Lower merger control thresholds will apply to transactions involving enterprises which develop or produce military or dual use items, quantum technology or computing hardware. This is to allow the UK Government to review and potentially block those transactions on the basis of national security.
At present, the UK Government can generally intervene in mergers only if they meet the turnover or share of supply tests in the Enterprise Act 2002, and then only on the grounds of national security, media plurality or financial stability.1 The Government considers that recent technological and economic changes mean the existing thresholds no longer effectively safeguard national security, while the UK is facing greater and more complex threats, which could emanate from foreign investment.
The Competition and Markets Authority (CMA) and the Department for Business, Energy & Industrial Strategy (BEIS) have therefore taken steps to implement various proposals which were first announced in the Government's October 2017 Green Paper on national security implications of foreign ownership or control.2 To widen the Government's powers to intervene, BEIS has laid a draft Order in Parliament to amend the share of supply test for mergers involving targets in three specific sectors.3 This will be followed by a second Order4 to lower the turnover threshold in these sectors.
The CMA and BEIS are now consulting5 on guidance that each has produced about these changes.
If the target is active in the development or production of items for military or dual use, quantum technology or computing hardware, the CMA will have jurisdiction to review the transaction (so the Government could intervene on any of the three grounds) if:
The turnover of the target exceeds £1 million (compared to £70 million in all other sectors); or
The target already has a 25% share of supply of the relevant goods or services in the UK or any substantial part of it. There will be no need for that share to increase as a result of the merger. This threshold has been introduced to capture mergers involving targets which undertake a unique activity in the UK. (Mergers which meet the existing threshold of increasing a share of supply to 25% or more will still be caught.)
The draft BEIS guidance clarifies the three sectors to which the new thresholds will apply:
Development or production of items for military or dual use: this includes arms, military and paramilitary equipment and items which can be used for both military and civil purposes, listed on four Strategic Export Control Lists.6 Targets which develop or produce these goods or services, or which hold related information, will be within the scope of this sector.
Design and maintenance of aspects of computing hardware: this includes targets which own, create or supply intellectual property relating to the functional capability of computer processing units, the instruction set architecture for such units, or computer code that provides low level control for such units. It will also bring into scope targets which design, maintain or provide support for the secure provisioning or management of roots of trust of computer processing units, or computer code that provides low level control for such units.
Development and production of quantum technology: this includes: quantum computing or simulation; quantum imaging, sensing, timing or navigation; quantum communications; and quantum resistant cryptography. The concept of 'development' includes design, assembly and testing, as well as the creation of intellectual property. However, targets providing non-quantum technology-related goods or services to quantum technology businesses are not subject to the new thresholds.
The Government will offer informal, non-binding advice on whether particular targets fall into one of these sectors.
Transactions involving targets which are only partially involved in one of these three sectors are still subject to the revised thresholds, but the Government will only be able to intervene where a merger involves a change in material influence or control over that particular activity.
What's staying the same?
BEIS estimates that the new thresholds will give the CMA the jurisdiction to review up to 29 extra mergers per year. However, notifying the CMA of a merger will remain (at least in theory) voluntary and the CMA does not anticipate opening any "own-initiative" investigations on the basis of the new thresholds. The CMA considers that any horizontal mergers raising competition concerns already trigger the existing thresholds, while most non-horizontal mergers do not raise competition concerns.7
In effect, the Government only expects to intervene in up to six additional mergers each year. The procedure it uses to intervene will not change. The Secretary of State will issue a Public Intervention Notice (PIN), requiring the CMA to carry out a Phase 1 report on jurisdictional and competition issues. The Secretary of State will then clear (conditionally or unconditionally) or, following an in-depth Phase 2 investigation, block the merger on one of the three grounds. But given the nature of the three sectors to which the new thresholds apply, BEIS only expects to issue a PIN in relation to mergers caught by the smaller thresholds on the ground of national security.
National security issues in mergers have historically been resolved by undertakings at the end of Phase 1. Alternatively, BEIS may proactively seek undertakings to protect national security before a relevant merger situation arises. For example, following Melrose's bid for GKN, BEIS and Melrose have engaged in discussions resulting in Melrose offering binding commitments (if its bid is successful) to, inter alia, maintain its UK listing and headquarters and maintain or increase GKN's current level of research and development investment.8 If BEIS accepts binding commitments at the bidding stage, this should satisfy any national security concerns, so the Government would be unlikely to issue a PIN. Any merger control assessment would then be based purely on competition issues.
When will the changes come into effect?
The CMA and BEIS consultations close on 12 April. BEIS is expected to finalise the draft legislation shortly after the outcomes of the consultations are issued. The new thresholds will only apply to mergers which take place after the amendments come into force.
In the longer term, these amendments are likely to be just the first of many in the UK and further afield:
BEIS has also consulted on reforms to revise the way in which the Government scrutinises the national security implications of foreign investment. The consultation closed in January and the Government will set out related proposals in a White Paper in due course;
The Government will continue to assess risks in other sectors, including emerging technologies, and will bring forward further legislation if necessary; and
In September 2017, the European Commission suggested establishing a framework to ensure that Member States can co-ordinate reviews of foreign takeovers endangering security or public order. The French government has now announced that it plans to update its national security screening rules for foreign investments alongside this framework.
1. The Government may specify additional grounds by Order. In very limited cases, the Secretary of State can intervene by issuing a Special Intervention Notice where the merger does not meet the turnover or share of supply threshold. See our alert New controls over foreign investment in UK strategic infrastructure? The legal background to the threat of increased state intervention
2. See our alert UK national security and infrastructure – tougher merger control ahead?
3. Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018
4. Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018
5. Competition and Markets Authority - Draft guidance on changes to UK merger thresholds and - Department for Business, Energy & Industrial Strategy - Enterprise Act 2002: changes to the turnover and share of supply tests for mergers - Draft guidance 2018
6. The UK Military List (Schedule 2 to the Export Control Order 2008); the UK Dual-Use List (Schedule 3 to the Export Control Order 2008); the UK Radioactive Source List (Schedule to the Export of Radioactive Sources (Control) Order 2006); and the EU Dual-Use List (Annex I to Council Regulation (EC) No. 428/2009)
7. CMA draft guidance on changes to the jurisdictional thresholds for UK merger control, paragraphs 3.4-3.6
8. See Department for Business, Energy & Industrial Strategy - Correspondence on the proposed GKN/Melrose takeover