The government has issued a Public Inerest Intervention Notice (PIIN) in relation to the proposed acquisition of a UK tech business, Sepura plc, by a Chinese multi-national.
What’s the issue?
The UK’s merger control regime grants the Competition and Markets Authority (CMA) jurisdiction under the Enterprise Act 2002 (Act), to intervene in and potentially prohibit mergers and acquisitions which may be expected to substantially lessen competition in the UK. Mergers which reveal the potential for such issues during an initial Phase I assessment will be subject to a more detailed substantive investigation (Phase II). However, in addition to the ability to scrutinise mergers on competition grounds, section 42 of the Act grants the Secretary of State the power to issue a PIIN in relation to transactions which (s)he believes may be expected to operate against the public interest, regardless of any adverse effect on competition. National security is expressly recognised as a potential basis for a PIIN under the Act, and the government has asked the CMA to consider whether a “public interest intervention is relevant to the acquisition as a result of Sepura’s commercial arrangements with UK government entities”.
National Security has accounted for seven of the twelve PIIN’s that have now been issued. Other PIINs have been based on protecting the plurality and diversity of the media under public interest considerations introduced by the Communications Act 2003, and on maintaining the stability of the UK financial system in connection with Lloyds TSB’s proposed acquisition of HBOS in 2008.
What’s the development?
On Monday 10 April 2017, Greg Clark, the Secretary of State for Business, Energy and Industrial Strategy (BEIS) issued a PIIN in relation to the proposed acquisition of Sepura plc (Sepura) by Hytera Communications Corporation Ltd (Hytera). Sepura is a UK business providing walkie-talkie equipment in more than 40 countries servicing a wealth of sectors including transportation, airports, oil and gas, mining, manufacturing and, crucially, the supply of such equipment to emergency services. The UK government has intervened on national security grounds in relation to the bid by the Chinese multinational Hytera, the world’s second-largest global radio terminal manufacturer, to acquire its rival for £74 million.
What does this mean for you?
The publication of the PIIN comes at a very interesting time in light of the implications of Brexit and the current focus of BEIS on the issue of foreign takeovers and investment. The Prime Minister has made clear her desire to improve the ability of the UK government to intervene in certain mergers on political grounds. Further, in the wake of the government’s agreement with EDF regarding the Hinkley Point Project last Autumn, BEIS stated:
“There will be reforms to the Government’s approach to the ownership and control of critical infrastructure to ensure that the full implications of foreign ownership are scrutinised for the purposes of national security. This will include a review of the public interest regime in the Enterprise Act 2002 and the introduction of a cross-cutting national security requirement for continuing Government approval of the ownership and control of critical infrastructure.”
Following these comments the CMA submitted a response to BEIS, warning against the broadening of existing powers to enable governmental intervention in UK transactions on public interest grounds. The CMA highlighted the risk of widening the public interest consideration so that it could ultimately operate as a ‘catch-all’ exemption, and cautioned that piecemeal reforms to the merger regime could result in a fragmented system and cause significant and undesirable legal uncertainty for businesses. Greater powers to intervene in mergers on non-competition grounds might also serve to damage the UK’s international reputation as an open, competitive place to do business. The CMA emphasised that public interest considerations must remain precisely defined and objectively assessed.
Finding and maintaining the right balance on these issues is all the more critical given that Brexit may provide the foundation for substantial changes to the UK’s merger control regime, as well as an opportunity to entrench the current political perspective. The UK’s freedom to intervene in cross-border mergers to protect national interests is currently fettered by the merger control regime at EU level. It appears possible, however, that if the Government seeks to extend the scope of its public interest powers following Brexit, some foreign acquisitions could be prohibited (or at least made subject to substantial conditions) in an attempt to protect UK interests. This could potentially allow the UK to veto EU-level mergers which trigger the UK’s merger control regime. As such, this marks another area of legal regulation which looks set to be heavily influenced by international politics in the coming months and years.
Once the Secretary of State has intervened, the CMA is obliged to report to the Secretary of State on the competition issues and whether, if it were not a public interest case, it would refer it to Phase II investigation (or accept undertakings in lieu of such a reference). The CMA may also give its views and recommendations on the public interest consideration, although the Secretary of State is not bound by these. The Secretary must, however, accept the CMA’s Phase 1 findings on competition issues.
The Secretary of State will refer the transaction to a Phase II investigation if (s)he believes that the merger may be expected to operate against the public interest, either as a result of the public interest consideration and a substantial lessening of competition, or on the basis of the public interest consideration alone. Consequently, a Phase II reference may be made even if the CMA has recommended that this should not take place on any grounds. However, section 45(6) of the Act provides that any “anti-competitive outcome” shall be considered adverse to the public interest unless it is justified by a relevant public interest consideration.
If the Secretary of State decides to make a reference, the CMA will undertake an in-depth Phase II assessment. The CMA must report on whether the merger may be expected to operate against the public interest, taking account of both competition issues and the public interest consideration, within 24 weeks (potentially extended by a further 8 weeks). It will also consider whether the adverse impact of the transaction could be mitigated by the imposition of conditional remedies.
In light of the CMA’s report, the Secretary of State will make the ultimate determination as to whether to make an adverse public interest finding and, if so, what remedies may be imposed to address these concerns. Again (s)he will be bound by any conclusions on competition issues but not by the CMA’s views on the public interest consideration; the Secretary of State may, therefore, prohibit a merger on public interest grounds even where there is no anti-competitive outcome.
The announcement potentially represents a further regulatory hurdle for this transaction. Although it now appears a potentially tricky Phase II investigation in Germany will be narrowly avoided based on Sepura’s turnover in Germany for the latest financial year, discussions with the German competition regulator remain ongoing and a Phase I investigation in Spain is also underway. At the very least, the service of the PIIN by the Secretary of State has the potential to significantly disrupt the deal timetable. The CMA has until 4 May 2017, to present its initial conclusions to Mr Clark, on which he will base his decision whether to launch a Phase II probe.