On 15 March 2018, the Government confirmed that it intended to proceed with the first part of its proposals, involving amendments to the current UK merger control regime to lower the thresholds for review of mergers in the military and dual-use sector, and parts of the computing hardware and advanced technology sectors.
The Government is still considering how it should proceed with the "long term" proposals it announced in its October 2017 Green Paper and which are described here. The Government is expected to publish a White Paper setting out its position on the long-term proposals, together with draft legislation, later in 2018.
In the meantime, on 15 March 2018, the Government published draft legislation to bring into effect some of the proposed short-term changes, together with a response to the consultation and draft guidance explaining the changes.
The Government highlights that "advances in technology now mean that there are ubiquitous goods with the potential to be directed remotely should a hostile actor obtain access or control". The Government considers that such advances have often been driven by small businesses, with the result that mergers involving such businesses run a real risk of prejudicing national security.
The Government therefore intends to lower the thresholds under the existing merger control regime contained in the Enterprise Act 2002 ("EA02"):
- in the military and dual use sector – covering the design and production of military items and dual-use items (i.e. products which have both military and civilian uses); and
- for companies whose business involves certain activities relating to computer processing units ("CPUs") or quantum-based technology.
In these sectors, the Secretary of State would be able to intervene (and potentially prohibit the merger) on national security grounds if either:
- the UK turnover of the target exceeds £1 million (reduced from the normal £70 million); or
- the target has an existing UK share of supply of 25 per cent or more (this would remove the need for an increase in market share); or
- the transaction would create or enhance a UK share of supply of 25 per cent or more (i.e. the existing "share of supply test").
Pending any wider reforms under the long term proposals, the existing thresholds will continue to apply in all other sectors.
The draft legislation provides significantly greater clarity on the scope of activities covered by the expanded provisions. This includes:
- businesses which develop or produce goods, software or information the export of which is controlled under specified export control legislation. These provisions cover military and dual-use items;
- owning, creating or supplying intellectual property relating to computer processing units, and designing, maintaining or providing support for the secure provisioning or management of "roots of trust" of CPUs. Roots of trust means hardware, firmware or software components that are inherently trusted to perform critical security functions, such as cryptographic key material that can identify a device or verify a digital signature; and
- research into, developing or producing anything designed for use in various forms of quantum technology, specifically quantum computing, simulation, imaging, sensing, timing, navigation and communications, and quantum resistant cryptography. The draft guidance notes that quantum technology has the potential to break currently secure computer and telecommunications systems and could give military weapons substantial additional abilities.
If the Secretary of State intervenes under the expanded powers, the existing public interest process under the EA02 would be followed. Thus, he or she would become the final decision-maker as to whether the deal should be cleared or prohibited, provided he or she continues to think the public interest consideration remains relevant.
An impact assessment published as part of the consultation response sets out that the Government estimates that it will issue an intervention notice on national security grounds in 1 to 6 cases per year as a result of the new regime. Given that the Government has only intervened on national security grounds in seven transactions in the last 15 years (0.5 interventions per year) under the existing provisions, this is perhaps a surprisingly large number.
The way in which the Government has chosen to implement the changes means that the new regime would technically allow the Secretary of State to intervene on any of the currently specified public interest grounds in any deal where the target is active in a specified sector and the new, lower thresholds are met. However, the Government states that it cannot foresee any circumstances in which transactions involving firms in the specified sectors would give rise to media plurality or financial stability concerns. National security should be the only relevant consideration.
The reduced thresholds also apply to the Competition and Markets Authority's ("CMA") power to conduct competition assessments under EA02. However, the CMA has published draft guidance on the new rules in which it states that it does not expect the changes to bring about a material change in its approach.
The intended expanded regime is not premised on there being any foreign investment element: the powers would apply equally to UK acquirers. However, the Government indicates that in practice foreign investment is more likely to raise national security concerns.
The draft legislation published thus far does not cover the reduced turnover test. But this is expected to be published shortly. The Government intends that all the "short-term" changes will be introduced simultaneously and has stated that the new rules will not have retrospective application.
