The UK Government has published new draft legislation affecting acquisitions of businesses that design or manufacture military and dual use products, and businesses active in areas of the computing hardware and quantum technology sectors.
Where a proposed merger or takeover of a target business operating in one of these sectors meets certain thresholds, the Government will have the power to intervene on the basis that the transaction may raise national security concerns.
The new rules are subject to Parliamentary approval, although the Government has stated that it may intervene in affected mergers before then.
Mergers caught by the new rules
The new rules will potentially affect mergers and takeovers of the following types of business active in the following three sectors.
- Businesses that develop or produce items for military or dual use (i.e. both military and civilian uses), including related software and technology, which are listed on certain Strategic Export Control Lists.
- These include the UK Military List, UK Dual-Use List, Radioactive Source List and EU Dual-Lists (as at the date the new rules come into force). The Government will publish further legislation to reflect updates to the lists from time to time.
- The Government has also said it will publish further guidance about the lists and export controls. The Goods Checker Tool may help to establish if your items are controlled.
- Businesses that (i) own, create or supply intellectual property for computer processing units (or for the instruction set architecture or low level control computer code for such units) or (ii) design, maintain or support secure provisioning or management of either the low level control computer code of, or roots of trust of, computer processing units.
- Roots of trust means hardware, firmware or software components trusted to perform critical security functions, including cryptographic key material that can identify a device to which it is bound or can verify a digital signature for remote authentication purposes.
- Businesses that research, develop or produce anything (including intellectual property) for use in, or supply services employing, certain quantum technologies (computing, simulation, imaging, sensing, timing, navigation, communications and resistant cryptography).
The legislation and accompanying draft guidance gives more information and examples to assist in determining which entities are caught.
Thresholds for intervention
Two Orders will amend the Enterprise Act 2002 to permit Government intervention in a merger of a business active in one of these sectors – but only where the merger may raise national security concerns and where one of the following thresholds is met:
- Under the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018, the target must have an existing share of supply of the relevant goods or services in the UK of 25% or more.
- Under the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018, the target business’ turnover must exceed £1 million.
Under the new rules, it is no longer necessary for the activities of the parties to overlap. What is sufficient for an intervention if the thresholds are met, is that there is the possibility of national security concerns.
Government intervention powers
The new rules will make it easier for the Government to scrutinise and intervene in mergers and takeovers in these sectors. Any intervention would follow procedures already in place under the Government’s existing powers of intervention.
Where there is a national security concern, the Secretary of State can issue a public interest intervention notice, leading to phase 1 and possibly phase 2 CMA investigations. The Secretary of State can accept undertakings by the parties, make orders to remedy, mitigate or prevent adverse effects or block the merger (only in extreme cases).
To date there have not been any phase 2 investigations in connection with a national security-related intervention.
CMA competition assessments
The amended thresholds will also apply to UK Competition and Market Authority (CMA) assessments of mergers for competition concerns in these sectors. The CMA will have jurisdiction to review the acquisition of very small businesses in the sectors set out above. The Government and CMA have said they do not anticipate a material change in the CMA’s approach to merger assessments on competition grounds; however, the Government can request the CMA to investigate an acquisition even where there are no substantive competition concerns.
In parallel, the CMA is running its own consultation on the proposed guidance relating to the CMA’s intended approach to the jurisdictional changes.
Further changes on the horizon
More fundamental changes to the UK merger control regime, affecting a broader range of transactions, are on the horizon following the Government’s review of how it scrutinises the national security implications of foreign investment.
This will include targeting proposed foreign investments into key parts of the economy such as civil nuclear, defence, energy, telecommunications and transport.
We await the Government’s response to its consultation on these broader changes. For more information, see our January 2018 article.
Next steps and how we can help
The draft Government guidance estimates that between five and 29 additional mergers will be brought into scope each year, with only a minority of those (between one and six) expected to raise national security concerns.
We do not expect largescale UK Government intervention, blocking multiple M&A deals in these sectors. However the new rules clearly extend the range of transactions that may be subject to merger control processes in the future.
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.