This blog was kindly provided by Tom Morgan, a lawyer specialising in the research and innovation sector at CMS.
Under the National Security and Investment Act, which came into force earlier this year, the Government has two powers that particularly affect the research sector:
- The first is the power to intervene in ‘acquisition of entities’ – usually purchases of shares in companies, but also including where a certain level of ‘control’ is gained over ‘unincorporated associations’. Good luck unpicking that.
- The second is the power to intervene in ‘acquisition of assets’ which includes assignment or licensing of intellectual property.
Intervention means, among other things, blocking the transaction, imposing conditions on the transaction, unwinding a transaction, or demanding information. Any intervention has to be on the grounds of national security concerns – but the government doesn’t need to tell you what those concerns are, just that they exist.
In case it isn’t obvious, none of this intervention is nice (and to state something else that is obvious – no university intends to enter into transactions that put national security at risk). But some intervention is worse than others – and it is far, far worse for a deal that was signed four years ago to be unwound than it is for a deal that hasn’t yet been signed to be blocked before it starts.
Mandatory Notification
Some transactions are subject to mandatory notification – you must tell the government about them (providing lots of detail) before they complete, so the government can assess the transaction and decide if it’s fine to go ahead, if the government wants to intervene in any way, or if the government needs more time to read all the paperwork.
Those transactions are fairly easy to deal with: does the transaction meet the mandatory notification criteria? If yes, then you should probably notify. (There is nuance here that I’m ignoring).
Voluntary Notification
But what about transactions that aren’t subject to mandatory notification? The government has the power to intervene for up to five years, creating a significant amount of uncertainty over commercial transactions. To gain certainty, the parties can make a voluntary notification – If the government chooses not to intervene on the basis of a voluntary notification, they lose the right to intervene later.
Intellectual property transactions are not subject to the mandatory notification regime, so it is always a choice whether to make a voluntary notification or not. Here’s where it gets interesting.
When to make a voluntary notification?
Imagine a world where you work in the tech transfer office of a research-intensive university active in sensitive technology areas.
Let’s assume:
- You believe none of your deals are a threat to national security – or you wouldn’t pursue them.
- You view the government as being overly cautious – preferring to block a reasonable deal than run the risk of missing a deal that later turns out to be harmful.
A genie appears and tells you that, if you make zero voluntary notifications over the next five years, the government will still find out about, and unwind, five of your transactions. ‘But wait!’ you cry out, ‘which transactions do you mean?’. But it’s too late. The genie has gone.
Having a deal unwound is harmful commercially and reputationally, so you stay awake at night wondering how to avoid this pain.
In this situation, the perfect number of voluntary notifications to make over the next five years is no more and no less than five – if you correctly guess the transactions that would be unwound before they are unwound, you can voluntarily notify the government about them, and have confirmation prior to closing the transaction. This isn’t ideal (the parties will have expended energy in negotiation, and have nothing to show for it), but it is far better than having the transaction unwound four years after signing.
Alas, none of us are perfect, so it’s very unlikely you’ll be able to identify the right five transactions. There will be many other transactions of similar risk profiles (at least, to you – remember, the government is understandably reluctant to disclose the criteria they use to determine whether something is a concern to national security). So, you make ten voluntary notifications.
But, wait! In this parallel timeline, the government blocks seven of your transactions! It turns out not only have you identified the five the government would have unwound, you also told them about two that, had you not notified them, they would not have known about (and therefore never intervened). By your actions, you’ve ended up in a worse situation overall, in terms of deals, than if you made zero notifications.
Both the government and universities are working with imperfect information. The government isn’t really aware of all the many, many intellectual property (IP) licensing deals that exist (most of which it will never know about), and universities aren’t aware of specific government concerns in relation to national security.
What to do? Universities are in a tough place now, and it’s likely most are still working out where their risk profile sits along the following options:
- make zero notifications, on the assumption this will lead to the fewest transactions being blocked, but accepting the risk of transactions being unwound and the pain that goes along with that;
- over-notify to avoid the likelihood of transactions later being unwound, but understanding this means you will likely encourage more government intervention overall and fewer deals; or
- only notify transactions that have significant media attention on the assumption that the government will hear about these transactions and may block them later.
None of this is theoretical, and even voluntary notification can have worse-than-intended consequences. The government has just made its first use of powers to block a tech transfer deal which has garnered media attention for the higher education institution in question that it likely would rather not have. It’s also left picking up the pieces of a deal that likely took significant energy but was blocked by what could easily have been dismissed as a tick box exercise.
Universities strive to comply with the law, and they certainly seek to avoid any suggestion their activities could harm national security. At the same time, there is increasing pressure from government and research funders to commercialise the results of their research. Creating impact through technology transfer is a key public benefit.
There are no right answers when it comes to voluntary notification: doing the right thing is a balance of probabilities, conflicting duties, and any decision can only be made on the basis of imperfect information. Universities will need to consider deeply, seriously and at senior levels how best to decide the right approach for their institution.