UK Mergers Regime –
The UK is moving towards Reform of National Security and
Infrastructure Investment Review in The UK
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.
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
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.
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.
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.
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.
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
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.
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.
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.