Investing in AI-powered sports tech businesses
What you need to know about UK reporting rules
Sports tech is not often associated with being a risk to national security, but UK legislation brought in this year aimed at controlling and monitoring who owns businesses in 'high risk' areas relating to national security could (however inadvertently) capture acquisitions and investments of AI-powered sports tech businesses. Below we provide a high-level overview of when these new rules could affect an acquisition/investment and what that means for any impacted deals.
Which deals are affected?
1
There has to be a link with the UK for the new rules to apply i.e. the target company:
- is a UK company;
- carries on activities in the UK; or
- supplies goods or services to the UK.
2
Share/voting control
If one of the % share/voting rights thresholds on the right is crossed, this would (taken together with the other factors discussed) engage the new mandatory reporting rules. Importantly, this could encompass even internal reorganisations.
Even if the % share/voting rights thresholds on the right are not met, the deal would still qualify for mandatory notification if the acquisition of voting rights enable the acquirer to secure or prevent the passage of any class of resolution governing the affairs of the entity (and that includes any existing voting rights of the acquirer).
3
Relevant sector
The target company needs to operate in one of 17 specified sectors.
The vast majority of the sectors have little or no relevance to sports tech (e.g. civil nuclear) but, critically, the specified sectors include the use of artificial intelligence (AI).
If the target fulfils the following questions, then it falls within the AI sector:
- Does the target carry on research into, or develop or produce goods, software or technology that use AI?
- Is the AI work of the target used for one of the following applications: (i) identification or tracking, (ii) advanced robotics or (iii) (less likely for sports tech) cyber security?
Examples of identification & tracking relevant to sports tech businesses
- audio and speech recognition.
- gait analysis.
- image classification.
- object detection and object segmentation.
- surveillance (human and object).
- activities captured in ‘real time’ (i.e. video analysis to track an individual moving).
Mike Herbert - Managing Associate
"Whilst the rules are still relatively new and untested, the wide definition of 'artificial intelligence' would likely capture a number of sports tech businesses using AI in their products, for example, those involved in human performance or ball tracking technologies."
What reporting is required?
For deals which meet the criteria outlined above, a 'mandatory notification form' with various details of the deal needs to be completed and submitted to the new Investment Security Unit (ISU) (part of the UK Government's Department of Business, Energy and Industrial Strategy (BEIS)).
There is also a voluntary notification regime included in the legislation which incorporates a wider category of transactions (including transactions involving the acquisition of assets).
Standstill period
The deal should not be completed until approval is granted by the ISU, otherwise the transaction will be void (unless retrospective approval is granted - see right).
Therefore, this clearance will be included as a condition precedent to completion of the acquisition/investment.
What if the deal has already been completed?
You can apply for retrospective approval, but until that is granted the transaction would be considered void.
Statistics
January - March 2022
Number of transactions notified overall (including 1 retrospective application, which was ultimately approved)
Average number of working days for the Government to confirm acceptance following a notification
% of transactions dealt with by the Government within the statutory 30 working day period for review
% of transactions rejected, but mostly for administrative / timing reasons e.g. only submitting one notification for multiple qualifying acquisitions; not including sufficient information on the transaction; submitting a notification after the transaction, when it therefore should have been a retrospective application)
Number of transactions called in for further review (mostly military and dual use, defence, critical suppliers to government, data infrastructure and critical suppliers to emergency services)
Number of artificial intelligence transactions called in for further review
Sanctions for non-compliance
Financial sanctions
Percentage of worldwide turnover
OR
(whichever is higher)
Personal sanctions
- Up to 5 years' imprisonment.
- Disqualification as a company director for up to 15 years.
Mike Herbert - Managing Associate
"Ultimately, we consider it unlikely that any sports tech deal would be blocked for national security reasons under this new regime. However, given the severity of the sanctions, investors should ensure that pre-authorisation is considered and built into deal timetables."
Disclaimer
This update should not be treated as legal advice and only provides general information on the issues discussed.
