The legislation implementing the Government’s proposed short-term changes to the UK domestic merger control regime has been published. The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (the “SST Order”) and the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 were both made on 14 May 2018.
The changes come into effect on 11 June 2018.
The UK's domestic merger control regime currently allows the Competition and Markets Authority (CMA) to review certain transactions that satisfy one or both of two tests: the “turnover test” and the “share of supply test”.
The Orders make two principal changes to these tests:
- Turnover test. A transaction currently falls within the regime if the turnover of the target being acquired exceeds £70 million. This threshold has now been lowered to £1 million where the target is a “relevant enterprise”.
- Share of supply test. A transaction falls within the regime if it results in the creation of a combined share of supply or purchases of any goods or services of a particular description of 25% or more within the UK.Now, if the target is a “relevant enterprise”, there is an additional share of supply test that applies only to the target’s share of supply (and not the combined share). This test is if the relevant enterprise has an existing share of supply of at least 25% of the goods or services that make it a relevant enterprise. In other words, the test can be satisfied even if the share of supply does not increase as a result of the transaction.
The SST Order includes a list of activities that will make a business a relevant enterprise. As expected, these include (broadly) developing or producing goods that are subject to export controls (including dual-use technology), as well as quantum computing and computer hardware, firmware or software that performs critical security or low-level control functions (such as “rooting” software).
The list also includes the proposed broad category of: “owning, creating or supplying intellectual property relating to the functional capability of: (i) computer processing units; (ii) the instruction set architecture for such units, (iii) [or] computer code that provides low level control for such units”.
In its consultation response, the Government explained that it had restricted this category to “processing units” in order more clearly to target national security risks. However, the SST Order does not explain or define the term “processing unit”, nor does it say what is meant by “functional capability”. These terms will presumably need to be read with their plain meaning.
The result of this may be that any business that develops computer software, patents or other processes which in any way affect a computer’s processor could potentially fall within the new category of a “relevant enterprise”.
If that is right, the changes could bring many transactions within the CMA’s purview that currently come nowhere close to scrutiny.
Potential buyers of these kinds of business will need to analyse carefully whether any software or processes developed by the target business could in any way affect a computer’s microprocessor, processing unit or control unit to decide whether the modified tests apply.
More generally, buyers of UK businesses will now need to:
- analyse whether the target business falls within any of the new categories of activity that constitute a “relevant enterprise”;
- if it does, conduct turnover and share-of-supply analyses based on the new tests to decide whether their deal falls within the modified regime; and
- if it does, decide whether voluntarily to notify the CMA, in the knowledge that the transaction could potentially trigger a national security review.