Although broadly comparable to merger control regimes in other countries, the new powers seem inconsistent with the idea of the UK being open to foreign investment. Companies planning to acquire businesses or assets with a UK nexus will need to think carefully about the proposed new rules, given their breadth, potential impact and uncertain scope.
The government's existing powers to intervene in mergers with implications for national security were bolstered by the introduction of lower thresholds for intervention in certain sectors in June 2018. Those powers sit within the existing UK merger control regime, which is operated by the Competition and Markets Authority (CMA) and intended, primarily, to prohibit mergers that may substantially lessen competition in the UK.
The proposed new system would, however, be independent of the CMA's merger control regime, and would work alongside it. It would be overseen by a senior Cabinet minister, yet to be appointed. Ultimately, the senior minister would have the power to prohibit a contemplated acquisition, or even to require the reversal of an acquisition that has already been completed.
The new regime could apply to the acquisition of businesses and assets, including land, intellectual property and contractual rights. There would be a process by which transactions can be notified for clearance by the senior minister. The senior minister would also be able to call-in for review an acquisition where the minister has a reasonable suspicion that it may pose a risk to national security, even if the transaction has not been voluntarily pre-notified.
The government expects to receive about 200 notifications a year, of which around 100 transactions will be called-in and about 50 will likely require remedies. This is a significant increase in activity compared the CMA's merger control role. To put it in context, in its 2017-18 financial year the CMA adopted 62 decisions on mergers, of which nine were referred for an in-depth investigation.
In addition to the envisaged scale of the new national security regime, what is striking is its potential breadth. Certain "core areas", such as national infrastructure and advanced and dual-use technologies, are specifically identified as ones in which the new regime is likely to have particular application, but it will also apply more broadly to other "key parts of the economy".
The government's consultation on the proposed new national security regime ends on 16 October 2018.
What is the proposed structure of the new regime?
It is proposed that the new regime would take effect on the existence of a so-called "trigger event": an investment, acquisition or other activity that grants a party significant influence or control over entities or assets.
The senior minister may call-in a trigger event for review if two conditions are met:
- the senior minister must have reasonable grounds for suspecting that it is or may be the case that a trigger event has occurred or is in progress or contemplation; and
- the senior minister must have a reasonable suspicion that the trigger event may give rise to a risk to a national security risk due to the nature of the activities of the entity, or the nature of the asset (in the case of land: the nature or the location of the land), to which the trigger event relates.
The trigger events identified in the proposed legislation are any investment or activity that involves the acquisition of:
- more than 25% of an entity's shares or votes;
- significant influence or control over an entity;
- further significant influence or control over an entity beyond the above thresholds;
- more than 50% of an asset; or
- significant influence or control over an asset.
The definition of a trigger event is broad. The UK's merger control regime only applies where a business or part of the activities of a business are acquired. In contrast, the new national security regime will also apply to the acquisition of an asset, including IP rights, land and rights under a contract. The new regime will also apply to assets physically located outside the UK, where a clear 'nexus' test is met. The government anticipates that asset-related trigger events will account for around 50 notifications a year.
When undertaking a national security assessment, the senior minister will consider three aspects of the acquisition:
- the target risk – whether the entity or asset subject to the trigger event could be used to undermine national security;
- the trigger event risk – whether the trigger event gives someone the means or ability to use the entity or asset in this manner; and
- the acquirer risk – whether the acquirer may seek to use its acquisition of control over the entity or asset to undermine national security.
The senior minister will have formal information-gathering powers in the proposed legislation, which will enable it to decide whether to call-in a transaction for review and also to review a transaction after it has been called-in. Once called-in, a trigger event would not be able to complete until the government has finished its assessment. In addition, the senior minister may impose specific interim restrictions on parties' sharing of information or provision of access.
If the senior minister decides that the trigger event does pose a risk to national security, the minister will be able to impose conditions in order to prevent or mitigate those risks or, as a last resort, will be able to block or unwind the trigger event. The proposed legislation is likely to create civil or criminal sanctions for a failure to comply with remedies imposed on a trigger event, or other orders served on parties.
Who and what is the new national security regime targeting?
The new regime is primarily targeted at overseas purchasers of UK businesses and assets, but would also apply to purchasers who are UK nationals. In particular, the new national security regime is aimed at so-called "hostile parties", which includes other states that are considered to be hostile to the UK's national security and parties acting on their behalf.
The government has not put forward a list of who will be considered to be a hostile party, and it is not clear who these will be. From looking at other jurisdictions where similar measures have been implemented, the decisions taken can become quite political - for example, around whether investors from a particular state should be considered hostile.
Rather than propose the goods, services and assets which the government considers will give rise to a target risk, it has instead identified certain categories of activity that will be particularly affected: the so-called "core areas" set out in the consultation. However, even that list is not exhaustive because the government also considers that there are "other key parts of the economy" where a trigger event is more likely to give rise to national security risks compared to the wider economy as a whole.
As a result, in many instances it will be difficult for parties to be certain that the new regime will not apply to their transaction. Faced with such uncertainty, especially while the regime is in its infancy and where transactions involve overseas buyers, it is likely that parties, their funders and advisers will take a cautious stance and proactively notify transactions under the regime. Such caution is likely to be particularly acute where an acquisition is subject to the Takeover Code.
How will a notification be made under the new national security regime?
Notification under the new national security regime will be voluntary. Parties will be encouraged to notify any transaction that could prompt national security risks or enter into informal discussions with the government to gauge whether notification is appropriate. If parties do not voluntarily notify, the government could intervene on its own initiative and call-in a transaction for review.
What is the timetable for review under the new national security regime?
The consultation proposes that the senior minister could exercise the call-in power up to six months after either the trigger event occurred or the senior minister did or could have become aware of it.
Where a transaction is proactively notified for approval, the senior minister would have a period of 15 working days in which to decide whether to call-in the transaction for a national security assessment. This period may be extended once, by a further 15 working days.
Once called-in, a national security assessment would need to be completed within a period of 30 working days, which could be extended once by the senior minister for a period of a further 45 working days. It would also be possible for the parties to agree with the senior minister to a further extension of time. The review periods could also be further extended by 'stop the clock' provisions when the parties are called upon to provide specified data in response to an information request.
In other words, if a transaction was voluntarily notified for approval and if the senior minister extended the timetable to the maximum permitted, the overall review timetable would be 105 working days, assuming that there was no use of 'stop the clock' provisions.
The government has proposed that decisions to call-in a trigger event would be made public, but that decisions to not do so would not be.
Guy Lougher is a competition law expert at Pinsent Masons, the law firm behind Out-Law.com.