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'Re-politicisation' of merger process as part of reforms should be avoided, says expert

Care should be taken not to 're-politicise' the UK merger control process as part of proposed reforms to the national security public interest test, an expert has warned.26 Oct 2017

Giving the government more powers to intervene in potential mergers on national security grounds could "create legal uncertainty and undermine business confidence in the UK, especially post-Brexit", if those powers were too widely drawn, competition law expert Alan Davis of Pinsent Masons, the law firm behind Out-Law.com, said.

Targeted proposals which would allow the government to intervene in proposed mergers involving military and dual use products, and parts of the advanced technology sector, even those involving smaller businesses seemed sensible, giving the growing role played by these sectors and businesses in the defence sector, Davis said.

UK mergers are generally assessed on objective, economics-based competition grounds, with limited exceptions as permitted by EU law. The 2002 Enterprise Act allows the UK government to intervene in mergers on limited public interest grounds: national security, media plurality and stability in the UK financial system. It can only do so if the business being acquired has a UK turnover of more than £70 million, or where the parties' combined share of supply in the UK post-merger would be 25% or more.

The government is now seeking views on potentially expanding the reach of the national security public interest test in both the short and longer term. In the short term, it proposes lowering the threshold at which ministers can scrutinise mergers to smaller businesses with a UK turnover of over £1m, and removing the 25% share of supply threshold entirely. The changes would explicitly apply to proposed mergers involving military and dual-use products, and advanced technology such as chips and quantum computing.

In the longer term, the government intends to allow for better scrutiny of transactions that could "raise national security concerns", including the increased risk of espionage or sabotage or the ability to exert inappropriate leverage. It has suggested a number of changes it could make to the law, which could include a mandatory notification regime for foreign investment in certain critical sectors of the economy, specific businesses or plots of land as well as specific projects.

The sectors include civil nuclear, defence, energy, telecommunications and transport, as well the manufacture of military and dual-use items and advanced technology, and the government and emergency services sectors. However, for each of these sectors, the mandatory notification regime would only apply to certain defined "essential functions".

The government is also consulting on expanding the existing voluntary notification regime so that it applies to a broader range of transactions that raise potential national security concerns. The new powers would expand to government's ability to 'call in', on national security grounds, mergers that were not voluntarily notified to the CMA to include mergers where significant influence or control is acquired over any UK business by any investor (domestic or foreign). Significant influence would be deemed to arise where 25% or more of a company's shares or votes are acquired. The usual share of supply and turnover thresholds would not need to be met for the government to be able to intervene.   

Consultation on the short-term proposals, which could be introduced through secondary legislation, closes on 14 November 2017. Consultation on the proposed longer-term reforms closes on 9 January 2018.

Davis said that the first part of the consultation "did not seem to be objectionable and could be considered a sensible updating of the rules to reflect the growing importance of the role of technology in national security and the fact that small suppliers of such technology can sometimes play a critically important role". However, the second part of the consultation was "potentially more controversial", he said.

"First, the scope of what might come under the national security umbrella could be very wide and include many essential public functions, services and utilities in key parts of the economy," he said.

"Second, the government is consulting on whether a mandatory notification regime should apply for all foreign investment in certain parts of the economy that provide essential functions. Not only would this represent a significant shift in the UK's longstanding policy of voluntary merger filings, it could potentially catch a large number of sectors and assets," he said.