M&A into the UK: detailed proposals for tighter control of deals across tech, defence and energy sectors

As explained in Part 1 of this article the Government has concluded that the current patchwork regime for protecting national security where foreign investment is made into the UK is not sufficient.  A consultation has been launched on a proposed two stage overhaul.

New powers to review foreign investment into the defence and advanced tech sectors

First, BEIS is consulting on proposals to reduce the merger control thresholds in relation to: (a) the military and dual use sector (i.e. businesses that design and manufacture goods subject to export controls); and (b) businesses that design and manufacture computer chips or quantum technologies.

We have looked at the ramifications of these proposals on the defence sector here.  As regards advanced technology:

• the concerns around computer chips arise from the potential for them to be controlled remotely, allowing access to confidential information via a technological backdoor into connected devices. This concern may have been driven by scrutiny of the recent acquisition of a business supplying secure communications services for the emergency services, along with the increasing prevalence of connected devices all around us as the Internet of Things develops;
• the concerns around quantum computing are not explained but may reflect the power of this technology to turbo-charge encryption techniques – and therefore also to crack cyber-security algorithms.

Intellectual property rights around these technologies are also planned to be included in the new controls (although, in any case, the acquisition of a bundle of IP with an associated revenue stream from royalty rights etc can constitute a business for merger control purposes).

In future, it is proposed that the Government will be able to review deals in these sectors where the turnover of the target is only £1 million (instead of £70 million).  The government also proposes to remove the alternative threshold that the merger should result in the creation or enhancement of a share of 25 per cent (although it is not clear that this further change is needed).  The proposed very low threshold is considered necessary, in part to address the issue of building cumulative control across industry sectors, and in part because advanced tech businesses working on cutting edge products will often have very low turnover.

The high merger regime thresholds for public interest scrutiny are identified as the most pressing “loophole” to address in relation to defence and advanced tech.  This part of the consultation runs for four weeks, until 14 November 2017.

Should we have a standalone foreign investment review regime?

The second consultation is broader and less channelled in terms of outcome.  It seeks views on whether the UK should introduce a standalone foreign investment control regime with mandatory notification, or should address the remaining “loopholes” with further adjustments to the voluntary merger control regime.

The UK is unusual in not having a foreign investment control regime.  In jurisdictions such as the USA, Australia and Canada, there are active and often wide-ranging standalone regimes that exist entirely separately to merger control, with different thresholds, tests and enforcers.  Even in the EU, many Member States apply controls to protect national security and infrastructure, notwithstanding the constraints of the EU free movement of capital and anti-discrimination principles.

What is being proposed?

The Green Paper proposes a standalone regime which would apply to “essential functions in key parts of the economy”.  The key parts of the economy are identified, “as a minimum”, as:

• civil nuclear;
• defence;
• energy;
• telecoms; and
• the transport sector,

as well as the two sectors discussed above (defence and advanced tech), and also potentially the emergency services sector and government business.

The Green Paper considers that for these industries, the potential national security risks mean that it would be proportionate to impose the burden of compulsory notification and prior clearance on businesses.  However, the regime would apply only to “essential functions” within those industries (which we have listed here), plus potentially to individually identified businesses which were upstream or downstream in the supply chain from those products.

Finally, specific plots of land might also be brought into the regime, to deal with the concern that, for example, foreign ownership of a building or plot next to a military base could give rise to potential risks of espionage or sabotage.

When would mandatory notification apply?

Notification of an investment would be mandatory whenever a foreign purchaser acquired a stake of 25 per cent or more, or otherwise acquired significant influence or control over a company, or its UK assets or businesses, where such businesses fell within the specified list of essential functions in key parts of the economy.

The Green Paper estimates that up to 100 transactions per year might fall within this proposed mandatory regime.

The alternative proposal

The Green Paper proposes, as the alternative to a mandatory regime, further remodelling of the public interest provisions under the existing merger control regime so that a “national security” intervention could be made whenever a foreign purchaser acquired a 25 per cent stake or significant influence or control over a company, or its UK assets or businesses, which raised national security risks.

This part of the consultation runs for 12 weeks, until 9 January 2018.

Continue reading:

Part 3 | The government’s proposed list of “essential functions in key parts of the economy”