Background

The UK Government has approved a minority stake held in Vodafone Group Plc (Vodafone UK) by Emirates Telecommunications Group Co. PJSC (e&) subject to conditions to mitigate the national security risks. The decision is an interesting example of the fact that even minority investments can give rise to concerns under the UK's National Security and Investment Act 2001 (NSI Act), and that sectors falling within the UK's 'Critical National Infrastructure' (including telecoms and telecoms infrastructure) are likely to remain of particular sensitivity for the UK Government in terms of national security.

Abu Dhabi-based e& began building its stake in Vodafone UK back in May 2022. A year later, in May 2023, e& increased its shareholding to 14.6% and the parties announced that they had entered into a "Relationship Agreement". That agreement served to establish e& as a "cornerstone shareholder" of Vodafone UK and to enable collaboration across a broad range of "growth areas". By way of example, Vodafone's announcement refers to exploring joint offerings of "digital services and solutions to multi-national customers and public sector organisations".

What is the national security risk at play?

e& is 60% owned by the UAE Government. Under the terms of the Relationship Agreement, the group CEO of e& (previously CEO of Vodafone Egypt) will join the Vodafone UK board as a non-executive director for as long as the 14.6% shareholding is maintained. e& would also have the ability to nominate a second non-executive director, independent of e&, if its shareholding were to increase to over 20%.

The UK Secretary of State's final order describes the national security risks as arising in relation to Vodafone UK's role in:

  • Supporting the UK Government's domestic and international initiatives in the telecommunications sector;

  • Contributing toward ensuring UK cyber security; and

  • Acting as a strategic supplier of services to many parts of the UK's central government, including to UK Government departments which provide services in support of national security.

As is standard practice under the UK's national security regime, the final order is brief and high level.

It is, however, public knowledge that Vodafone UK holds government contracts for the Ministry of Justice, Ministry of Defence and the NHS 111 helpline. A division of Vodafone UK (called Vodafone Business Security Enhanced) also works on the UK Government's cyber security strategy. As well as serving over 18 million mobile and fixed line customers in the UK, Vodafone holds strategic assets in the form of subsea telecommunications cables between the UK and US.

In order to minimise the national security risks arising from the investment, the UK Government's final order requires e& and Vodafone UK to:

  • Meet certain notification requirements in relation to any alteration to, or termination of, the terms of the Relationship Agreement;
  • Meet certain requirements relating to Vodafone UK's board composition, board committee membership, and board committee functions; and
  • Establish a "National Security Committee" to oversee sensitive work that Vodafone UK and its group perform which has an impact on or is in respect of the national security of the UK.

Relevance of the minority shareholding

e&'s shareholding in Vodafone UK is a minority one (and, given the Relationship Agreement does not envisage e&'s ownership stake reaching 25% or more, mandatory notification under the NSI Act was not engaged). However, the UK Government viewed the arrangement as a trigger event under the voluntary regime. This is because the arrangements were found to amount to the acquisition by e& of "material influence" over Vodafone UK's policy.

"Material influence" in an NSI Act context has the same meaning as under the UK's merger control case law. "Material influence" is considered to be a lower threshold than the "decisive influence" test under the EU's merger control rules. As a general rule, shareholdings of more than 25% will likely be viewed as giving rise to material influence, although shareholdings of as low as 10-15% (even with no accompanying board representation or other strategic rights) may also give rise to material influence in some cases.

Here, whilst the 14.6% stake may have been enough in itself to amount to "material influence", the Relationship Agreement also went further to provide inter alia for non-executive board representation.

What now?

The UK's final order permits the Vodafone UK/e& collaboration subject to the conditions described, according with the UK Government's generally pragmatic stance to date under the NSI Act regime.

However this case is a useful reminder that the NSI Act regime is wider than the traditional M&A deal space. Minority investments (provided they amount to an acquisition of "material influence") can be caught and be subject to remedies in appropriate cases. This means that parties should carefully consider whether the rights acquired in any minority deal are enough to afford the acquiror with "material influence" over the target entity and whether the sector may attract national security interest such that a voluntary notification should be considered.

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