UK extends national security merger intervention powers

Out-Law Analysis | 30 Jul 2020 | 8:55 am | 3 min. read

New rules will allow the UK government to intervene more easily on national security grounds in acquisitions involving businesses active in artificial intelligence (AI); cryptographic authentication; and advanced materials sectors, following further amendments to the Enterprise Act.

The revised rules are an extension of the lower thresholds for UK government intervention in mergers or acquisitions (M&A) involving industry sectors considered susceptible to national security risk, which first came into force on 11 June 2018. These rules enable the government to scrutinise transactions where the target business has a UK turnover of above £1 million, or has a share of supply of 25% or more of relevant goods or services in the UK (or a substantial part of it), even if the transaction does not lead to an increase in the merging parties' share of supply.

With very limited exceptions, the government cannot usually intervene in a proposed merger unless the target has a UK turnover of over £70m or the merger creates or enhances a share of supply of 25% or more in the UK, or a substantial part of it.

The changes came into force on 21 July 2020. Before this date, the lower thresholds applied only to companies active in one of three specified sectors: developing or producing items for military or military and civilian use (so-called 'dual use' goods); quantum technology; and computing hardware.

Warrington Giles

Giles Warrington

Partner

The range of businesses which could be caught by the new rules is wide, potentially including service providers, IP owners and component suppliers.

The changes build on successive legal refinements to the UK regime for screening M&A activity involving sensitive industries. Just last month, in a separate amendment, new powers were introduced allowing the UK government to intervene on public interest grounds in takeovers where the target is directly involved with combatting a public health emergency. This amendment added the public health ground to the existing public interest grounds for government intervention - national security; media plurality; and financial stability.

UK government intervention in a takeover can occur either before or post-completion. As with the existing UK merger control and public interest regime, it will not be mandatory for acquisitions to be notified under the new rules. However, a post-completion intervention can be highly intrusive and could, in theory, ultimately lead to the risk of the acquirer being required to divest the business concerned.

To date, the government has never prohibited a merger outright under the national security regime. Instead, it has used its powers to obtain commitments from the acquirer where it has concerns - for example, a commitment to ensure that the UK's strategic capabilities are not compromised by safeguarding intellectual property.

Guidance on government intervention

The government has issued guidance explaining the rationale behind the entire regime (38-page / 495KB PDF) including the latest changes, as well as providing examples of the kinds of businesses that might be caught. For AI and cryptographic authentication - which refers to confirming an individual's identity using, for example, biometric information - the government has indicated that it only intends to intervene where it reasonably expects the technology to be used in systems critical to national security.

The government has suggested that it is unlikely to intervene where the technology is used in products that are generally available to the public and for consumer use - for example, facial recognition for security. However, there could be material overlap where the products are initially developed for consumer use, but also have characteristics and capabilities that may conceivably have national security applications.

The guidance is deliberately not overly prescriptive when describing the national security concerns the government may have. In addition, the range of businesses which could be caught by the new rules is wide, potentially including service providers, IP owners and component suppliers.

The voluntary nature of the UK regime means that companies will have to self-assess before deciding whether to make a formal notification. The guidance suggests early engagement with the relevant government department. Acquirers may need to consider the new rules early in any transaction process.

Towards a UK foreign direct investment regime

While the merger intervention regime is not specifically targeted at foreign investors, it forms part of the government's wider intention to strengthen the UK's historically relaxed foreign direct investment (FDI) regime. The proposed National Security and Investment Bill, which is expected to introduce a comprehensive FDI regime, is the centrepiece of the government's ambition.

This Bill, which was first suggested by Theresa May's government, contained very extensive proposals. Not only covering full company acquisitions, the proposals covered acquisitions of minority stakes and property interests, including intellectual property. They also encompassed a wide scope of economic activity, such as core infrastructure and critical suppliers to the UK government and the emergency services sector. The Bill is expected to be introduced later this year.