As European nations increasingly focus on regulation of foreign direct investment (FDI), the UK Government recently announced changes to the Enterprise Act 2002, which underpins the UK’s merger control regime.
Within the raft of legislative measures introduced to combat the effects of the COVID-19 pandemic, the UK Government has turned its focus to protection of businesses that are crucial to fighting public health emergencies, while also expanding the jurisdiction of the merger control regime in respect of a new slate of deals in high-tech industries. This client alert provides an overview of the latest developments in this space.
These developments come while we await the imminent publication of the National Security and Investment Bill (the “NS&I Bill”). The Bill will further enhance the UK Government’s powers to intervene in foreign investments from a national security perspective, and set a course for a paradigm shift in the UK’s approach to investment in sensitive industries in the post‑pandemic world.
There are two key amendments to the Enterprise Act 2002:
1. The addition of a new “public interest” criterion for intervention in mergers “to combat and mitigate the effects of a public health emergency”, effective immediately; and
2. Changes to the jurisdictional thresholds under the UK merger control regime for businesses operating in the fields of artificial intelligence (AI), cryptographic authentication technology and advanced materials. This remains subject to parliamentary approval.
Public Health Emergencies: The wider powers for the Secretary of State to intervene in transactions that both meet the jurisdictional thresholds under the UK merger control regime and threaten the UK’s ability to respond to public health emergencies will affect a range of directly relevant businesses, including suppliers of personal protective equipment, pharmaceutical companies and research bodies. However, the powers will also capture businesses with a more remote connection to public health, such as those involved in the food supply chain, logistics companies and internet service providers.
This means that there are now four “public interest” criteria as grounds for state intervention, with the latest addition sitting alongside (i) national security; (ii) media plurality; and (iii) stability of the UK financial system. This may extend to the acquisition of minority interests by foreign investors.
Jurisdictional Thresholds: The new focus on AI, cryptographic authentication technology and advanced materials flows from modifications made in June 2018, which introduced lower thresholds tests to the UK merger control regime for targets operating in certain sectors central to national security:
Following these modifications, the Competition and Markets Authority (CMA) may investigate transactions in these sectors where:
The Secretary of State (i.e. the Government) may elect to intervene where there are public interest implications as described above.
The new turnover threshold represents a substantial deviation from the main threshold of £70 million and effectively draws any substantive transaction in these sectors under the potential scrutiny of the UK Government. It has also significantly expanded the scope of transactions the CMA can review from a competition perspective.
Assuming Parliament approves the latest changes later this year, AI, cryptographic authentication technology and advanced materials will join the list of sectors that fall under these lower jurisdictional thresholds and will be subject to additional scrutiny. Investors should keep in mind when planning and implementing transactions in this space.
The latest developments described above are intended to “mitigate risks in the short term”, ahead of comprehensive changes to the UK’s FDI regime. Following a consultation paper released in July 2018, the NS&I Bill was announced in December 2019 and is expected to be published this summer.
The July 2018 paper indicates that a voluntary notification system of screening will remain, whilst expanding the state’s powers in additional circumstances, described as “trigger events”. The trigger events are wide ranging and focus on the acquisition of more than 25% of the shares or votes in an entity, more than 50% of an asset, or acquisition of significant influence or control over an entity or an asset. In practice, this could catch the acquisition of sensitive tangible assets like servers or data centers, but also intangible assets like computer code.
The UK Government originally declared that it intends to “scrutinise investments and consider the risks that can arise from hostile parties acquiring ownership of, or control over, businesses or other entities and assets that have national security implications”. However, the precise details of the regime are pending and the Prime Minister has recently suggested that it may deviate from certain principles outlined in the July 2018 paper, such as through the introduction of mandatory notification of certain transactions.
Although the consultation paper considers that foreign nationality makes it more likely that an acquirer will not have the UK’s interests at heart, and may therefore pose a greater risk to national security, we understand that the new regime is intended to be proportionate and not automatically subject all foreign investment to review. Rather, similar to the EU framework regulation and foreign investment control schemes set up by EU Member States, filing requirements are likely to apply only in particularly sensitive areas of business, such as critical infrastructures and critical technologies.
The UK Government estimates that there will be 200 notifications per year, with approximately 100 of those requiring in-depth national security reviews. It expects that around 50 cases will lead to the imposition of commitments, such as conditions relating to information access. At the far end of the spectrum, the Government may block deals or even unwind them post-completion, so acquirers will need to take the regime seriously when planning their approach to filings.
In today’s uncertain world, facing a global pandemic and the challenges of Brexit, the UK Government is under pressure to strike a balance between maintaining attractiveness to foreign investors, while mitigating the national security concerns that are increasingly the focus of attention across Europe. This trend is reflected in the EU by the upcoming full applicability of the EU framework regulation on FDI screening on 11 October 2020, and the amendments of EU Member State laws and regulations beforehand.
The latest amendments to the Enterprise Act 2002 emphasise the UK Government’s wariness and willingness to intervene in transactions, and is indicative of this evolving regulatory landscape. As we await the draft NS&I Bill, it remains to be seen how far the UK will swing in the direction of “national interest” over “national security”. However, both UK businesses and foreign investors will hope that the importance of free trade in the post-Brexit world will temper protectionist sentiments that can come to the fore in tumultuous times. National security concerns should be balanced against the need to ensure the UK is “open for business” in the manner in which international capital has long been accustomed.
For more information about Coronavirus (COVID-19) preparedness, visit our Coronavirus (COVID-19) Resource Center for Europe.