The National Security & Investment Act 2021 (NSIA) obliges UK universities for the first time to consider risks to national security when they transfer ownership of spin-out companies, intellectual property (widely defined to include items that are not legally protected), land, or moveable property such as machinery. Although it will become fully operational only on 4 January 2022, transactions occurring between now and then can be reviewed (“called in”) by the regulator, the Investment Security Unit of the Department for Business, Energy & Industrial Strategy (BEIS).
The NSIA sits alongside the export control rules which universities have had to administer with regards to sales of IP to foreign persons for many years. But selling equity in spin-outs is not subject to export control, and the NSIA applies to sales to British persons as well as foreign. The acquisition of a sensitive business entity or asset can become subject to review under the NSIA regime irrespective of its turnover or size; there is no minimum threshold.
Although the term “national security” is undefined, BEIS has listed 17 sensitive areas of the economy, such as advanced materials, robotics, quantum technologies, artificial intelligence and synthetic biology, many of which are researched intensely by universities. These areas are set out in detailed draft regulations here. If a university transfers a business entity or an asset involved in one of these areas, it can expect the Investment Security Unit to consider initiating a national security review. BEIS has the power to modify deals or unwind completed transactions and, within limits, can act retrospectively. The real-world consequences of BEIS exercising its mitigation powers have been only thinly sketched out.
From 4 January 2022, BEIS will become apprised of the upcoming transfer of a business entity involved in any of the 17 areas from a mandatory advance notification by the acquirer. As for transfers of IP or other assets touching these 17 areas, no advance notification will be required. For them, BEIS will presumably rely on hearing from the Export Control Joint Unit about applications made for exports; its receipt of voluntary notifications; or publicity.
While universities selling spin-outs will not be responsible for notifying BEIS, they will need to comply with any requests by BEIS for information and also with any remedial orders that BEIS subsequently issues. Handling this legislation is primarily a matter of compliance for universities, and amongst all the detail it will be helpful for them to concentrate on its “trigger events”: a transfer of control of an entity or an asset which touches on one of the 17 sensitive areas. “Control” can be transferred easily, including by non-exclusive license in the case of IP. BEIS has provided guidance specifically to universities on 20 July 2021 and is expected to issue more guidance before 4 January 2022.
BEIS has the power to modify deals or unwind completed transactions and, within limits, can act retrospectively
Universities will be relieved to discover that the NSIA does not affect the attendance of foreign undergraduates. However, arrangements for PhD students which result in transferring ownership of IP to the funder, if the relevant IP touches any of the 17 sensitive areas, will be subject to national security review.
The higher education team at VWV has prepared a list of ten steps which universities in all four nations (national security not being a devolved item) should consider taking now.
1 Identify which professional services team members may need to be updated about the NSIA eg, (i) research managers; (ii) legal (research contracts, spin-out teams, and IP protection); (iii) technology transfer office; (iv) research finance teams; (v) pro vice-chancellors for research; (vi) human resources (as to any externally funded academic appointments in the 17 sensitive areas); and (vii) development teams (donations in the form of grants or chair sponsorships).
2 Become broadly familiar with the 17 sensitive areas of the economy listed by BEIS and identify and educate research teams working in these fields.
3 Add “risks to national security” as a filter in the IP policy.
4 Ensure that relevant research managers are aware of their different obligations under the export control legislation and the NSIA.
a. Exemptions from export controls relied upon by universities will not be available under NSIA.
b. Export controls do not apply to selling equity in spin-outs.
c. NSIA does not require determining the nationality of the acquirer or whether the asset will leave the UK.
5 Establish processes for research managers or research teams to flag any ongoing or future research collaborations or contracts which touch on any of the 17 sensitive areas and involve external parties obtaining rights to research.
6 Review any spin-out transactions that are in train to determine whether they involve any of the 17 sensitive areas.
a. If any do, and will complete before 4 January 2022, consider notifying the Investment Security Unit informally to avoid its subsequent review.
b. If any do, and will complete after 3 January 2022, ensure that allocation of responsibility to the acquirer of notifying Investment Security Unit pre-completion is included in the contract. Standard contractual terms exist.
7 Review any transfers of IP or other assets that are in train to determine whether they involve any of the 17 areas (as well as requiring licensing by the Export Control Joint Unit). If any transfer obviously implicates the target of the NSIA, such as, eg, licensing advanced material IP for lithium substitutes to a Chinese company, then consider notifying the Investment Security Unit informally to avoid its subsequent review.
8 Establish record-keeping process for logging all future transfers of assets or businesses that involve any of the 17 sensitive areas, or which are closely linked thereto. This will enable the university to provide information promptly to BEIS if the transfer is called in.
9 Commence reviewing PhD arrangements which obviously fall within the 17 sensitive areas and that are funded by an external party, to flag any in which the funder will obtain rights to IP.
10 Ensure that the policy for receiving donations in the form of grants or chairs touching any of the 17 sensitive areas precludes licensing any ensuing IP to the donor.
Thomas Dick is a partner at leading education law firm VWV. Thomas can be contacted on 07968 559 217 or at firstname.lastname@example.org.
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