On 17 October, the UK Government published a Green Paper reviewing national security implications of foreign ownership or control, as indicated in this year's Queen's Speech.

The Green Paper (see link below) sets out the Government's proposals to revise the UK's merger control system to allow increased scrutiny of the national security implications of particular investments. These would apply initially to investments in the defence, dual use or high tech sectors, even where quite small businesses are involved. The Government is also consulting on potential wider changes to the UK's merger control system.

The UK's current merger control thresholds

The Competition and Markets Authority (CMA) may investigate a merger under the Enterprise Act 2002 (EA2002), if either:

(a) The UK turnover of the target exceeds £70 million (the turnover test); or

(b) The parties' combined share of supply of any particular description of goods or services is 25% or more in the UK or a substantial part of it (the share of supply test).

The UK's merger control system is based on voluntary (not mandatory) notification, so there is no legal requirement to notify a merger to the CMA, whether or not the CMA can review it. However, the CMA may investigate a merger on its own initiative.

The current grounds for Government intervention

The Government can intervene in mergers on any of three public interest grounds: national security, media plurality and financial stability. It can specify additional grounds by Order.

National security issues generally relate to defence. The most recent intervention on national security grounds was in April 2017. This concerned the proposed purchase of the digital radio manufacturer, Sepura, by Hytera Communications Corporation, a Chinese company. The national security concerns identified by the Secretary of State were dealt with through commitments agreed by the parties and ultimately the merger was cleared by the CMA1.

Government intervention is normally only permitted for mergers which meet the turnover test or the share of supply test, but in a few cases, involving certain defence contractors and media companies, the Government can intervene where neither of these tests are met.

Gaps in the UK's current merger control system

The current UK merger control system does not apply to:

  • Mergers involving most small businesses;
  • Investments in new projects, such as new-build nuclear power stations – until they begin operation; or
  • Transfers of "bare assets", such as machinery or intellectual property, which do not amount to an "enterprise".

The Government's proposals seek to address these gaps in a staged approach, as discussed below.

Short term proposals

In the short term, the Government proposes to amend the turnover test and the share of supply test as set out in the EA2002.

The Government is proposing to lower the turnover test from £70 million to £1 million and remove the share of supply test in the following two sectors:

(i) The dual use and military use sector - covering the design and production of military items (such as arms, military and paramilitary equipment) and so-called dual-use items which could have both military and civilian uses. The Government proposes to use some of the Strategic Export Control Lists to identify relevant businesses in this sector that would be subject to amended thresholds for intervention in mergers; and

(ii) Parts of the advanced technology sector - focusing on multi-purpose computing hardware and quantum-based technology.

The proposed changes would therefore apply UK merger control to acquisitions of businesses:

  • with comparatively low UK turnover that undertake activities that are critical for defence, or which otherwise affect UK national security; and
  • in those sectors by buyers with no current presence in that market, or indeed any market, in the UK.

The deadline for responses to the short term proposals is 14 November 2017.

Long term reforms

In the longer term, the Government intends to revise the way in which it scrutinises the national security implications of foreign investment. Detailed proposals will be put forward in a subsequent White Paper, and will focus on foreign investment in the UK's most critical businesses.

The Government is consulting on whether to retain the UK's current voluntary merger notification system, to move to a mandatory notification system, or combine the two approaches.

Voluntary system, with an expanded call-in power

This option would enable the Secretary of State to make a special “national security intervention” where he reasonably believed that national security risks were raised by the acquisition of "significant influence or control" over any UK business entity by any investor (either domestic or foreign). The Government proposes to define this as either the acquisition of over 25% of a company’s shares or voting rights, or any other transaction giving (directly or indirectly) significant influence or control over that company or over its assets or businesses in the UK.

Mandatory notification

This option would apply only to those companies:

  • which undertake, or are crucial to the undertaking of, the "essential functions" which the Government views as critical to ensuring the national security of the UK;
  • where foreign ownership or control of them could pose a risk which cannot be reasonably mitigated otherwise; and
  • where existing licensing or regulatory regimes are insufficient to provide the Government with the information and powers required to protect national security.

Mandatory notification would apply to certain parts of key sectors, including civil nuclear, defence, energy, telecommunications, and transport, as well as the manufacture of military and dual-use items and advanced technology, as defined above. Other key parts of the economy, such as the Government and emergency services sectors, could be included, as well as certain named individual businesses/assets. The Green Paper includes (in Annex C) draft definitions of "essential functions" that could be used in any mandatory notification regime.

The deadline for responses to the long term reforms is 9 January 2018.

Other relevant changes

Besides the Green Paper, other measures are being considered which may also change national security safeguards in the UK, notably:

(i) The Takeover Panel's recent consultation paper proposing reforms to the ways takeovers operate2; and

(ii) Recent EU proposals on the screening of foreign investment3 - the UK is considering its approach to these proposals, although they are unlikely to take effect before the UK leaves the EU. As currently drafted, they do not propose to expand the public interest grounds for intervention in mergers subject to the EU's Merger Regulation.


While the Prime Minister says the UK will remain “open for business: open to investment in our companies, infrastructure, universities and entrepreneurs”, the Green Paper's proposals would impose more controls on such investment. The challenge will be to define clearly when Government intervention can occur and to ensure that any such intervention and decisions are based on objective analysis.