Buyers of businesses that produce military or dual-use goods, certain aspects of computing hardware, or quantum technology for supply in the UK should carefully assess the risk of governmental intervention if their targets fall within the scope of the new regime.
On 11 June 2018, the UK government will gain new powers to review transactions raising potential national security issues if the target business is active in the production of military or dual-use goods, computing hardware, or quantum technology for supply in the UK. The government may intervene if the target business’ UK turnover is as low as £1 million, or if the target business has a share of supply of goods or services within the relevant areas of at least 25%. While these powers will apply to only a limited subset of transactions and do not give rise to mandatory notification requirements, the application of the new powers will require careful scrutiny during the due diligence phase of transactions that are potentially within scope. The new thresholds are the result of the government’s ongoing review of its foreign investment review powers, which may result in a further expansion of governmental powers in the longer-term.
According to the current UK public interest regime under the Enterprise Act 2002 (the Enterprise Act), the government can review transactions within the general UK merger control regime that involve a change of control and raise potential public interest concerns if:
- Either of the following conditions are satisfied:
- The target business’ UK turnover exceeds £70 million
- The parties have a combined share of supply of goods or services in the UK of at least 25%
- The transaction raises a public interest concern as specified in the Enterprise Act, namely:
- National security
- Media plurality
- The stability of the UK financial system
More exceptionally, the government may also review transactions that fall below the jurisdictional thresholds outlined above. This applies if the target business is a government contractor that holds or receives confidential defence-related information, or if the transaction falls within European Commission jurisdiction but raises public interest concerns within the UK.
The Competition and Markets Authority (CMA) administers the current UK public regime. The CMA carries out its own merger control review, but reports to the relevant Secretary of State, who is the ultimate decision-maker on the public interest aspects of the transaction. The current regime will continue to apply to transactions falling outside the three areas to which the new rules apply.
Following the recent amendments to the Enterprise Act, the government will gain new powers under the UK public interest regime to review smaller transactions that involve a change of control — but do not fall within the current regime — if the following conditions are met:
- The target business is a “relevant enterprise” defined under the new section 23A of the Enterprise Act as a business that carries out one of the following three activities:
- Development or production of items for military or military and civilian use
- Design and maintenance of aspects of computing hardware
- Development and production of quantum technology
- If either of the following conditions are satisfied:
- The UK turnover of the target business exceeds £1 million
- The target business has a share of supply of goods or services within the one of the relevant areas in the UK of at least 25%
- The transaction raises potential national security concerns
The government’s new powers are therefore limited to activities of a “relevant enterprise” as outlined above. However, the definition of these activities under the new section 23A of the Enterprise Act is complex and potentially broad. Consequently, potential purchasers may need to adopt a cautious approach in assessing the risk of intervention. In addition, the amendments to the Enterprise Act lower the current level of UK turnover required of the target business from £70 million to £1 million. The amendments also dispense with the requirement that both the purchaser and the target business must supply the relevant goods or services of which they have a combined share of at least 25%. Under the new thresholds, if the target business alone has a share of at least 25% of goods or services within one of the relevant areas outlined above this will be sufficient, without the necessity for an increment from the acquirer’s activities. Finally, while the government could theoretically intervene based on any of the public interest grounds under the Enterprise Act, the rationale for the new rules is related to national security concerns and the government has said that it does not envisage intervening on grounds other than national security.
The CMA will remain responsible for administering the UK public interest regime if the Secretary of State has raised potential public interest concerns — in particular, through the issuance of a public interest intervention notice (PIIN) — under its existing or new powers under the Enterprise Act. In parallel to its primary merger control review under the Enterprise Act, the CMA will continue to report on the public interest aspects the transaction raises. Interestingly, while the CMA will theoretically have expanded powers to review transactions caught by the new thresholds for potential competition concerns, the government has said that these transactions are unlikely to raise separate competition concerns.
The amendments to the Enterprise Act do not give rise to any mandatory reporting requirements, and notification under the UK public interest regime — as with the general UK merger control regime — remains voluntary. That said, the application of the new rules will require careful scrutiny during the due diligence phase of transactions potentially within scope. If a transaction involving a “relevant enterprise” raises potential national security issues, the purchaser must decide whether to approach the relevant government department prior to completion. If the purchaser decides against this, the Secretary of State will have up to four months post-closing to issue a PIIN.
While the amendments to the UK public interest regime considerably expand the government’s powers to investigate transactions raising potential national security concerns, interventions under the UK public interest regime remain the exception. To date, under the current regime, the government has intervened in respect of just seven transactions on national security grounds under the Enterprise Act. Under the new rules, the government expects to intervene in up to six transactions per year that give rise to potential national security issues. The exact impact of the new rules remains to be seen, and an initial teething period in the application of the new thresholds is inevitable.