Under the UK merger control regime, while notification is voluntary, the Competition and Markets Authority (the CMA) has jurisdiction to investigate a merger if either:
- the UK turnover of the target exceeds £70 million; or
- the merger results in the creation or enhancement of at least a 25% or more share of supply or acquisition of goods or services in the UK or a substantial part of it (the share of supply test).
The CMA has a statutory duty to refer transactions to a detailed Phase 2 investigation where it believes there to be a realistic prospect that the merger will result in a substantial lessening of competition.
The Secretary of State can only intervene in limited circumstances of exceptional public interest for (i) national security (ii) media plurality or (iii) financial stability reasons in mergers that meet the above thresholds and in certain mergers that do not meet these thresholds that involve government defence contractors or newspaper or broadcasting businesses. However, these interventions are infrequent; since the Enterprise Act 2002 came into force, the Secretary of State has considered only seven mergers on national security grounds. The government has now concluded that the limitations of the above tests pose risks to the UK's national security.
What are the reforms?
As of 11 June 2018, the Secretary of State will have an increased scope to investigate mergers that may raise national security concerns. Two statutory instruments (the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 and the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018) widen the test for a relevant merger situation under the Enterprise Act 2002. In its draft guidance, the Department for Business, Energy & Industrial Strategy (BEIS) has stated that it considers the revised tests will lead to an additional one to six mergers per year being considered for national security concerns.
For most transactions, the thresholds will remain as before. However, if the company being acquired (the target) falls under the definition of a ‘relevant enterprise’, the turnover threshold for the target is to be reduced to £1 million and the share of supply test will be met when the target’s share of supply is 25% or more, even if this was not enhanced by the merger.
Deciding whether a target is a ‘relevant enterprise’ is therefore now a key consideration in whether the CMA, and the Secretary of State, have jurisdiction to consider a transaction. The definition of a 'relevant enterprise' covers three main areas of the economy:
- The development or production of items for military or military and civilian use.
- The design and maintenance of aspects of computing hardware.
- The development and production of quantum technology.
BEIS will publish guidance (following the draft guidance published on 15 March 2018) that will help companies assess whether they or a potential target are considered as ‘relevant enterprises’.
In addition to increasing the Secretary of State’s powers to investigate mergers, the change in thresholds also applies to the CMA's jurisdiction to consider mergers in these sectors. While the CMA has indicated in its draft guidance (also published on 15 March 2018) that it does not anticipate investigating transactions where it would not previously have had jurisdiction, it has not ruled out the possibility of it using the lower thresholds to investigate mergers for competition concerns in these sectors. Furthermore as a voluntary regime, this may lead to an increase in notifications, even in instances that are unlikely to raise national security or competition concerns.
National security concerns?
BEIS’ draft guidance sets out some broad ways in which mergers could pose a risk to national security. In particular the draft guidance states that foreign investment is more likely to raise national security concerns than domestic investment, as ‘foreign investors are less likely to have the UK’s interests at heart’. However, the guidance is kept intentionally broad and states that any national security assessment must be considered on a case by case basis.
The law does not have retrospective effect (meaning that completed mergers not subject to the previous merger control thresholds cannot be investigated) and as the merger control regime in the UK remains voluntary there should be no immediate impact on companies following the change in the law.
However, companies that may be caught by the new regime should consider ahead of any future mergers whether there are possible national security concerns and therefore whether either notifying the CMA or engaging with the Secretary of State prior to completion could mitigate the risks of intervention.
Will there be any further reforms?
As part of BEIS’ initial consultation last year, the government indicated that in the long-term, it intends to undertake a more comprehensive reform of its powers to scrutinise foreign investments with national security implications. BEIS consulted on the possibility of an expanded ‘call in’ power as part of a voluntary notification system and a mandatory notification system for foreign investment in certain sectors.