Clifford Chance

In a recent trend, the UK Government has issued three final orders under the National Security and Investment Act 2021 concerning the defence sector, imposing obligations on the parties to keep certain defence capabilities in the UK.

Background

Under the National Security and Investment Act 2021 ("NSIA"), certain deals involving 17 sensitive sectors must be notified to the UK Government and receive clearance before closing.

Most NSIA filings are cleared in a simple 30-working day 'Phase 1' review. The Government can, however, 'call in' certain transactions for a detailed 'Phase 2' review. At the end of Phase 2, the Government can either clear a transaction, or issue a 'final order', which imposes conditions on the parties or blocks the deal.

Defence is a sensitive sector, and targets which are either direct Government contractors or in a chain of sub-contractors can be caught. Several other designated sectors may also be relevant to the UK's defence and national security interests, including artificial intelligence (and specific uses of AI, such as cybersecurity), critical suppliers to the UK Government, and military and dual-use items.

In three deals over the last year, the UK Government has issued final orders on defence deals imposing requirements that certain of the target's defence capabilities remain in the UK, often referred to as sovereignty requirements.

Exosens UK Limited / Centronic Limited

On 25 July 2024, the Government imposed a final order which conditionally cleared Exosens UK Limited's ("Exosens") acquisition of Centronic Limited ("Centronic").

Exosens is active in the development, manufacture, and sale of high-end electro-optics technologies in the field of amplification, detection, and imaging, and is ultimately based in France. Its end customers are active in areas such as defence and surveillance, life sciences, and nuclear energy. Centronic has a broad range of capabilities in production, manufacturing, and testing across a variety of sectors, with applications including radiation monitors, x-ray imaging systems, and aerospace and defence instrumentations. It supplies the nuclear and defence industries, as well as aerospace and oil & gas customers.

The only condition imposed on the parties was for Centronic's site and capability pertaining to current and future UK defence contracts to remain in the UK. The order noted the risk to national security and the UK's defence capabilities were such activities to move abroad.

ESCO Maritime Solutions Limited / Ultra PMES Limited

On 28 February 2025, the Government imposed a final order conditionally clearing ESCO Maritime Solutions Limited's ("ESCO") acquisition of Ultra PMES Limited ("Ultra").

ESCO specialises in advanced solutions for naval defence, primarily serving the US and UK naval defence markets, and is ultimately based in the US. Ultra also specialises in advanced solutions for naval defence, including the provision of high-integrity power solutions for naval platforms, and magnetic signature management solutions and services. Their systems are installed on the navies of several countries, including the UK's Royal Navy.

The conditions for clearance imposed on the parties were:

1. To carry out certain work related to the UK's defence programmes in the UK;
2. To implement an International Traffic in Arms Regulations Internal Control Plan approved by the UK Government;
3. To meet corporate governance requirements, including security clearance for members of the board and the appointment of a Government non-executive director and chief security officer;
4. To establish a security sub-committee responsible for issues related to UK national security; and
5. If required by the Government at a later stage under certain circumstances, to sell and transfer all relevant capabilities in support of the UK's defence programme and platforms.

The final order noted that the conditions mitigated the risk that Ultra's capabilities would be reduced or moved out of the UK, such that Ultra could no longer supply the UK Ministry of Defence. According to the Government, the conditions also addressed the risk of classified and/or sensitive information being accessed by non-authorised individuals, including non-UK nationals.

Walsin Lihwa Europe S.à r.l. / Advanced Manufacturing (Sheffield) Limited

On 6 March 2025, the Government imposed a final order conditionally clearing Walsin Lihwa Europe S.à r.l.'s ("Walsin") acquisition of 38.8% of the shares in Advanced Manufacturing (Sheffield) Limited ("AML").

Walsin is a Luxembourg-based supplier of advanced materials and manufacturing solutions, with its parent company based in Taiwan. AML specialises in high-performance machining, and has clients in the aerospace, defence, energy and nuclear sectors, and there appears to be some supply relationship between AML and the UK Government in the defence sector.

The conditions for clearance on the parties were:

1. To meet certain operational requirements, including restrictions on the location of AML's precision engineering capabilities and a requirement to retain certain existing operational activity in the UK;
2. To employ a chief security officer to oversee compliance with the conditions;
3. To meet requirements relating to IT equipment, data storage, access and handling; and
4. To uphold certain terms of employment concerning confidential information and intellectual property rights.

The final order notes that the conditions will mitigate risks relating to the security of the UK's "know-how and intellectual property relating to the precision engineering of gas turbine engine components, access to which could lead to an uplift in adversaries' capabilities". It also notes that the risk of an interruption to the continuity of the supply of precision-machining capabilities to UK defence programmes has been addressed, implying that this was an area of activity for the target company.

Comment

It is noteworthy in itself that of the first four final orders issued in 2025, two involved deals with a defence sector nexus. This points to the heightened M&A activity in this space, and it is perhaps also emblematic of a renewed interest by the UK Government in calling-in defence transactions for a detailed Phase 2 review.

The commonalities between the conditions imposed in these three transactions is that the Government is using final orders to secure its own long-term supply and defence capabilities, imposing requirements to carry out certain defence works in the UK. This is consistent with the wider geo-political trends towards defence sovereignty and a greater scepticism towards reliance on traditional allies.

The final orders imposed in 2025 also imposed corporate governance requirements on the parties to appoint a chief security officer. The obligations on ESCO also went further, with an obligation to appoint a Government non-executive director and to allow the Government, under certain circumstances, to sell and transfer all relevant capabilities in support of the UK's defence programme and platforms. Moreover, the ESCO conditions imply that certain works will only be able to be carried out by UK nationals. Exosens / Centronic and ESCO / Ultra also present examples of Government interventions in transactions where the ultimate acquirer is based in a jurisdiction to which the UK is allied. This is consistent with the pattern identified in the NSIA's 2023-24 Annual Report, which noted that of the final orders issued in that reporting period, two were associated with the UK and two with the USA. Acquirers associated with Canada, France, and the UAE each accounted for one final order.

Therefore, investors should continue to take note that their defence deals could be cleared only with conditions, despite being trusted defence partners to the UK. The conditions that could be imposed may also impact on their business plans. Investors should therefore ensure that their scenario planning covers the possibility of UK defence-sensitive activities having to be continued, for those activities to be maintained in the UK, for sufficiently skilled UK nationals to be employed, and for governance and information-ringfencing measures to be implemented.