On 22 June 2020 the government announced amendments to the merger control regime which extend its discretionary powers to intervene on national security or public interest grounds. These reforms aim to address concerns raised by the COVID-19 pandemic and related financial uncertainty which has heightened the "risk of hostile actors exploiting the situation" to acquire vulnerable UK businesses.(1)

In brief, the amendments:

  • enable public interest interventions in takeovers of businesses that "combat and mitigate the effects of a public health emergency". The government will be able to intervene in takeovers of healthcare companies (eg, pharmaceutical companies and medical equipment suppliers), critical service providers (eg, internet service providers and food supply chain companies) and "usually stable businesses" that are suffering short-term changes in share price or profitability; and
  • lower jurisdictional thresholds for transactions relating to AI, cryptographic authentication technology and advanced materials. Transactions in these sectors will be reviewable if the target has a UK turnover of more than £1 million (in contrast with £70 million for other sectors) or the transaction will result in a UK share of supply of 25% or more. These lower thresholds already apply to the military, quantum technology and computing hardware.

The first reform came into effect on 23 June 2020. The lower turnover thresholds are to be debated and approved by Parliament before coming into effect later in 2020.

These changes to the Enterprise Act 2002 set the scene for further, extensive reforms to be set out in the National Security and Investment Bill (NSI Bill), expected before Parliament this summer. The NSI Bill, in development since the publication of a June 2018 white paper, is expected to establish a standalone foreign direct investment (FDI) screening regime which will enable the government to scrutinise a far wider range of transactions than has historically been the case. This system is expected to be in addition to and distinct from the pre-existing antitrust merger control regime.

These UK proposals form part of the rapid global spread of FDI screening regimes. Increasingly, FDI screening is viewed by national governments as a necessary tool to enable the protection of domestic businesses from takeovers by hostile foreign investors.(2) The recent wave of reforms in major jurisdictions, including the EU-level screening regime due to come into full effect in October 2020, underlines how rapidly the regulatory landscape is changing. Deal teams should therefore assess FDI filing risks early in the deal planning process to mitigate adverse timing and other execution risks.

For further information on this topic please contact Will Pearce, William Tong, Nicholas Spearing or Matthew Yeowart at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email ([email protected], [email protected], [email protected] or [email protected]). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.

Endnotes

(1) This article is part of a series on regulatory scrutiny of M&A transactions. For earlier articles in the series, please see:

(2) See earlier briefing here.