The UK Government has decided to proceed with proposals to extend its powers to review mergers in certain key strategic sectors on national security grounds¹.

The proposals were set out in a green paper published in October last year, where the Government explained its concerns that its existing powers do not go far enough in light of the increased potential threats to national security in the UK, in particular in relation to foreign investment.

At this stage, the Governments is proceeding with the short terms reforms set out in the green paper, which involve amending the jurisdictional thresholds under the UK merger control rules. It is still considering responses to its consultation on possible longer term reforms, including the ability to review a wider range of transactions and a mandatory notification regime for foreign investment in certain sectors.

What are the changes?

At present the Government can intervene on national security grounds in mergers that qualify for review under the UK merger control rules or the EU merger regulation, as well as mergers involving certain defence contractors which have been notified that they hold confidential information.

The changes involve the Government amending the jurisdictional thresholds under the UK merger control rules in relation to transactions in two areas: (i) the dual use and military use sector and (ii) parts of the advanced technology sector.

As regards the dual use/military use sector, the amended thresholds will apply to transactions where the target is active in the development or production of items on certain Strategic Export Control Lists (or holds related software and technology for such items). The relevant lists are the UK Military List, the UK Dual-Use List, the UK Radioactive Source List and the EU Dual-Use Lists.

As regards the advanced technology sector, the amended thresholds will apply to transactions where the target is active in:

  • the design and maintenance of aspects of computing hardware, or
  • the development and production of quantum technology.

The amended thresholds are that a transaction involving a target active in any of these areas will be caught if:

  • the UK turnover of the target exceeds £1 million (the normal threshold is £70 million), or
  • the target supplies or acquires goods or services in any of these areas that account for at least 25% of those goods or services supplied or acquired in the UK or a substantial part of it (the normal threshold, which the Government proposes would continue to apply as a separate threshold, is that the transaction must increase the share to 25% or more, meaning that both parties have to supply or acquire the same goods or services in order for the transaction to be caught).

What is the impact of the changes?

The effect of these changes is that, in the relevant dual use/military use and advanced technology sectors, a much greater number of transactions will qualify for review under the UK merger control rules than is currently the case – and therefore potentially be at risk of intervention both by the Competition and Markets Authority (CMA) on competition grounds and the Government on public interest grounds (including, but not only, national security).

That said, the CMA has issued draft guidance indicating that it does not expect the changes to bring about a material change in its approach to the assessment of mergers on competition grounds.

It is also worth noting that the changes will not only apply to transactions involving foreign investment – they will also apply to purely domestic transactions.

Where the Government decides to intervene on national security grounds, it can clear the merger (where it considers no concerns arise) or, if it considers that there are concerns, make clearance conditional on certain remedies being put in place or block the merger.

When will the changes come into effect?

The amendments are subject to Parliamentary approval and so the precise timing is currently unclear. However, assuming approval is given, the changes are expected to take effect shortly.