UK Government proposes further powers for reviewing mergers and other investments on national security grounds
The UK Government has announced a consultation on proposals to implement a new regime for reviewing mergers and other investments on national security grounds¹. The new regime would represent a significant expansion of the Government’s current powers.
The proposals are set out in a White Paper published on 24 July 2018, which follows a consultation on a Green Paper published in October 2017. The Green Paper led to short term changes to the thresholds for reviewing mergers under the UK merger control rules in three specific areas of the economy, namely military/dual-use, computer processing units and quantum technology, enabling the government to intervene in a wider range of cases in these areas where national security concerns are raised².
What are the proposed changes?
The Government is proposing to introduce a new regime involving voluntary notification, where parties will be encouraged to notify transactions that they consider may raise national security concerns. In order to assist parties with this assessment, the Government is proposing to publish guidance on when it expects national security concerns are likely to arise. This will take the form of a statement of policy intent (a draft of which has been published alongside the White Paper).
Where parties decide not to notify, the Government will have the ability to intervene of its own initiative, including after the transaction has taken place (within a possible period of up to six months).
The Government is proposing a short preliminary assessment period of 15 working days, with the possibility of an additional period of 15 working days where further time is required. At the end of the preliminary assessment, the Government will call in those cases that raise national security concerns and carry out a full assessment to investigate the concerns. The White Paper envisages a period of up to 30 working days, extendable by a further 45 working days, for this assessment to be completed, with the possibility of further extensions.
Once a transaction has been called in, parties must not complete the transaction until approval has been granted (or, if it is has completed, take any further measures to increase the acquirer’s control or any steps that would make it more difficult for the transaction to be unwound – with the possibility for the Government to impose further interim restrictions). If the Government concludes that there are concerns, it will impose conditions to prevent or mitigate the national security risks. These conditions can be imposed on any party. In appropriate cases, such conditions could include blocking the transaction or unwinding it, if it has already taken place.
The new rules will apply to any transactions involving an acquisition of control or significant influence over an entity or asset. This will normally be by means of a merger, investment or other commercial activity (including a loan), but may be through any other means. The rules will also apply to the acquisition of any additional means of exerting control or significant influence.
An entity for these purposes covers companies, partnerships and any other form of entity over which control or significant influence may be acquired. Transactions that will be caught will potentially include acquiring more than 25% of an entity’s shares or votes or any other acquisition of significant influence or control over an entity.
An asset for these purposes covers any real or personal property, intellectual property and contractual rights. Transactions that will be caught will potentially include acquisitions of more than 50% of an asset or any other acquisition of significant influence or control over an asset.
The transaction must relate to an entity or asset in the UK, a non UK-entity carrying on activities in the UK (or supplying good or services to persons in the UK) or a non-UK asset used in connection with activities taking place in the UK (or the supply of good or services to persons in the UK).
The proposed new rules will replace the current power to intervene on national security grounds under the UK merger control rules.
What are the implications?
The Government expects there to be around 200 notifications each year, but anticipates it will be able to screen out around half of those as not raising concerns. Of those cases called in for a full assessment (either following notification or on the Government’s own initiative), the Government expects about half will require remedies.
These numbers are significant, particularly when compared with the total number of cases reviewed by the Competition and Market Authority each year under the UK merger control rules (currently around 60), albeit on competition grounds, and the total number of national security interventions by the Government under those rules in the last year (one).
Although the new regime will apply to a much wider range of transactions than the UK merger control rules, it is unclear how the Government has formulated these estimates.
What does appear clear is that those looking to make investments in the UK (or in non-UK entities or assets with a connection to the UK) will need to consider the new rules carefully (once they are in force) in formulating their acquisition strategy.
When will the changes come into effect?
The proposals are not yet final and the deadline for responses to the White Paper is 16 October 2018.
¹ https://www.gov.uk/government/news/government-upgrades-national-security-investment-powers
² Further discussion of the short terms changes can be found at: https://www.charlesrussellspeechlys.com/en/news-and-insights/insights/tmt/2018/uk-government-to-implement-new-powers-for-reviewing-mergers-in-key-strategic-sectors-on-national-security-grounds/
This article was co-authored by Paul Stone, Mark Howard and Daniel Rosenberg. For more information please contact Paul Stone on +44 (0)20 7203 5110 or at paul.stone@crsblaw.com.
