This week the UK Government enacted two new orders which change the UK merger control thresholds under the Enterprise Act 2002. The legislation extends the jurisdiction of the Competition & 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 11th June 2018.
These Orders will potentially extend the reach of the UK merger control system to deals of a much smaller value. In addition the sale or purchase of companies engaged in activities covered by the Orders are likely to 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 owned companies are likely to 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 . The Government was concerned that the UK’s current mergers regime was insufficient to protect national security effectively.
They have just published 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) which give effect to these proposals.
Under the existing merger control rules in the Enterprise Act 2002 the CMA has jurisdiction to review the 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 supply of 25% or more of sales or purchases in the UK (or in a substantial part of it) of goods or services of a particular description (“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 the grounds of certain specified public interest grounds .
Lower Merger Control Thresholds
The effect of the new orders is to lower the jurisdictional thresholds for investigation for transactions which result in a change of control of “relevant enterprises”.
The Turnover Test Order amends section 23 of the Enterprise Act 2002 and lowers 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 to or over the 25% threshold 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 it qualifies as a relevant enterprise.
The new Orders insert a new section 23A into the Enterprise Act which define what constitutes a “relevant enterprise”. The responses to the Government’s consultation were highly critical of the very 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 comfort to any of 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 very broad classifications particularly the references to computer processing units- which are not defined- are likely to catch an over broad number of technology transactions that have little or no bearing on national security implications or indeed competition.
These new rules will potentially extend the reach of the UK merger control system to deals of a much smaller value in the sensitive sectors concerned .
Those companies whose activities are covered by the Orders as “relevant enterprises” will need to be mindful that if they are considering a disposal their transaction could be subject to scrutiny under the Enterprise Act 2002 by the Secretary of State under national security grounds whether or not there are any competition law issues present and regardless of the existing activities of the prospective purchaser . This will result in slowing down transaction timescales to meet additional regulatory hurdles. However it will also make the selection of right purchaser that much more important even in small transactions as any foreign ownership could to be subject to detailed scrutiny under national interest rules
If you are a potential purchaser of a relevant enterprise under the Orders you need to be mindful that you are likely to face increased scrutiny under these rules if you are in foreign ownership or have significant foreign shareholding regardless of whether or not you have any overlapping activities with the target company. Accordingly you need to factor in extra time and 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.