KEY POINTS

  • On 15 March 2018 the UK Government proposed legislation to amend the current UK merger control filing thresholds for three specific categories of mergers that could raise national security issues in the UK. The Government first consulted on this proposal in October 2017 in its Green Paper entitled "National Security and Infrastructure Investment Review" (see our client alert).
  • The jurisdictional thresholds will be amended for UK mergers involving a "Relevant Enterprise" (includes enterprises active in (i) the development or production of items for military or military and civilian use ("military and dual use"), (ii) quantum technology and (iii) multi-purpose computing hardware - see further below).
  • At present, for mergers in which the target is not a Relevant Enterprise, the UK merger filing thresholds will be met where (a) the UK turnover of the target exceeds £70m and/or (b) the transaction results in a combined share of supply of goods or services of any description of at least 25% in the UK (i.e. combined share of supply increases as a result of the merger and exceeds 25%).
  • Under the proposed legislation, for mergers in which the enterprise being taken over (or part of it) is a Relevant Enterprise:

(a) the turnover test is met if the Relevant Enterprise's annual UK turnover exceeds £1m.

(b) the share of supply test is met if, before it ceased to be a distinct enterprise, at least 25% of all the goods or services by virtue of which the enterprise being taken over was a Relevant Enterprise were supplied to or by the persons carrying on the Relevant Enterprise in the UK. In other words, the test is met, even if share of supply does not increase as a result of the merger.

  • An Order has been laid in draft in Parliament, amending the share of supply test. The intention is to lay a further Order to amend the turnover threshold. Subject to Parliament’s consideration and approval, both Orders will come into force at the same time.
  • The Government is still considering the long term proposals set out in its Green Paper (including the introduction of a mandatory notification regime).

IMPLICATIONS

  • These are the first substantial amendments to the UK merger filing thresholds since the relevant legislation (the Enterprise Act 2002) came into force. The implications are significant for firms that are Relevant Enterprises, as the thresholds are much lower than under the current regime, meaning that a large number of deals could be caught. In particular, the £1m threshold is not limited to the target's sales of goods or services in the new defined sectors in the UK. The Government considers that there could be "considerable practical difficulties in determining what part of the turnover of a business related to the particular activities captured by the definitions in the legislation where those activities are part of a wider business." However, where a business has no activity in one of the relevant sectors in the UK, it is unlikely that the Government could conclude that a merger involving its acquisition would give rise to a risk to national security.
  • Notification remains voluntary and in practice, the changes should not affect the manner in which the UK Competition and Markets Authority (CMA) undertakes a competition review of those national security mergers. The notification procedure remains the same. The CMA has issued draft guidance on the new thresholds which states that it would only investigate a transaction on its own initiative if there merger is likely raise antitrust issues. We do not yet understand how, if at all, the CMA would be involved in the national security aspects of any review, and whether any other UK agency will be involved. However, the new thresholds add a layer of uncertainty to deal strategy, as companies will have to conduct both antitrust and national security risk assessments when deciding whether to notify a deal to the CMA for clearance or not.
  • Three sectors: (i) military and dual use; (ii) quantum technology and (iii) multi-purpose computing hardware are specifically picked out as subject to the national security review. The definitions of the three sectors affected by the changes are complex. The Government has issued draft guidance, but has interpreted each of the sectors extremely broadly.
  • The definitions of military and dual use goods are based on goods and technologies covered by existing Strategic Export Control Lists. This could create uncertainty for businesses that have not, to date, exported goods and so would not be familiar with the lists, or companies that have military or dual use goods or technology embedded in products. Given that the new jurisdictional thresholds are relatively low, it is conceivable that many small or medium enterprises could be caught by the £1m threshold but may be unsure whether they are covered by the definitions, or at least which parts of their business might be subject to national security concerns.
  • Similar questions relate to the breadth of computing and quantum controls. UK companies that own, create or supply intellectual property in relation to the way that computer processing units function could fall within the new provisions. Quantum technology has also been broadly defined, with the new legislation capturing quantum computing or simulation; quantum imaging, sensing, timing or navigation, quantum communications; and quantum resistant cryptography. The Government's reasoning is that mergers related to businesses that undertake these activities could give hostile actors knowledge or expertise that could be used to undermine UK national security. However, the breadth of the categories do not show a clear link to national security concerns.

COMMENT

The UK Government has been coming under increasing pressure to intervene in transactions on the grounds of public interest, in particular national security. For example, last year the Government intervened in the acquisition of Sepura plc by Hytera Communications Corporation Limited due to national security concerns, eventually clearing that transaction subject to undertakings. At the moment, the Government is being pushed to intervene in Melrose plc's hostile takeover bid for the engineering firm GKN, on the grounds of national security (See Hansard debate of 15 March 2018). The changes to the merger filing thresholds for Relevant Enterprises are designed to fill a gap and allow the Government to scrutinise deals which do not meet the existing thresholds are therefore not reviewable. However, there needs to be a balance between continuing to encourage foreign investment in the UK, and protecting national security interests.

The latest steps by the UK echo similar approaches around the world - Germany has recently tightened its screening rules and President Trump recently blocked Broadcom's $117 billion bid for Qualcomm over fears that it could threaten national security in the US. Meanwhile the EU is considering adopting a coordinated EU-wide approach to reviewing foreign investment. All of this activity highlights the need for investors to prioritise foreign investment review risks. While most cross-border transactions have a high likelihood of being approved, those in sensitive sectors may encounter more scrutiny and face a prolonged approval process. Taking the time to understand the rules and identify a regulatory strategy early in the deal process can minimize the risk of delays, last-minute changes to the deal structure, or even failed transactions.