New UK Powers in Transactions Impacting National Security

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The UK government passed reforms on 21 July 2020 lowering the thresholds to intervene in mergers and acquisitions considered relevant to UK national security in the artificial intelligence, cryptographic authentication, and advanced materials sectors. Longer term the UK government is planning to pass further legislation to obtain additional powers of intervention in mergers impacting UK national security.

As noted in our recent LawFlash: New Powers for the UK Government to Intervene in Transactions Impacting Public Health Emergencies and National Security, the UK Parliament has now passed an amendment to the UK merger control regime on 21 July 2020, establishing new lower thresholds to enable the UK government to intervene in transactions in the artificial intelligence, cryptographic authentication, and advanced materials sectors (see UK government guidance: Enterprise Act 2002: changes to the turnover and share of supply tests for mergers, dated 21 July 2020 (BEIS Guidance).

These new powers follow previous reforms that came into force on 23 June 2020, enabling the UK government to maintain in the United Kingdom the capability to combat and mitigate the effects of public health emergencies. The UK government also intends to enact the UK National Security and Investment Bill, establishing a new, standalone screening regime for acquisitions of UK businesses and assets (including intellectual property) with national security implications. For further detail regarding the UK merger control regime and UK government interventions on public interest grounds, see LawFlash: New Powers for the UK Government to Intervene in Transactions Impacting Public Health Emergencies and National Security and LawFlash: Potential UK Reforms Could Increase Screening of Certain Foreign Takeovers.

Non-UK investors in these sectors in particular should be mindful of the increased risk of intervention by the UK government on public interest grounds, which now have a wider ambit. Investors should consider engaging in early informal discussions with any relevant UK government departments and the UK antitrust authority, the Competition and Markets Authority (CMA). Where relevant, investors may also wish to consider potential remedies such as divestments, behavioural undertakings, or restructuring transactions in such a way as to allay potential UK government concerns (e.g., by including UK investors or by reducing the level of control of non-UK investors).

These reforms are part of a wider trend towards greater screening of foreign investment by European governments that is likely to last beyond the coronavirus (COVID-19) pandemic (see our LawFlashes addressing this: LawFlash: COVID-19: EU Commission Issues Guidelines to Protect Against Predatory Buyers ; Potential UK Reforms Could Increase Screening of Certain Foreign Takeovers; LawFlash: COVID-19: Control of Foreign Direct Investments in France; and LawFlash: Germany to Tighten National Foreign Direct Investment Screening Regime in Light Of COVID-19).

NEW REFORMS:

Lower Thresholds for Intervening in Transactions in the Artificial Intelligence, Cryptographic Authentication, and Advanced Materials Sectors, and the Possible Application of These to Foreign Direct Investments

Prior to these latest reforms, reforms to the Enterprise Act 2002 in 2018 lowered the thresholds for intervention in transactions in the following sectors relevant to national security: (i) the development or production of items for military or dual-use; (ii) the design and maintenance of aspects of computing hardware; and (iii) the development and production of quantum technology. The lowered thresholds for intervention in these sectors are:

  1. the target’s UK turnover exceeding £1 million (rather than the UK £70 million turnover for all other sectors); or
  2. the target’s existing share of supply of goods or services in the United Kingdom is at least 25%. This is different from the ordinary share of supply test in other sectors, which requires an overlap between the target and the purchaser in the supply or purchases of relevant goods or services in the United Kingdom or a substantial part of the United Kingdom.

Following the latest reforms that came into force on 21 July 2020, these lower thresholds now also apply to transactions in the artificial intelligence,[1] cryptographic authentication,[2] and advanced materials sectors.[3]

While these reforms are not expressly premised on there being a foreign investment element, since the powers apply equally to UK acquirers, the UK government indicated that in practice, foreign investments are more likely to raise national security concerns.[4]

KEY TAKEAWAYS

Governments in Europe and elsewhere are increasingly focussed on the risks associated with foreign acquisitions in their strategic sectors. We are likely to see greater government intervention and a stricter application of foreign investment regimes and screening for the duration of the current COVID-19 pandemic, and potentially over the longer term. Even though to date the United Kingdom does not have such a standalone screening regime in place, this is expected to change in the short term (see LawFlash: Potential UK Reforms Could Increase Screening of Certain Foreign Takeovers). Accordingly, if you think that a proposed merger may give rise to the issues addressed here, it would be advisable to seek specialist advice.


 

[1] The reforms are intended to cover all businesses that produce, develop, and design artificial intelligence technologies, including components and service providers and all relevant intellectual property, where these products are reasonably expected to be used in systems critical for national security. This also includes technology that enables the training of a device or software to use or process external data (independent of any further input or programming). The UK government does not intend to intervene in mergers or takeovers where enterprises provide goods and services that utilise artificial intelligence which are generally available to the public and for use by the consumer (for example, virtual artificial intelligence assistants that are capable of undertaking certain actions by voice commands,, traffic routing services, SPAM removal, social networking applications, facial recognition for security, and shopping recommendations) (see the BEIS Guidance, page 23).

[2] The reforms are intended to also apply to businesses that develop products whose primary function is authentication using cryptographic means, where these products are reasonably expected to be used in systems critical for national security. This includes IT systems in critical infrastructure sectors. Such products may be used in the verification of the identity of an individual or user (see the BEIS Guidance, page 23).

[3] Relevant enterprises active in advanced materials sectors broadly include enterprises active in the research, development, production, ownership, creation, supply, or exploitation of intellectual property or the provision of knowhow or services regarding materials broadly for use in (i) modifying the detectability or appearance of any object; (ii) alloys formed by chemical or electrochemical reduction; (iii) manufacturing processes for the solid state formation of alloys into crude or semi-fabricated forms or powders for the purpose of joining materials to make parts from three-dimensional model data; or (iv) composite material designed to change the manner in which electromagnetic, acoustic, or vibrational energy interacts with such material (see the BEIS Guidance, page 25).

[4] See the BEIS Guidance, page 28.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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