Mergers and Takeovers: UK Strengthens National Security Scrutiny

The UK government has widened the circumstances in which it may block mergers and takeovers of businesses in the military, dual-use, computing hardware and quantum technology sectors. Further strengthening of the UK rules is expected later this year. In parallel, work is moving forward in the EU on a new Regulation to increase co-operation between Member States and to expand the role of the Commission in reviewing sensitive foreign investment. Dechert can assist businesses and investors to clarify if and how they may be affected. 

Foreign direct investment is increasingly seen as a potential threat to national security. While the US is developing measures¹ to strengthen scrutiny of foreign (particularly Chinese) investment, the UK and the EU are taking similar - albeit less radical - steps. 

United Kingdom 

The issues in the UK have been in the headlines following the offer from a US company, EchoStar, for the UK’s largest satellite company, Inmarsat. This comes on the heels of the takeover of UK engineer GKN by the US’ Melrose, and of the UK’s chip designer, Arm, by Japan’s SoftBank. Each raised fundamental questions over how far the UK’s ‘strategic assets’ should be in foreign hands. 

Following consultations on which we reported last December,² the UK Government concluded that measures to manage the national security risks of mergers and takeovers should be strengthened. As an initial step, it made two amendments to the Enterprise Act 2002 that came into force on 11 June.³ The government may now intervene in a transaction if it believes that the merger may raise national security concerns and the target business: 

a) has an existing 25% or greater share of supply of relevant goods and services in the UK (the previous threshold, that a transaction had to result in the merging parties’ share of supply increasing to 25% or more, will continue to apply); and 

b) has a UK turnover of £1 million or over (the previous threshold was £70 million) and is involved in: 

• export controlled items, specifically: the development or production of, or the holding of technology concerning, military or dual-use items (not all items subject to export controls are covered – those on the EU Human Rights List or subject to temporary export controls are excluded); 
• computer hardware, specifically: the ownership, creation or supply of intellectual property relating to the functional capability of: computer processing units, the instruction set architecture for such units and computer code that provides low level control for such units; and the design, maintenance or provision of support for the secure provisioning or management of ‘roots of trust’ of computer processing units and computer code that provides low level control for such units; 
• quantum technology, specifically: research, development or production of goods or supply of service involving: quantum computing or simulation; quantum imaging, sensing, timing or navigation; quantum communications; or quantum resistant cryptography. 

The UK Government estimates that these changes will result in up to 29 additional transactions per year coming into scope for potential intervention, but with only 1-6 per year posing a sufficient concern to justify the issue of a public interest intervention notice by the Secretary of State. This may lead to the merger proceeding, potentially on the basis of undertakings given by the parties, or to orders to remedy, mitigate or prevent any adverse effects to the public interest or (in extremis) to block the merger altogether. 

The UK Government does not anticipate that transactions affected by these changes will raise other public interest or competition-related concerns and the changes do not require businesses to take any direct action, since the UK retains a voluntary notification mergers system for both competition and public interest considerations. If businesses consider that a transaction may raise national security concerns, they are encouraged to contact the relevant department as early as possible before the transaction concludes. 

Further measures will be announced in a White Paper later this year. On the basis of the earlier consultations, these might involve expanding the scope of scrutiny to a broader range of transactions and/or introducing a mandatory notification regime for foreign investment in critical infrastructure or technologies. But the Government’s intentions remain to be made clear. 

European Union 

The changes in the UK do not affect the European Commission’s existing powers under the EU Merger Regulation. However, work is moving forwards in Brussels on the Commission’s proposal for a new Regulation⁴ establishing a framework for screening of foreign direct investments into the EU. 

The International Trade Committee of the European Parliament last month voted to adopt a strengthened version of the Commission’s proposals that would increase cooperation between Member States in conducting assessments of foreign direct investments and provide for the Commission to issue a non-binding opinion if another Member State’s or ‘Union interests’ (i.e. programmes with a significant share of EU funding, critical infrastructure or sensitive technologies) may be affected, although decisions would ultimately remain for Member States to take. 

This month, the Council (EU Member States) also decided on its position and will start negotiations with the Parliament with a view to agreeing on the new Regulation by early next year. 

How Dechert Can Help 

The new UK provisions do not impose any legal obligation on any business, therefore they need take no immediate action as a direct consequence of the amendments coming into force. But companies and investors should nonetheless familiarise themselves with the implications of the amendments so as to be well-placed ahead of any future relevant merger that might raise national security-related concerns. For mergers brought into scope of Government intervention as a result of the amendments, parties may wish to voluntarily notify the Government as they are currently able to do for mergers which already qualify for intervention. 

Members of Dechert’s International Trade and EU Law Team have extensive experience, including as former regulators, in these and related issues including negotiating bilateral investment treaties and managing national security reviews. 

Footnotes 

_{1) The Coming Storm? CFIUS Reform and Considerations for Private Equity
2) EU and UK Foreign Investment and National Security
3) Enterprise Act 2002: guidance on changes to the turnover and share of supply tests for mergers
4) Regulation of the European Parliament and of the Council establishing a framework to review FDIs into the EU}