The UK Government has published proposals to extend its powers to scrutinise mergers and acquisitions with national security implications. This move is part of a wider global debate on state intervention in foreign investments and reflects a more general trend within the European Union (and some of its member states), Japan, the United States, and Australia to increase scrutiny over foreign acquisitions.
The proposals could mean greater scrutiny, some additional complexity and timing implications and, at least initially, some uncertainty around how the Government will apply the new test and which transactions it calls in for review.
The Government is requiring comments on the proposals by 16 October 2018.
The current regime
To date, the UK Government could only review mergers where the target's turnover exceeded £70m or where the transaction resulted in the creation or increment to a share of supply of 25 percent. Mergers below that threshold were generally not reviewable.
Wind of change
Last month the UK Government amended the Enterprise Act 2002 by reducing these thresholds where transactions affect military, computing hardware or quantum technology. For those areas, the target turnover threshold was reduced from £70 million to £1 million and the alternative share of supply test of 25 percent no longer needs an increment. The amended thresholds empower the Government to intervene in mergers satisfying the above criteria but also apply to the jurisdiction of the Competition and Markets Authority (CMA) to review mergers on competition grounds.
To date, there has been one Governmental intervention under these new thresholds. Last June, following the announcement by Gardner Aerospace Holdings Ltd (a wholly owned subsidiary of Chinese Shaanxi Ligeance Mineral Resources) of its proposed acquisition over Northern Aerospace Ltd, the Secretary of State decided to intervene on national security grounds. Both Gardner and Northern Aerospace manufacture and supply parts used in the manufacture of aircrafts. The transaction was ultimately cleared by the Secretary of State on 19 July 2018, following a report by the CMA, after receiving further representations by the Ministry of Defence, on the competition and national security aspects of the transaction.
The proposed regime
The Government is now seeking to replace last month's changes and extend these measures by separating the foreign investment review from the merger control review and by removing the jurisdictional thresholds for the former altogether.
The main aspects of the proposed foreign investment regime are as follows:
- The Government will have direct powers to call in transactions, impose remedies or conditions, or block or unwind transactions raising national security issues. The Government's assessment will be exclusively based on potential national security implications and, as such, the new regime will create a clear separation between competition and national security-related assessments.
- This process will be de-linked from the competition-based merger control review undertaken by the CMA and is likely to be undertaken by a Government department (the consultation refers to a Cabinet-level minister as the key decisionmaker for the new regime).
- There will not be a mandatory notification requirement but, similar to the CMA's system, there will be a voluntary notification system combined with the Government's monitoring of the market for potentially relevant developments.
- Notified transactions will be subject to a 15 working day preliminary review period (extendable by an additional 15 working days). If at the end of this period the Government decides to open an in-depth national security assessment, the Government will have 30 working days (extendable by further 45 days) to decide whether to clear, block, or impose remedies on the transaction. Deals which are not voluntarily notified might still be called in within six months of closing.
Which transactions are caught?
The regime will apply to assets, such as IP rights, as well as businesses. Even loan agreements may be a trigger, where an asset secured as a collateral could itself give rise to national security concerns in the event of a change of ownership.
In particular, the proposed regime will apply to: (i) the acquisition of more than 25 percent of the votes or shares in an entity, or of significant influence or control over an entity, even below a 25 percent shareholding; (ii) the acquisition of further significant influence or control over an entity through additional shares or votes or new or additional rights; and (iii) the acquisition of more than 50 percent of an asset, or of significant influence or control over such asset, even below the 50 percent threshold. The latter has been included as an anti-avoidance measure.
What constitutes a national security risk?
There is no definition of national security risk but more information about where certain trigger events may give rise to national security risks is already provided in the Government's draft Statement of Policy Intent, which is also currently subject to public consultation. The proposals make it clear, however, that they are aimed at the national infrastructure sectors, critical direct suppliers to the Government and to the emergency service sector, and certain advanced technologies.
Importantly, the target's turnover and share of supply tests which are used to establish jurisdiction for the CMA's merger control review are completely removed for the purpose of the Government's national security review.
The timeline for reviews under the new regime is not entirely congruous with the timeline of a CMA's competition-based merger control review. Nevertheless, the Government aims to ensure that this review and the CMA's review take place in a co-ordinated fashion. This means that, when a transaction is scrutinised in parallel by the Government (to assess its national security risks under the new regime) and by the CMA (to assess its impact on competition), the Government may request that the CMA pauses its competition assessment pending the outcome of the national security assessment or may vary any undertakings or orders previously put in place by the CMA where these are inconsistent with the interest of national security.
How many cases are caught?
The Government expects there will be around 200 notifications each year under the new regime out of which around 100 will raise national security concerns requiring a full assessment. The Government expects that it will seek to impose remedies in around 50 of such cases.
These figures are quite high when compared to CMA merger reviews which currently run to between 50-100 in any given year and which are expected to rise by 30-50 cases annually as a result of Brexit where transactions previously notifiable to Brussels will fall under the CMA's jurisdiction.
When will it apply?
Comments on the proposals are requested by 16 October 2018. The Government has not provided any indication as to when it envisages the changes to come into effect. Given the crowded Parliamentary schedule due to Brexit, this may take some time.
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