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UK Government announces significant changes to the UK merger control regime to further protect national security interests

UK Government announces significant changes to the UK merger control regime to further protect national security interests

  • United Kingdom
  • Competition, EU and Trade
  • Mergers and acquisitions

27-03-2018

The UK Government confirmed on 15 March 2018 that following consultation it has decided to make significant changes to the UK’s voluntary merger control regime. The reforms will materially expand the UK Government’s ability to review and intervene in M&A transactions involving foreign investment on the basis of national security concerns[1].

M&A transactions involving the acquisition of companies which:

(a)   have turnover in the UK of £1 million or more and/or which have a share of supply of 25% of particular goods or services in the UK (or a significant part of the UK); and

(b)  are active in any one of:

  1. the development or production of items for military or dual-use, 
  2. the design and maintenance aspects of computing hardware; or
  3. the development and production of quantum technology,  

will fall within the scope of the UK’s voluntary merger control regime (“In Scope Transactions”).

Eversheds Sutherland responded to the Government’s consultation[2] to highlight concerns that, in practice, the reforms to the regime would materially increase the number of deals which may be scrutinised and would have a significant impact on many UK companies, particularly small and medium-sized enterprises. The Government’s final proposals partially address these issues, particularly by refining the definitions of some of the market sectors which will be affected by the changes. 

Nonetheless, the reforms remain potentially far reaching. As the UK Government acknowledges, some businesses may not know that they fall within the scope of the new regime (e.g. businesses which have not, to date, exported items but which produce or develop items caught by the new rules) whereas, for example, potential investors may not be sufficiently familiar with a company’s activities to know that it is caught by the new provisions.

The reforms will also materially expand the Competition and Markets Authority’s (“CMA”) jurisdiction to investigate In Scope Transactions for competition concerns.

The CMA is consulting[3] on guidance[4] (“CMA Guidance”) as to how it intends to apply the revised thresholds. It is helpful that the CMA has said that it does not expect the amendments to the regime to lead to a “material change” to the CMA’s assessment of mergers on competition grounds. However, the CMA acknowledges that the changes will expand its review powers and the Guidance explicitly leaves open the possibility that the CMA could investigate M&A transaction for competition concerns which it would not previously have had jurisdiction over.

An Order has been laid in draft in Parliament, amending the share of supply merger control threshold. It is proposed that a further Order will be laid to amend the turnover threshold; the exact timing for these Orders coming into effect has not yet been confirmed.

The Government also intends to bring forward longer-term reforms concerning how it scrutinises the national security implications of foreign investment (for example, to put in place a mandatory foreign investment regime).  The consultation on the longer-term reforms closed on 9 January 2018 and the Government is now considering the responses received; it will publish its proposals in due course.

Background to the reforms

On 15 March 2018, the Department for Business, Energy & Industrial Strategy (“DBEIS”) published the UK Government’s response (“Response”) to its October 2017 consultation on the National Security and Infrastructure Investment Review (“Consultation”).  The Consultation was part of an initiative, driven by DBEIS, to consider the national security implications of foreign investment in the merger and acquisitions market in the UK.

The UK is one of the world’s most favourable countries for foreign direct investment (“FDI”)[5].  The DBEIS recognised the importance of FDI to the UK economy and highlighted that the vast majority of mergers and acquisitions with foreign backing raise no national security concerns at all.  However, the Consultation noted that the UK Government “need[s] to be alert to the risk that having ownership or control of critical businesses or infrastructure [by foreign investors] could provide opportunities to undertake espionage, sabotage or exert inappropriate leverage” and set out proposals to reform the manner in which the UK Government scrutinises investments for national security purposes.

Consultation and initial Government proposals

The Consultation sought stakeholders’ views on the UK Government’s proposals to expand the public interest national security regime to allow it to examine and potentially intervene on grounds of national security in mergers in two areas:

(i) the dual-use and military  sector; and

(ii) parts of the advanced technology sector (multi-purpose computing hardware and quantum based technology).

For these areas only, the UK Government proposed amending the jurisdictional thresholds within the Enterprise Act 2002 (“Enterprise Act”) which determine when the UK merger control regime applies to an M&A transaction. In particular, the UK Government proposed lowering the turnover threshold from £70 million to £1 million and removing the requirement for an M&A transaction to increase the merging parties’ share of supply of particular products or services (meaning that if the company being acquired has a share of supply of 25% or more then the regime would apply)[6].

The Government also consulted on long-term plans to develop the entire mergers and acquisition regime to change the manner in which it scrutinises the national security implications of foreign investment, including, but not limited to creating an expanded version of the Enterprise Act’s ‘call in’ powers; and a mandatory notification regime for foreign investment into UK infrastructure.

Eversheds Sutherland responded to the Consultation to address a number of concerns including that:

  • the proposed changes would significantly increase  the number of deals potentially requiring scrutiny and would have a significant impact on many UK companies, particularly small and medium-sized enterprises;
  • the proposed changes could bring about a chilling effect on M&A transactions and in the worst case on FDI into the UK, which would have resulting costs for the UK economy;
  • the proposals were likely to create significant uncertainty amongst businesses and, in the absence of clear guidance as to what the threshold for UK Government intervention will be, there was a real risk that in practice the UK competition regime would become mandatory[7];
  • it was not clear how market activity will be monitored for national security considerations[8]; and
  • it was vitally important that the UK Government published clear guidance on when it would expect merging parties to make a voluntary notification from a national security interest perspective and whom parties should engage with in order to do so, in particular where the transaction raised both national security and competition concerns.  

The Government’s revised proposals

The Response confirms that the UK Government has decided to lower the turnover threshold to £1 million and to remove the current requirement for the merger to increase the share of supply to or over 25% in the UK; these changes will apply only in relation to mergers in the dual-use and military sectors and the areas of multi-purpose computing hardware and quantum based technology[9].

The UK Government concluded that the decision to lower the turnover threshold to £1 million is a proportionate step to address national security risks while leaving micro-businesses outside the scope of the Enterprise Act regime.

The UK Government also concluded that the new share of supply test is appropriate as it will allow it to act when a transaction involves a business with a significant share of the supply of particular goods or services in the UK which are critical to national security, whether or not the other businesses involved in the merger have an overlapping share of supply in the UK.

In order to address questions of clarity and certainty raised during the Consultation, the Government expanded upon the definitions of “multi-purpose computing hardware” and “quantum based technology” and, by extension, the types of enterprises which would fall under the new thresholds.

The Government has also published draft Guidance on the reforms generally[10] and has confirmed that it will lay out its plans for long-term reforms concerning how it scrutinises the national security implications of foreign investment in due course.  

CMA Guidance

The new provisions, and thus the amended thresholds, also apply to the CMA’s competition assessment under the Enterprise Act.  The CMA Guidance acknowledges that as a result of these changes a greater number of transactions in the three areas identified above will come within its jurisdiction (In Scope Transactions).  For example, the CMA acknowledges that the changes to the regime will potentially allow it to investigate transactions involving suppliers at different levels of the supply chain (non-horizontal mergers) which it may not have been able to review previously. This is a significant departure from the CMA’s previous jurisdictional position.

The CMA Guidance is, however, helpful in that it suggests that the CMA does not intend to depart materially from its existing approach; the CMA does not anticipate opening investigations itself into transactions which it would not have been able to investigate previously.

This provides businesses with some comfort but, as the CMA Guidance makes clear, the reforms nonetheless leave open the possibility that more transactions than previously could be reviewed by the CMA on competition grounds.   

Comment

The proposed reforms reflect a wider international trend of increased government intervention in transactions on the basis of national security.  For example, in March 2018 the US administration blocked Singapore-based Broadcom’s US $117 billion bid for US chip-maker Qualcomm citing national security concerns; this follows the US government’s decision to also block a US $1.2 billion bid by China’s Ant Financial Services Group for US-based Moneygram in January 2018, also on national security grounds.  

Similar concerns are being considered in the European Union, for example, the European Commission last year announced a new framework for screening of foreign direct investments[11] and Germany adopted an amendment to its Foreign Trade Regulation to allow the German government to screen and ultimately block a wider range of foreign takeovers[12].  The UK Government’s proposals therefore reflect similar actions taken in other jurisdictions, and are part of a trend which we expect to continue.

The Government’s ability to adequately review transactions which affect national security is important and it is not surprising that it wishes to strengthen this regime. However, the proposed changes will have a significant impact on companies operating in, or looking to invest in, the dual-use and military sectors  and the areas of multi-purpose computing hardware and quantum based technology.

In the context of military and dual-use items/services, it is important to note that this is not just relevant to the export or transfer of controlled items/services. The new provisions bring into scope businesses that develop or produce such items/provide such services or that hold related information (e.g. blueprints, manuals diagrams and designs) that is capable of use in connection with the development or production of these items/provision of these services and the information is responsible for achieving or exceeding the performance levels, characteristics or functions of the controlled items/services.

The costs of assessing the potential national security interests, of carrying out a classification of all products a business manufactures or services it provides to determine whether they are or would be controlled for export, and of obtaining legal advice on whether a notification should be made could be particularly burdensome on small businesses.

It is helpful that the CMA’s guidance indicates that the reforms should not result in material changes to the way in which it will assess M&A transactions on competition grounds in the relevant sectors.  Nonetheless, the wide ranging nature of the reforms means that businesses should be cautious about unexpectedly falling under merger control scrutiny from a competition perspective as well as from a national security perspective.     


[1]  See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/690623/Government_Response_final.pdf

[2] See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/652505/2017_10_16_NSII_Green_Paper_final.pdf

[3] The consultation period ends on 12 April 2018.

[4] See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/690938/merger_guidance_consultation_.pdf

[5] In 2016, a ranking of countries by FDI as a proportion of GDP ranked the UK at 46% - making it the fourth highest proportion in the G20.

[6] Instead an additional test would be added such that the share of supply threshold would also be met in the relevant sectors if the target business had an existing share of supply of 25% or more of the relevant goods or services.

[7] I.e. companies would choose to notify on a fail-safe basis so as to ensure that they overcome any possible national security hurdles. This could have a significant impact for the Competition and Markets Authority’s resources at a time when the CMA’s budget will already be under pressure as a result of the expected increase in its workload arising from Brexit.

[8] For example, who will fulfil the equivalent role to the CMA’s Mergers Intelligence Committee.

[9] The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 has been laid in draft before Parliament and the government intends to lay a separate Order to amend the turnover threshold.  Subject to Parliament’s consideration and approval, both Orders will come into force at the same time.

[10] See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/690627/EA02_guidance_draft_final_for_publication.docx.pdf

[11] See: http://europa.eu/rapid/press-release_IP-17-3183_en.htm

[12] This followed the German government withdrawing approval for China’s Fujian Grand Chip Investment Fund to buy German chip equipment maker Aixtron in October 2016, citing security concerns.

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