On July 20, 2022, the Secretary of State for the Department for Business, Energy, and Industrial Strategy (BEIS) within the UK government published a final order blocking a proposed licensing arrangement between the University of Manchester and Beijing Infinite Vision Technology Company Ltd. (Beijing Infinite). This final order is the first time that the Secretary of State has halted a contemplated transaction under the National Security and Investment Act 2021 (the NSI Act). (Our previous alerts regarding the NSI Act can be found here and here.)

The University of Manchester and Beijing Infinite entered into a license agreement pursuant to which Beijing Infinite would use certain intellectual property related to vision sensing technology. The relevant technology is dual use nature (i.e., it is sold commercially but has potential military applications.

According to public reports, Beijing Infinite purportedly planned to develop, test and verify, manufacture, use, and sell the relevant technology in connection with children’s toys. Nevertheless, the Secretary of State blocked the transaction on national security grounds, concluding that the “the technology could be used to build defence or technological capabilities which may present national security risk to the United Kingdom.”

Given the limited public information available, it is difficult to draw many conclusions from the Secretary of State’s action. Nevertheless, the final order presents some interesting takeaways regarding BEIS’s approach to reviewing transactions under the NSI Act:

• The Licensing Arrangement Did Not Give Rise to a Mandatory Notification: The parties’ licensing arrangement constituted a trigger event for NSI Act purposes because Beijing Infinite would have gained control of a qualifying asset (i.e., the licensed technology). But the NSI Act only requires acquirers to submit mandatory notifications to BEIS for a subset of trigger events involving equity investments in qualifying entities. The University of Manchester apparently chose to submit a voluntary notification to BEIS regarding the proposed licensing arrangement. BEIS subsequently called-in the transaction for a comprehensive national security review before the Secretary of State issued a final order.
• The Secretary of State’s Final Order Was Surprising in Some Ways: The trigger events most likely to be scrutinized are equity investments in qualifying entities operating in high-risk sectors, which are subject to mandatory notification requirements pursuant to the NSI Act. It is therefore somewhat unexpected that the UK government first blocked a trigger event under the NSI Act in connection with a licensing arrangement that did not require either party to notify BEIS of the transaction. This final order thus suggests that for higher-risk investors (see the next bullet) acquiring companies with UK assets or licensing UK technology can present significant risk with respect to deal certainty, even if the transactions are not subject to mandatory filing requirements.
• The Secretary of State’s Final Order Was Expected in Other Ways: The Secretary of State’s final order is consistent with BEIS’s guidance and FDI trends in other Western countries. The parties’ contract involved technology that is linked to several of the high-risk sectors under the NSI Act, including advanced robotics and dual use items. BEIS has indicated that transactions involving these high-risk sectors are most likely to present significant national security risk. In addition, the Secretary of State’s decision to block a transaction involving a Chinese party is hardly a surprise. BEIS has taken the position that it does not subject investors to enhanced scrutiny simply because they are based in a particular country. However, in reality Western governments have closely reviewed covered transactions involving Chinese acquirers.
• BEIS Has Been Active This Summer: In addition to publishing this final order, BEIS announced that it had cleared the U.S. company Parker-Hannifin to acquire the UK aerospace company Meggitt, subject to various undertakings made by the parties. BEIS also published its first annual report on the NSI Act, Market Guidance notes, and updated guidance regarding the high-risk sectors specified in regulations to the NSI Act.