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UK Government exercises its newly expanded powers to intervene in M&A deals on national security grounds for the first time

  • United Kingdom
  • Competition, EU and Trade
  • Mergers and acquisitions
  • Private equity
  • Real estate

25-07-2018

Only a month after the UK Government’s reforms to the UK merger control process came into force (to enable intervention in a broader range of M&A deals involving foreign investment on the basis of national security concerns), the UK Government has intervened in a transaction for the first time.

The UK Government’s intervention is a key development for the new regime.

• It highlights the UK Government’s objective to review foreign investment transactions from a national security perspective irrespective of their size. The CMA’s decision shows that the UK Government has only been able to intervene in this transaction as a result of the changes made to the regime which came into force in June (which significantly lowered the CMA’s thresholds for intervention and so broadened the range of transactions potentially subject to review).

• This case also demonstrates that the UK Government will intervene in deals even if the products or services that the UK Government is concerned about are peripheral to the deal or to the activities of the Target business. In this case Northern Aerospace, the Target business, is a manufacturer of structured assemblies to the aerospace industry; but it has been reported that less than 1% of its revenues go to military programmes and the parties to the deal did not consider them to be particularly sensitive .

• In order to overcome the UK Government’s concerns the acquirer had to give undertakings (a) to prevent the acquirer’s Chinese parent company from having access to sensitive ‘restricted’ information and (b) to appoint an independent auditor to carry out a review of Northern Aerospace’s security arrangements to ensure that sensitive “restricted” information is protected.

• The UK Government’s intervention has caused major disruption to a UK private equity deal. The private equity seller announced that the CMA’s intervention caused the deal to lapse. While the transaction has ultimately completed, the CMA’s decision stated that the parties had to have further discussions in order to progress the transaction.

The transaction

The transaction involves the proposed acquisition of Northern Aerospace Limited (Northern Aerospace), a British aircraft component maker based in County Durham which employs around 600 people, by Gardner Aerospace Holdings Limited (Gardner), a wholly-owned subsidiary of Chinese-owned Shaanxi Ligeance Mineral Resources Co. Limited (SLMR), from private equity firm Better Capital Limited (Better Capital) for £44 million.

Key observations

(i) Swift intervention and close cooperation between UK Government departments

The UK Government’s intervention took place within nine days of the deal being announced:

• On 8 June 2018, Better Capital announced that it agreed to the sale to Gardner Aerospace; and

• On 17 June 2018, the UK Secretary of State for Business, Energy and Industry Strategy (BEIS) issued public interest intervention notice (PIIN), setting out its decision to intervene in the transaction on the public interest ground of national security. The PIIN highlights that the newly expanded regime involves close cooperation between different UK Government departments and in this case the decision to intervene was based on representations from the Secretary of State for Defence relating to national security. The PINN also indicates that the CMA is required to investigate and report on the competition and national security aspects of the transaction by 13 July 2018.

• On 13 July 2018 the CMA announced on its case page that it had submitted its report to the Secretary of State.

• On 19 July 2018 the Secretary of State for BEIS announced its decision not to refer the transaction to a Phase 2 investigation on the ground that “no public interest consideration” is relevant to it. It then remitted the case back to the CMA and required it to deal with it “as an ordinary merger case”. It also published a redacted version of the CMA’s report.

• On the same day the CMA issued a commencement of initial period notice announcing the commencement of its merger inquiry.

• On the next day, 20 July 2018, the CMA issued its final decision confirming clearance of the transaction.

(ii) Preventing the deal from closing pending CMA and UK Government review

On 19 June 2018, the CMA served an initial enforcement order (IEO, followed by a variation order) on the parties. This explicitly prevents the parties to the transaction from closing the transaction by taking actions that, for example, would lead to the integration of the Northern Aerospace business with SLMR or to the transfer of ownership or control of the Northern Aerospace or SLMR business.)

Given the voluntary nature of the UK merger control regime (which allows companies to close a transaction prior to clearance being received), it is unusual for the CMA to impose this type of obligation in relation to a deal which has not yet completed. The CMA’s guidance, for example, states that it would impose an IEO on such deals “relatively rarely” as the risk of the parties having integrated their activities prior to completion is “much lower than in completed mergers”.

It appears that BEIS were involved in the CMA’s decision to impose this restriction on closing and so this case could well be an indicator that the CMA will be more likely to impose IEOs on anticipated transactions where national security concerns are raised (compared to a competition law only review).

(iii) CMA’s role in relation to national security is limited

The CMA’s report makes clear that the CMA views its role in relation to national security as limited to one of reporting those concerns provided to it by UK Government departments. Rather it appears that in this case the lead on these aspects were the Ministry of Defence and the Department for BEIS.

(iv) Undertakings required to overcome national security concerns

The CMA’s report also reveals the Ministry of Defence’s key concerns and the undertakings that the parties were required to put in place in order to address them.

According to the CMA, Northern Aerospace is an active participant in the UK aerospace industry (which is a strategic priority for defence) and is involved in the development or production of “restricted goods” (as specified in the relevant export control legislation). Accordingly there was a perceived need to “ensure that the UK’s aerospace capability is fully protected” and to safeguard any sensitive technology it might have access to by virtue of its activities in the future. The key question that the Ministry of Defence sought to analyse was therefore whether the transaction created the potential for SLMR to have access to “restricted information”(including controlled items, sensitive information or intellectual property rights, relating to Gardner or its customers) through commercial arrangements.

To address this concern, the parties had put in place two undertakings in order to provide comfort to the Ministry of Defence: the first one, between SLMR and Gardner, operated to prevent SLMR accessing ‘restricted information’. The second one, between Gardner and the Secretary of State for Defence, required Gardner to appoint an independent auditor and establish a series of auditable security arrangements to protect the ‘restricted information’. Both deeds of undertakings are enforceable in English courts by the Ministry of Defence and Gardner’s customers.

(v) CMA reviewed the deal from a competition law perspective despite its previous guidance

The CMA has been clear in its guidance and comments to-date that the reforms to the national security public interest regime will not change its approach to its competition law remit. In particular, the CMA has said that it does not anticipate opening any own-initiative competition investigations on the basis of competition concerns into transactions which it would previously not have had jurisdiction. It also considers that mergers brought into scope by the amendments are not expected to raise competition-related concerns.

However, in this case it appears that the CMA have only been able to look at this transaction because of the lower thresholds introduced by the new regime (i.e. it may not have been able to review this transaction prior to the reforms coming into force in June 2018). Despite this the CMA did carry out a full phase 1 investigation of this deal from a competition perspective. This demonstrates that, going forward, mergers brought into scope by the amendments could “unexpectedly” fall under merger control scrutiny, not just from a national security perspective, but also competition law perspective2.

Comment

Both the CMA and the UK Government have previously made clear that the changes to the public interest national security regime do not require businesses to proactively contact or notify the CMA or UK Government of a deal and merger notification remains (at least in the short term) voluntary.

This case indicates, however, that the UK Government will be proactive in using its expanded powers to intervene in foreign investment in the UK on national security grounds. While in its guidance BEIS estimates that an additional 5 to 29 additional mergers per annum would be brought into scope of a result of the revised thresholds, and that only a minority of those (1 to 6 per annum) will raise national security concerns, the Northern Aerospace case – and the parties’ reaction to BEIS’ intervention – indicates something different: the amended public interest national security regime will likely have a more significant impact than this. This is a concern we raised during the UK Government’s consultation on the reforms to the regime.

It is also clear that deal or target company size is not a particular consideration for the UK Government. The UK Government is prepared to and will use its powers in relation to deals of all sizes where it has national security concerns.

When considering the reformed regime companies should be aware that:

(i) the definition of products / services covered by the amended regime is extensive. Both the CMA and BEIS have in their guidance documents urged businesses and investors to consider their particular circumstances and where necessary, seek legal advice and consult with relevant units of the UK Government;

(ii) the public interest national security regime is closely linked to the existing strategic export control laws. For example, the Export Control Unit of the Department for International Trade on 12 June 2018 issued a notice warning exporters that businesses that develop or produce goods on certain of the Strategic Export Control Lists will be covered by the revised thresholds and they should ensure their company is familiar with them. Importantly, BEIS’ guidance highlights that businesses that do not export strategic items (and which therefore may not be themselves familiar with export control laws) but nonetheless develop or produce those items or hold related information are also covered by the expanded regime;

(iii) the UK Government’s starting point as set out in its guidance is that it considers that foreign investors “are less likely to have the UK’s interests at heart and may be controlled or influenced by hostile state actors” who wish to undermine the UK and its “society, military or way of life” and so foreign investments will likely continue to be a focus of UK Government scrutiny.

 


 

  1. http://citywire.co.uk/investment-trust-insider/news/better-capital-frustrated-as-northern-aero-sale-cleared/a1140043
  2. Part 3 of the CMA’s Guidance on Changes to the jurisdictional thresholds for UK merger control, retrievable here.

 

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