UK government intervenes to force sale of semiconductor company
Key points
The UK government has intervened to reverse the 2021 acquisition of a British semiconductor company by a Chinese entity.
By directly unwinding an acquisition, the ruling runs against the trend of rulings since January 2023 that have required organisational change and strengthened protective security from the entities involved.
This decision may reflect a concern that protective security measures would be insufficient to mitigate risk in this case.
We assess that any acquisition involving entities working in the semiconductor sector will be at elevated risk of government scrutiny for the foreseeable future.
The UK government has exercised powers provided under the National Security and Investment Act 2021 to force a company ultimately owned by a Chinese entity to sell its majority stake in a UK technology company.
The ruling was revealed in a final order published on 6 November by the UK government. That publication details how in December 2021 a company called FTDI Holding Limited gained control of Glasgow-based fabless semiconductor company FTDI, via the acquisition of more than 75% of the company’s shares.
FTDI Holding Limited - although a UK registered company - is in turn owned by Hong Kong registered Future Technology Devices Holdings Limited, and both of FTDI Holding Limited’s listed directors are identified as Chinese nationals.
The final order sets out the justification for the ruling, explaining how the decision will mitigate risks to national security. In this case, the order cites two issues:
The impact on the development in the UK of “semiconductor technology and associated intellectual property”
The impact on critical infrastructure which uses the company’s products.
Analysis of the final order
The decision runs against a trend in decisions made under the NSIA since January 2023. The chart below highlights the running count of NSIA final orders divided by those that have blocked or unwound acquisition entirely, versus those that have permitted acquisitions to go ahead provided that the entities involved introduce behavioural changes. As noted elsewhere, “[t]hese changes emphasise a holistic approach to protective security, with a focus on security governance, personnel security and vetting, and assurance functions.”
In this case, however, the decision requires the acquisition to be unwound through the sale by FTDI Holding Limited of 80.2% of FTDI, “within a specified period and by following a specified process.”
The decision to force the sale may reflect an assessment that changes in security processes and structures would have been insufficient to mitigate the perceived risks around the continuing ownership of FTDI by FTDI Holding Limited.
The timing of the decision is also interesting, coming almost three years after the triggering event. The final order does not provide a definitive indication of a more recent change that prompted the intervention.
As a fabless manufacturer, FTDI’s value proposition is centred entirely around its intellectual property and the expertise of its personnel. The potential for the transfer of intellectual property is likely to have played at least some role in the decision.
Implications of the decision
We assess with a high degree of confidence that M&A activity and investment in UK companies involved in any aspect of the semiconductor industry will come under elevated scrutiny under the NSIA for the foreseeable future.
This reflects broader geopolitical competition over this key technological enabler of strategic advantage - the tenor of which has become more uncertain following the US presidential election.
Organisations operating in this area that cannot demonstrate a mature approach to protective security will be at elevated risk of regulatory intervention, particularly around financial events but also thereafter.
Companies with foreign partners, or that are considering mergers and acquisitions with foreign companies, should be able to demonstrate information security management processes that address the flow of intellectual property across borders.
Companies engaged in research and development should also have well-developed processes in place to enable secure research and innovation, including processes for managing international collaboration.
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