Summary: This week the UK Government enacted two new Orders which lower the UK merger control thresholds under the Enterprise Act 2002. The legislation extends the jurisdiction of the Competition and Markets Authority (CMA) and the Secretary of State to investigate mergers in certain sensitive sectors of the UK economy which may have national security implications. The new Orders will come into force on 11 June 2018.
These Orders will extend the reach of the UK merger control system to deals of a much smaller value. As a result, the sale or purchase of companies engaged in activities covered by the Orders may face additional regulatory hurdles and scrutiny as to whether they are likely to be in the public interest or not, regardless of whether any competition issues are present. In these circumstances, foreign companies will potentially face extra barriers in the UK to acquiring these types of company.
The Government’s proposals arose out of a Green Paper setting out the result of the Government's review of the Enterprise Act 2002 and its powers in relation to foreign investment and national security which was published for consultation in October last year by the Department for Business, Energy & Industrial Strategy (see our previous coverage here). The Government was concerned that the UK’s current merger control regime is not “fit for purpose” to protect national security effectively.
The two Orders, the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 (SI 2018/593) (the Turnover Test Order) and the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (the Share of Supply Test Order) (SI 2018/5), give effect to these proposals.
Under the existing merger control rules in the Enterprise Act 2002, the CMA has jurisdiction to review a transaction where the target company has an annual UK turnover of £70 million or more or where the merger creates or enhances a combined share of 25% or more of sales or purchases of goods or services of a particular description in the UK (or in a substantial part of it) (“a relevant merger situation”). Where a relevant merger situation exists, the Secretary of State has the power under Section 42 of the Enterprise Act to intervene on certain specified public interest grounds, including national security.
Lower merger control thresholds
The effect of the new Orders is to lower the jurisdictional thresholds for transactions which result in a change of control of “relevant enterprises”.
The Turnover Test Order amends section 23 of the Enterprise Act 2002 so as to lower the turnover test from £70 million to £1 million for changes in control over "relevant enterprises”
The Share of Supply Test Order amends the share of supply test so that where the target company is a "relevant enterprise" the share of supply test will be met if the relevant enterprise has a 25% share of supply of goods or services in the UK before the merger. There is no need to show an incremental increase in the parties’ combined share of supply as a result of the transaction as there is under the standard thresholds. The relevant goods or services for this purpose are those by virtue of which the target qualifies as a relevant enterprise.
The new Orders insert a new section 23A into the Enterprise Act which defines what constitutes a "relevant enterprise". The responses to the Government’s consultation were highly critical of the broad scope of the goods and services which the Government proposed to include within this new enhanced merger control system. The wording of the Orders is unlikely to give significant comfort to those earlier critics.
Relevant enterprises are defined in the Orders as enterprises engaged in specified activities in connection with:
- military or dual-use goods that are subject to export control;
- computer processing units; and
- quantum technology.
These broad classifications, particularly the references to computer processing units- which are not defined- are likely to catch a broad number of technology transactions, some of which may have little bearing on national security or indeed competition.
These new rules extend the reach of the UK merger control system to deals of a much smaller value in the relevant sectors.
Those companies engaged in activities falling within the scope of “relevant enterprises” will need to be mindful that transactions previously outside the remit of the UK merger control regime due to their limited size, may now be subject to scrutiny under the Enterprise Act 2002 by the Secretary of State on national security grounds. This scrutiny may fall on them regardless of either the presence of competition issues or the business of the existing activities of the prospective purchaser. Any such scrutiny will affect deal timetables. However, it will also make the selection of the right purchaser that much more important even in small transactions in the relevant sectors, as any foreign ownership could to be subject to detailed scrutiny.
Potential purchasers of relevant enterprises will need to be mindful that they may face increased scrutiny under these rules if they are in foreign ownership or have significant foreign shareholdings, regardless of whether or not they have any overlapping activities with the target company. Accordingly, they will need to factor in extra time and the cost of complying with potential regulatory clearance issues in the UK.
Given that the Government has been eager to implement tougher merger control rules for these sensitive sectors of the economy for some time, it now remains to be seen how zealous it is in policing these new rules when they come into force next month.