UK National Security and Investment Act: remedies clear the path in telecoms deal

The UK Government has repeatedly emphasised its aim to remain "proportionate and well-targeted" and as "pro-business and pro-investment as possible" through its operation of the National Security and Investment Act (NSIA) regime.

Now, nearly 2 and a half years into the NSIA regime (and with 5 deal prohibitions and 18 remedies cases under the UK Government's belt) what more can we say about the UK's willingness to solve national security risks via remedies packages, even where politically sensitive states are involved?

The recent example of the proposed merger between Vodafone's UK business (Vodafone Limited) and Hong Kong-based mobile network operator 'Three' (Hutchison 3G UK Holdings Limited) can in some respects be seen as confirmation of a "pro-investment" approach. It signals the UK's willingness to accept remedies in a sector falling within the UK's 'Critical National Infrastructure' (in this case, telecoms and telecoms infrastructure) and in a case involving a politically sensitive origin of investor. The outcome has been keenly awaited given the vigorous debate generated around the stated benefits of the deal (in terms of advanced roll-out of a 5G network) balanced against the perceived national security risks of Hong Kong-based Hutchison as a party.

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NSIA interventions to date

Since the NSIA came into force back in January 2022, the UK Government has readily taken action in deals where UK national security concerns arise. It has prohibited 5 transactions involving acquirers based in politically sensitive states (thus far, China and Russia) and sectors that are key to the UK’s national security.

To date, 4 of the 5 prohibitions have related to acquirers with links to China and deals in the defence and semiconductor (within the 'advanced materials' sector) space. The final prohibition covered an acquired business in the telecommunications sector involving sanctioned Russian individuals.

However, we have seen several examples of the UK Government demonstrating a pragmatic stance when considering the appropriateness of remedies packages even where politically sensitive states and sectors are involved.

In relation to investors with Chinese links, we have seen 5 clearances subject to remedies in the energy and aerospace sectors (including in cases involving state ownership of the investor – a factor that is not present in the latest Vodafone UK/Hutchison example). A broad range of remedies have been imposed, typically including restrictions on the sharing of information and the maintenance of strategic capabilities in the UK.

In terms of telecoms specifically, the latest Vodafone UK/Hutchison decision has been keenly awaited given the remedies outcomes to date have involved investors based in Europe and, most recently, the UAE.

Back in January 2024, the UK Government approved a minority stake held in Vodafone UK by Abu Dhabi-based 'e&', subject to conditions to mitigate the national security risks. In addition to signalling a UK willingness towards remedies in the telecoms sphere, this case is an interesting example of the fact that even minority investments can give rise to concerns under the NSIA.

Vodafone UK/Hutchison – Remedies accepted (again) in the telecommunications sphere

In its final order of 9 May 2024, the UK Government approved the proposed merger between Vodafone's UK business (Vodafone Limited) and Hong Kong-based mobile network operator 'Three' (Hutchison 3G UK Holdings Limited) under the NSIA, subject to conditions.

What is the national security risk at play?

The Secretary of State described the risks of the merger as two-fold.

First, relating to Vodafone’s role as a strategic supplier of services to many parts of the UK Government. Although not specifically mentioned in the final order, it is public knowledge that Vodafone UK holds government contracts for the Ministry of Justice, Ministry of Defence and the NHS 111 helpline.
Second, relating to the security of UK networks and data, including cyber, personnel and physical security, resulting from the process of merging two large, complex organisations and their respective staffing, policies, processes and networks. Vodafone serves over 18 million users in the UK. Parliamentary debates have expressed concern over the merger leading to an expansion of Hutchison's access to UK telecoms users and data (Three currently has around 10 million UK users).

In approving the deal, the UK Government required certain conditions designed to mitigate these national security risks.

        The parties must:
    
Establish a National Security Committee within the merged entity to oversee sensitive work that Vodafone and the merged entity undertake which has an impact on, or is in respect of, the national security of the UK. This committee will be required to provide regular updates and information to UK Government.

Establish a Technical Group within the National Security Committee which will monitor a specified list of topics relating to cyber, physical and personnel security. Again, regular updates and information to the UK Government will be required.

Ensure that the merged entity's network migration planning is subject to review by an external, Government-approved auditor.

Put in place specified arrangements for the governance of the merged entity.

In line with Government practice, scant detail on the precise requirements is given in the final order. However, the broad scope of the remedies is in line with those expected: indeed, these types of requirements have been seen in other remedies cases. In the telecoms sphere, the UK Government approved TP Global's acquisition of mobile communications provider Truphone Limited in December 2022 subject to conditions requiring the appointment of a Government-approved auditor and security officer. Similarly, the approval of e&'s minority stake in Vodafone UK was subject to the appointment of a National Security Committee.

So what does this all mean for deal parties and their advisers?

An indicator of future approach?

This case is an important example of the Secretary of State demonstrating willingness to engage with remedies in a politically challenging case. Whilst members of the UK Parliament have expressed concern, during debate, over the Chinese origin of the Hutchison group and the potential risks of access to sensitive UK telecoms infrastructure, user data and critical government contracts, ultimately the UK Government has reached a position which enables the deal to proceed (from an NSIA stance) – the transaction remains under review by the UK Competition and Markets Authority.

Whilst deal blocks under the NSIA have been (relatively) rare and, to date, have involved sectors closely linked to defence or critical semiconductor technology, there is an unanswered question as to how many additional deals have not progressed beyond the board room and/or been abandoned in the face of scrutiny by the UK Government and potential prohibition. It is therefore encouraging to see that there is scope for remedies in politically challenging cases such as this.

Perhaps of relevance to the UK Government's appetite to work with remedies in this case, in terms of a 'counterfactual', the Hutchison group is already present in the UK mobile telecoms sector (through its wholly owned network, Three). The immediate result of the deal will be a 49/51% split (in favour of Vodafone). This is likely to have featured in the UK Government's overall assessment, alongside the "pro-investment" plans of the merged entity for the UK's 5G capabilities.

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