Changes to UK merger control: public health emergencies and national security
24 June 2020
On 21 June the UK Government announced plans to introduce a new public interest consideration to the UK merger control regime: public health emergency. It also announced a proposal to expand its powers to scrutinise and intervene in mergers which it believes may give rise to national security concerns.
The proposed amendments mark another step in a series of reforms put forward by the Government intended to broaden its jurisdiction to intervene in mergers to ensure the UK’s national security and resilience while at the same time maintaining its position as an attractive place to invest. On announcing the proposals, Secretary of State for Business Alok Sharma commented: “the UK is open for investment, but not for exploitation”. This alert gives you an overview of the Government’s intentions, and the implication for deals.
Public health emergency
The first proposal follows concerns that Covid-19-related economic disruption exposes UK businesses with critical capabilities – those directly involved in a pandemic response such as vaccine research or personal protective equipment manufacture – to takeovers either from “outwardly hostile approaches, or financially distressed companies being sold to malicious parties”. These are risks that we are seeing many governments worldwide taking steps to mitigate (see our Covid-19 foreign investment control tracker table for more information).
An order – which came into force on 23 June 2020 (but which must be subsequently approved by both Houses of Parliament within 28 days) – allows the Government to intervene and scrutinise mergers and takeovers to ensure that they do not threaten the UK’s capability to combat, and to mitigate the effects of, public health emergencies. This new public interest consideration joins three others: national security, media plurality and financial stability. While it will be open to the Government to intervene in relation to all transactions, both domestic and foreign, meeting the jurisdictional thresholds, it is notable that the Government’s press release announcing the proposal calls out only the threat of foreign takeovers. It also notes that no transaction has ever been blocked on public interest grounds – the Government has intervened on 20 occasions but either did not find any public interest concerns or was able to address concerns with remedies.
Secondly, the Government is looking to amend the merger control thresholds to give it additional powers to review takeovers of companies in sensitive technology sectors which at present are too small to be caught. It proposes to lower the threshold for it to be able to intervene in relation to three sectors of the economy which it considers as central to national security – artificial intelligence, cryptographic authentication technology and advanced materials (each a ‘relevant enterprise’). The same lower thresholds took effect in June 2018 in relation to military or dual-use goods which are subject to export control, computer processing units and quantum technology.
For these additional sectors, a transaction will meet the UK merger control thresholds – and be open to review by both the Competition and Markets Authority (CMA) for its impact on competition and by the Secretary of State on national security grounds (following the issuing of an intervention notice) – where:
- the target has turnover in the UK exceeding GBP1 million (down from GBP70m) or
- the target has a 25% share of supply of goods or services in the UK before the merger (ie no requirement for an increase in the share of supply).
Both the Department for Business, Energy & Industrial Strategy (BEIS) and the CMA issued guidance on the 2018 changes. The BEIS 2018 guidance – which we anticipate will be updated to include the three new sectors – should provide some clarity on whether a target business is active in a relevant sector and, if so, whether the transaction could give rise to national security concerns. The CMA guidance is clear that any competition assessment under the revised thresholds remains broadly the same. Overall, however, it is clear that, once the new provisions take effect, parties considering the purchase of a ‘relevant enterprise’, and any ‘relevant enterprises’ which are/may become acquisition targets, should carefully assess:
- whether the new thresholds will be met
- if so, whether the deal may give rise to national security concerns (BEIS notes in its guidance that, broadly, foreign investment is more likely than domestic investment to raise concerns)
- if concerns appear likely, possible ways that they may be mitigated – the BEIS guidance notes that this could take the form of behavioural undertakings (such as limiting access to certain sites or other assets to those with appropriate UK security clearances), or structural undertakings (eg not acquiring control over a particular division or asset)
- at what stage to engage with the Government: in its guidance BEIS notes that the Government welcomes informal notification “as early as possible”, so it can begin its assessment process (or can say that it has no national security concerns with a deal) – it also welcomes suggestions by the parties “at the earliest point” as to acceptable undertakings which could satisfy the Government’s concerns
- provision for Government intervention and Government and CMA review in deal documentation
Indeed, the first clearance case under the revised rules – Gardner Aerospace’s acquisition of Northern Aerospace – demonstrated the UK Government’s willingness to use its new powers to intervene and illustrated the impact that such intervention can have on deal certainty and execution. Notwithstanding clearance on both competition and national security grounds, Government intervention prevented the parties from meeting their initially agreed completion date.
The Government sees these amendments as a bit of a stop-gap, intended to mitigate risks in the short term. The public health emergency provision became law on 23 June 2020 and we expect the extended national security provisions to become law shortly after (the latter needing debate in and approval by both Houses of Parliament before it can come into effect). Proposed far-reaching longer term reforms were set out in a July 2018 White Paper. This detailed a voluntary notification system with trigger events enabling Government review (see our previous alert). But it is now expected that the “forthcoming” National Security and Investment Bill (which was announced as part of the Queen’s Speech in December 2019) will be even more radical. We anticipate a mandatory regime, and criminal sanctions against contravening domestic companies and their directors (fines, disqualification or imprisonment). And we expect the net to be cast wider than M&A – the White Paper noted that in some circumstances loans may fall within the scope of the regime and recent press reports suggest that collaboration with UK universities may also be caught.