We are witnessing a trend of protectionism and control of foreign acquisitions and investment in key infrastructure across the US and Europe.
There have been calls to increase the Committee on Foreign Investment in the United States’ powers where foreign investment is proposed into certain key sectors. An EU-wide framework to screen foreign investments in member states is also proposed. Screening would be on grounds of public order or security, focusing on the technology, cybersecurity, nuclear power and financial services sectors.
In the UK the government launched a two-part consultation last year, outlining plans to update the merger control regime in 2018. If brought into effect, the changes will enable increased government intervention in mergers and investment into UK businesses that raise national security concerns.
Part 1 – military, dual use and advanced technology sectors
Part 1 of the consultation concerns acquisitions of, or investments into, companies that design or manufacture military and dual use products, and areas of the advanced technology sector (design of computer chips and quantum technology).
The intention is to significantly reduce and alter the current thresholds for government scrutiny and potential intervention in these sectors, as follows:
- the target has UK turnover of over £1m (down from £70m); and
- the target’s or any investor’s own existing share of supply in the UK of a relevant product or service is 25% or more (current rules are that the transaction itself must give rise to a combined share of supply of 25% or more).
Part 2 – national security vetting and foreign investment
Part 2 proposes more fundamental changes to the UK merger control regime, potentially affecting a broader range of transactions.
Currently, the Competition and Markets Authority can assess proposed mergers using the existing turnover and share of supply tests. Government’s power to intervene is limited to cases of “exceptional public interest” concerning national security, financial system stability, media plurality or press freedom.
The consultation proposes granting the UK government a new “national security intervention” power, triggered where a proposed acquisition by any investor (foreign or domestic) of any UK business entity would present national security risks. The acquisition would need to be 25% or more shares or votes in a UK company, or any other transaction giving (direct or indirect) significant influence or control over a UK company or its UK assets or businesses.
The consultation also proposes a possible mandatory notification regime for foreign (as opposed to domestic) investments into key parts of the UK economy, such as civil nuclear, defence, energy, telecommunications and transport.
Next steps and how we can help
We await the outcome of the consultation (Part 1 closed on 14 November 2017, Part 2 on 9 January 2018). The government intends to set out further detail in a White Paper, together with guidance to help implement any changes. However at present, the mechanism for enforcement is unclear as is the number of companies and products that may be affected.
Whilst we do not expect an avalanche of UK government intervention blocking multiple M&A deals if these plans proceed, they would clearly extend the range of transactions that could be subject to a merger control process. More deals may need to be structured to be contingent on such processes and it seems likely that there will be at least some level of increase in transactions that attract close scrutiny and could be blocked.