We continue our series of articles considering issues relevant to the uptick in distressed M&A activity, which we expect to see as the government’s coronavirus financial support packages come to an end, with a look at the UK government’s powers of intervention in respect of foreign investment transactions, including recent changes
The UK government has introduced changes to the UK merger control regime. These are designed to allow the government to intervene in certain mergers or takeovers for the purposes of maintaining the UK’s capability to combat public health emergencies, such as the COVID-19 pandemic, and protecting certain sectors on grounds of national security.
Although the new measures apply to acquisitions involving both domestic and foreign investors, the measures are designed to protect the UK’s key sectors and will allow the government to scrutinise foreign investment. As the UK does not yet have a stand-alone foreign direct investment regime, the government has announced the new measures are intended to mitigate risks in the short term. This is ahead of more comprehensive powers in the forthcoming National Security and Investment Bill which is currently going through Parliament (we reported on this bill here).
Background
Under the UK merger control regime, the UK Secretary of State can intervene in transactions that raise public interest concerns by issuing a public interest intervention notice ('PIIN') where the transaction falls within the UK merger control regime. The Secretary of State can also issue a European Intervention Notice ('EIN') where the transaction falls within the EU merger control regime.
Where a PIIN or EIN is issued, the UK Competition and Markets Authority ('CMA') is required to issue a report advising the Secretary of State on considerations that may be relevant to conducting a more detailed investigation (a Phase two investigation), as well as summarising representations made by relevant stakeholders. The Secretary of State may then:
- decide there are no relevant public interest concerns; or
- accept undertakings in lieu of a Phase two investigation where appropriate; or
- decide to refer the transaction to a more detailed Phase two investigation.
The public interest considerations on which the Secretary of State can intervene are national security, media plurality and the stability of the financial system. To date, the government has intervened on public interest grounds on 20 occasions: 12 on national security grounds, seven on media plurality and once on financial stability. Under the Enterprise Act 2002, the Secretary of State has the power to add additional grounds where appropriate.
What are the new measures?
a) New public interest consideration
On 23 June 2020, the Enterprise Act 2002 (Specification of additional section 58 consideration) Order 2020 came into force, which added to the public interest considerations the need to maintain the UK’s capability to combat and mitigate the effects of public health emergencies. Accordingly, the Secretary of State can now intervene in mergers for the purposes of maintaining the UK’s capability to combat a public health emergency, such as the COVID-19 pandemic. The Secretary of State may intervene where the following merger control thresholds are met: (i) the target’s UK turnover is more than £70 million; or (ii) the transaction results in the creation or enhancement of at least a 25 per cent share of supply of goods or services in the UK, known as the “share of supply test”.
The current pandemic may make some businesses with critical capabilities more susceptible to takeovers (for example if they are financially distressed) and the government has stated that new public interest consideration is designed to 'allow the government to scrutinise certain foreign takeovers to ensure they do not threaten the UK’s ability to combat a public health emergency such as coronavirus.' The new measure comes after the European Commission issued guidance to EU member states in March encouraging the use of their foreign direct investment screening tools during the COVID-19 pandemic, to protect against the increased risk of foreign investment that could undermine EU healthcare capacities (e.g. where foreign investment is made into businesses that produce medical or protective equipment, or related industries such as research establishments).
The Explanatory Memorandum explains that under the new public interest consideration the government may need to intervene where the target is involved in the fight against COVID-19 or is a vaccine research company or a manufacturer of personal protective equipment. In addition, it may also intervene where the target is an internet service provider or food supply-chain company given the potential for increased demand for internet services in a lockdown situation or disruption to food supply. However, the new public interest consideration is not limited to the current COVID-19 pandemic and may apply to future public health emergencies.
b) Lower merger control thresholds for certain sectors
On 21 July 2020, the Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020 and Enterprise Act 2002 (Turnover Test) (Amendment) Order 2020 came into force which lowered the merger control thresholds for national security mergers where the target is active in artificial intelligence, cryptographic authentication technology, and advanced materials.
In June 2018, the government reduced the merger control thresholds to £1 million (from £70 million), and amended the share of supply test such that it can be satisfied by the target having a share of at least 25 per cent, where the transaction involves a target that is active in one of the following sectors which are considered crucial to national security:
- 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
We reported on these changes here.
The government has now extended the lowered thresholds to the following three additional sectors, which are also considered crucial to UK national security:
- artificial intelligence
- cryptographic authentication technology
- advanced materials, which include (i) materials capable of modifying the appearance, detectability, traceability or identification of objects by humans or sensors within specified ranges up to and including ultraviolet, (ii) alloys formed from chemical and electrochemical reduction of metals, polymers and ceramics in their solid state, (iii) processes taking solid state alloys in or into crude or semi-fabricated forms, or powders for additive manufacturing, and (iv) other metamaterials (not including fibre-reinforced plastics in certain applications and packaged device components for civil application).
The government has also published its updated guidance on the application of the lowered thresholds, aimed at assisting businesses that may be affected.
What are the implications for investors?
Although the new measures are intended to mitigate risks in the short term before the National Security and Investment Bill comes into force, foreign investors should be aware of these changes and consider their implications on any ongoing or potential transactions at an early stage.
In particular, there will be increased risk of government intervention where the target is crucial to the UK’s ability to combat the COVID-19 pandemic or is active in artificial intelligence, cryptographic authentication technology or advanced materials.
In addition to these measures, the Foreign Affairs Committee has launched an inquiry into the Foreign & Commonwealth Office's ('FCO') role in blocking foreign asset stripping of UK companies, especially where there may be national security risks. The inquiry will examine how the FCO assesses whether a potentially hostile party is seeking to secure significant influence or control over a UK company and in what circumstances the FCO should intervene. These measures are all part of a series of foreign investment reforms being introduced in the UK to protect the country’s key industries.
How can we help?
Burges Salmon has significant experience advising domestic and international investors on UK merger control matters, including the foreign investment regime. If you have any questions in relation to the issues raised in this article, please contact Chris Worrall, Rupert Weston or your usual Burges Salmon contact.
This article was written by Sandra Mapara.