UK: The Proposed UK Merger Control Regime

Last Updated: 13 June 2019
Article by STA Law Firm

The UK is moving towards Reform of National Security and

Infrastructure Investment Review in The UK

Introduction

Generally, countries introduce merger control regimes that are assessed based on competition criteria. However, most merger regimes also allow consideration of public interest criteria when scrutinizing mergers. The most common public interest criteria are those that allow governments to intervene on grounds of national security. National security threats may include acts of terrorism or actions of hostile states related to Cyber-warfare, supply chain disruption of certain goods or services, sabotage of sensitive sites and lastly espionage or leverage. There are four aspects of the United Kingdom's economy that are particularly susceptible to national security risks. These are, firstly, the core national infrastructure sectors (the civil nuclear, communications, defense, energy and transport sectors). Secondly, certain advanced technologies including computing, networking and data communication and quantum technologies. Thirdly, critical direct suppliers to the government and emergency services sectors and lastly military or dual-use technologies.

The UK government noted security gaps in the military and dual use sector, and parts of the advanced technology sector. The military and dual use sector refers to enterprises that design or manufacture military items or hold related software and technology subject to export controls. This sector is also comprised of enterprises that design, produce or have technical expertise in items that are primarily for civilian uses but could also have military applications. The advanced technology sector includes activities relating to computing hardware and quantum technology. Computing hardware covers business that own, create or supply intellectual property relating to the way that computer processing units function and that provision or manage roots of trust in relation to processing units. Quantum technology refers to businesses that carry out research into, design, or manufacture quantum technology such as quantum computing or simulation and quantum communications. The UK faces new security challenges in these sectors because of the greater interconnectivity of the nations and greater flows of capital, as well as the increasingly complex economic and political landscape.

Background

Following a government consultation on 17 October 2017, The UK government published The Green Paper on National Security and Infrastructure Investment. Several transformative proposals were presented to ensure that national security is not undermined by inbound mergers or investments. The proposals are aimed at extending the scope of governmental authority to intervene in transactions for the preservation of national security, while simultaneously mitigating any negative effect these reforms may have on predictability and procedural transparency. These proposals were made in anticipation of the British exit from the European Union (Brexit). Moreover, the UK government recognized the need to protect the country from hostile actors when it was unable to block China from investing in the nuclear power plant Hinckley Point.

The UK Government suggested implementing the reforms through a two-stage process: short term reforms and long-term reforms. Two public consultations followed, the first focusing on the changes to the Enterprise Act of 2002 and the Competition Act of 1998 and the second on longer term options. On 11 June 2018, the new rules contained in the Green Paper came into force. In July 2018 the UK Department for Business, Energy and Industrial Strategy published its National security and investment: proposed legislative reforms (The White Paper).

The Old Regulatory Framework versus The Proposed Regime

The UK relied on the Enterprise Act 2002 as amended by the Enterprise and Regulatory Reform Act 2013 (ERRA) to review mergers on national security and other public interest grounds alongside the competition regime. Under this legislation, the Competition and Markets Authority (CMA) can block a merger or takeover claiming it will lead to a substantial lessening of competition. The new regime removes the existing national security considerations from the realm of the Enterprise Act 2002. National security is now considered distinct from public interest issues which include, plurality of the media and ensuring financial stability which are dealt with in the Enterprise Act 2002 merger control regime.

Previously, the UK government could only intervene on grounds of national security if the Competition and Markets Authority (CMA) or the European Commission's jurisdictional thresholds for merger control review were met. Under the proposed new regime, national security review of foreign investment would be separate from a competition assessment and would not involve the CMA. Decisions would instead be taken by a Cabinet-level minister such as a Secretary of State.

The new regime introduces new jurisdictional thresholds relating to mergers, acquisitions and investments that involve military dual use technology and the advanced technology sector. Where the UK government could only intervene in mergers and acquisitions that involve companies with a UK turnover of more than £ 70 million, the proposed reforms allow the UK government to intervene in mergers where the companies have a UK turnover of over £ 1 million. Previously, the UK government could only intervene in a company where the share of UK supply increases to 25% or over, or one which does not meet that threshold but involved a party designated as a government contractor. Currently the UK government will be able to intervene in mergers or acquisitions that meets the current test of creating or enhancing a share of supply of at least 25% without the need for an increment to the share supply.

Main Features of the Proposed UK Merger Control Regime

Trigger Events

There are several trigger events that may be reviewed by the UK government on national security grounds. Firstly, the acquisition of more than 25% of the voting rights, shares or equivalent ownership rights in an entity. Secondly, the acquisition of significant influence or control over an entity in the form of formal rights and/or a practical ability to influence or control. Thirdly, the acquisition of further influence or control over an entity above the thresholds such as the acquisition of 50% of 75% of shares or voting. Fourthly, the acquisition of more than 50% of an asset including acquisitions of land that may give rise to national security risks due to their proximity to sensitive locations. Fifthly the acquisition of significant influence or control over an asset which may include licenses or intellectual property rights is a trigger event. Finally, a loan may also constitute a trigger event at agreement, default or acquisition of collateral depending on the circumstances or if the lender obtains significant influence or control over sensitive collateral.

Notification

If a trigger event is either contemplated or in progress, the parties to the transaction may make a voluntary notification to the Government. There is also a mandatory notification regime in relation to foreign investment in certain areas of the economy. Where a trigger event is notified, the government will ask for detailed information about the trigger event including its purpose and expected date as well as details of the acquirer and the investments. The Government will undertake a preliminary screening review lasting 15 working days, which may be extended for an additional 15 days for complex cases. The Senior Minister would then decide whether to "call in" the trigger event or not.

Calling-in of a Trigger Event

According to Chapter 7 of the White Paper Completed transactions could be called in within six months. Following a call-in notice, the parties to the transaction must provide any information required by the Government and the trigger event must not occur until approved although preliminary or preparatory steps towards it make be taken. If the Government is assessing a trigger event that has already taken place, once it has been called in, parties must not take any further measures that increases the acquirer's control not take steps that would make it more difficult for the trigger event to be unwound. The Government may impose additional interim restrictions where relevant.

Screening

If a transaction raises a significant national security concern, then the Government will undertake full national security assessment. The screening process involves a clear and circumscribed legal test, and is subject to a clear and transparent process subject to appropriate judicial oversight. The Government has 15 working days to consider whether a notified deal will be subject to a full national security assessment. If it so decides it then has a period of up to 30 working days, potentially extendable by a further 45 working days to complete its assessment.

Remedies

As Chapter 8 of the White Paper describes the Government may block transactions, limit access to certain sites or divide the assets of a business. Conditions may only be imposed if the Government reasonably believes i) national security risk is posed ii) it is necessary to impose a condition iii) if the remedy is proportionate to the risk, iv) if there are no more adequate or proportionate powers available to the Government, and v) Government has considered representations from the parties. If the transaction has been put into effect, it will have the power to order for it to be unwound. Interim enforcement orders will likely be imposed where a transaction has been called in and has already been completed to mitigate the risk to national security pending the outcome of the investigation.

Sanctions for Non-compliance

Chapter 9 of the White Paper states that there are several criminal and civil sanctions for breaches of requirements to be introduced by the Government. Custodial sentences, for up to five years for most offences, and up to two years for less serious offences may be imposed. Civil Penalties are available for failure to provide information with a fine of £30 000 or maximum daily fine of up to £15 000. For all other breaches, a business may be fined up to 10% of a business' worldwide turnover or for an individual, up to 10% of the higher of their total income or £500 000. Another sanction director disqualification orders for up to 15 years.

Judicial Review

The White Paper, in Chapter 10, outlines the judicial review and appeal procedures. However, judicial scrutiny of substantive decisions by Senior Ministers would be limited to strict judicial review grounds because of the separation of powers, which makes it inappropriate for courts to supplant ministers' decisions.

Implications of the Proposed Regime

Brexit

The UK is due to leave the EU on 29 March 2019, either on terms set out in the withdrawal agreement provided that both the UK and the EU approve the agreement in time for it take effect on 29 March 2019, or without a deal.

If a withdrawal agreement is reached, a transition period until the end of December 2020 or December 2022 will be provided for. During this period EU Merger Regulation (EUMR) will still be applied and maintained. The UK will no longer be a Member State of the EU but EU legislation will remain applicable to and in the UK. The EUMR and UK merger control will operate as if the UK were still a member of the EU. Mergers within the EU's jurisdiction will be dealt with by the European Commission. This will lead to duplication of notification, as companies engaged in mergers or acquisitions will have to make parallel filings in Brussels and London. Certainly, this will burden companies as the EUMR and the UK merger regime are structured differently.

A no- deal Brexit will have significant implications for parties involved in mergers and acquisitions. Without a deal the EU Merger Regulation (EUMR) will immediately cease to apply in the UK. However, the EU and UK merger control regimes will run in parallel and a transaction that qualifies under the EUMR may also be subject to UK merger control. This will inevitably lead to an increase in the number of UK merger investigations by up to 40%. Merger cases which have been referred to the Commission under the EUMR but which have not been finalized by exit day will come under the CMA's jurisdiction provided that the jurisdictional requirements are met. New transactions after Brexit may face parallel investigations under both the EUMR and the UK merger regime if they meet the jurisdiction thresholds of both regimes.

Implications for Investors

Regardless of the Brexit outcome, the proposed regime has significant implications for investors. Investors may be distrustful of using national security criteria to scrutinize mergers as the term "national security" can be interpreted widely, to mean foreign takeovers and broader Foreign Direct Investment (FDI) in sectors of strategic national interest. In addition, the return of ministerial decision-making under the proposed reforms could deter foreign direct investment (FDI) by creating perceptions of an assessment process based on subjective criteria. There is also a risk that, in case of parallel review, the Government may be tempted to put pressure on the CMA to take a decision on its competition assessment that is consistent with the Government's decision on national security.

To investors, national security powers can and will be used to intervene for politically motivated reasons. For instance, the UK government extracted substantial commitments from Melrose in respect of its purchase of GKN, yet this takeover did not involve a foreign business or indicate a national security threat. This serves to further deter investors from the UK.

Restricting foreign takeovers may lead to suspicions of protectionism which may reduce the incentives of prospective foreign investors to seek ventures in a country. The country then becomes an unattractive destination for FDI.

The UK government expects 200 transactions to be caught by the regime per year with over 50 of those deals subject to conditions or even blocked. Undoubtedly, this will increase the CMA's workload and put a strain on its resources. For inward investors it will provide additional complexity to the merger clearance process, especially if they are in one of the high-risk categories of the economy highlighted by the White Paper.

There are several economic consequences because of these reforms. There will be direct costs to the companies whose investments are called in and challenged and indirect costs in terms of delay and uncertainty. There are also additional costs for all firms contemplating investments and takeovers in terms of the unpredictability of the outcome. Many companies may not invest in the first place due to uncertainty about the outcome. In situations where timing is of the essence, for example, this may in practice serve to exclude many foreign bidders. Moreover, tighter scrutiny of foreign direct investment (FDI) is likely to reduce value of UK assets. There may also be a harm to competition. Foreign direct investment increases competition because a foreign owner may have deeper pockets, better technology, or an expansion strategy that increases competition in domestic markets.

Recommendations

The Commission and the CMA can create a framework for cooperation in merger cases. The framework would, for example, outline the information to included in a complete notification, and include identical questionnaires and cooperation in interviews. Furthermore, pre-notification and formal review periods could be aligned. Surely this would lessen the burden in both the CMA and businesses.

Conclusion

Globalization has led to new and complex national security threats for the United Kingdom. Both The Green Paper and the White Paper were published to amend the Enterprise Act 2002 and the Competition Act 1998, to make legislation suitable in a no deal Brexit scenario. The Reforms introduce new jurisdictional thresholds and trigger events, as well as notification, screening, calling in procedures. Remedies, sanctions for non - compliance and judicial review are also included in the propose UK merger regime. Despite the Brexit outcome, the reforms make the UK an unattractive Foreign Direct Investment destination. However, this can be mitigated through cooperation between the European Commission and the Competition and Markets Authority of the UK.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions