of the UK’s infrastructure. The new regime is also very likely to affect – one way or another – precisely the emerging technologies targeted by the government’s new Industrial Strategy Challenge Fund. 

There’s all also a couple of catch-all categories, comprising “critical direct suppliers to the Government and emergency services sectors” and “military or dual-use technologies”. The proposals also suggest that acquisitions and investment by organisations based in certain nationalities will more likely trigger a block and that it will take up to 45 days to get a decision of any deal “called in”. 

Widely drafted legislation, a protracted formal approval process, potentially serious civil and criminal sanctions for a breach, coupled with uncertainty in the investment and advisory community, are all the ingredients for stagnation. Informal and efficient pre-consultation of the appointed regulator would be one proven mechanism for alleviating this new potential problem for tech companies. Many of the companies likely to be caught by these changes, or concerned that they might be, are already dealing with inherently risky and potentially unproven, if not actually secret technologies. They also operate in markets not immune from international competition. If the underlying objective is not simply protectionist, perhaps the fundamental question here is whether all this is really necessary? Just how difficult would it be for the UK develop these goods or services in the event of crisis or war? 

These proposals will more likely than serve to limit both initial and follow on investment in core technologies, such as AI and in those companies seeking to develop them. Attracting overseas backing, for example from the US, as a route to providing a return, or exit, for investors might potentially be closed off. This in turn represents additional uncertainty and hence risk for investors. 

Perhaps not co-incidentally the British Business Bank has recently announced a new wholesale fund - The National Security Strategic Investment Fund (NSSIF). But, not only would companies have to meet the investment criteria of the fund managers appointed by the BBB to invest that money, they’d also have to match the strict requirements as to the overarching purpose of the NSSIF. It is not impossible to imagine a position where a company is refused clearance for a deal on the new, broadly drafted national security grounds, but then also fails to impress the appointed fund managers and/or doesn’t match the NSSIF criteria. There is a real risk here of creating a captive, government-backed investment market for a broad spectrum of technology companies. Others may be left in no man’s land following referral or refusal where they can neither attract follow on investment, or government backed funding. 

We intend to seek an early meeting with BEIS to set our concerns and in any event will be responding to the formal consultation process, which closes on 16 October. If you have strong views on this and would like contribute to our response, do please get in touch with me or Katerina Joannou at