New Investment Security Unit and CMA to liaise under National Security and Investment Act

The National Security and Investment Act 2021 (NSIA) came fully into force on 4 January 2022, giving the UK government the right to intervene in a broad range of transactions on national security grounds. As well as introducing a mandatory notification regime for transactions that concern sensitive sectors, NSIA also gives wide powers to the government to call-in transactions that fall outside the mandatory notification requirement, including before the transactions have closed.

The Competition and Markets Authority (CMA) on 4 January 2022 also published a revised version of its "Guidance on the CMA's Jurisdiction and Procedure" to coincide with and reflect the commencement of the new national security regime. The government expects its newly created Investment Security Unit (ISU), which operates within the Department for Business, Energy and Industrial Strategy, to review notifications under the new legislation. The guidance notes that "the CMA and the ISU expect to coordinate, as may be appropriate, to manage the interactions between the two regimes that may arise in specific cases".

Previous powers 

Prior to the introduction of the NSIA, the UK did not have a separate screening regime for inward investments. The new Act replaces the existing "public interest" merger-regime provisions of the Enterprise Act 2002 (EA 2002) insofar as a transaction involves national security considerations.  

Under the EA 2002, transactions meeting the relevant jurisdictional thresholds have been subject to review by the CMA as to their impact on competition. While the government could already intervene in certain transactions on national security grounds, this was solely on an ex post "call-in" basis. Under UK merger control, the CMA only has jurisdiction where: 

(i)  the target entity has more than £70 million turnover in the UK; or 

(ii)  the transaction gives rise to a combined share of supply of more than 25% of goods or services of a particular description.

In 2018 and 2020, the UK government granted the CMA further powers to review mergers in high-risk sectors by amending the jurisdictional thresholds in order to allow the regulator to review transactions that would otherwise fall outside the previous merger test – particularly those in the areas of dual and military-use technology, quantum technology, computer hardware, artificial intelligence, cryptographic authentication and advanced materials sectors. 

The turnover threshold for the target in those sectors was lowered from £70 million to £1 million, while the requirement in the "share of supply" test for an increase in the parties' combined share of supply to a figure of more than 25% was replaced by a requirement that the target business alone should have a share of supply of 25% or more of the relevant goods or services.

The way forward

The NSIA removed national security from the list of public interest considerations and, therefore, the updated merger guidance provides that the secretary of state is no longer equipped to intervene in the merger control process on national security grounds. From 4 January 2022, all national security issues will be addressed under the new national security regime. However, businesses need to be aware that, where a transaction completed before 4 January 2022, the secretary of state will continue to be able to intervene in a CMA merger review on national security grounds.

The updated CMA merger guidance also makes it clear that the new regime is separate from the existing merger control provisions under the EA 2002 and that a merger may be capable of qualifying for review under both merger control and NSIA. In such cases, the CMA encourages parties to engage with it at an early stage in order to discuss issues around the timing and process of the review.

Further, the CMA notes that, where a final order is in force or a final notification that no further action is to be taken has been given under the NSIA, the secretary of state can issue a direction to the CMA to do or not do anything under the EA 2002, provided that the secretary of state reasonably considers that the direction is necessary and proportionate for the purpose of preventing, remedying or mitigating a risk to national security. Prior to issuing any direction, the government will consult with the CMA (and with other parties where appropriate).

Finally, the special merger-control jurisdictional thresholds, following the NSIA coming into force, no longer apply. This means that transactions in these sectors are again subject to the standard UK jurisdictional thresholds, where (i) either the target entity has more than £70 million turnover in the UK or (ii) where the transaction gives rise to a combined share of supply of more than 25% of goods or services of a particular description.  

Cooperative watchdogs

Expect active cooperation between the CMA and the ISU. The scope of the new national security regime is very broad, with the government having previously stated that it expects the newly created ISU to review approximately 1,000-1,850 notifications per year. The government has also stated that it will only use its new powers to block (and potentially unwind) transactions as a last resort where there is a significant national security concern and remedies are not appropriate. Inevitably, a number of those cases will also be reviewed in some form by the CMA, either by its Mergers Intelligence Unit as part of their market-monitoring activities or in the context of a more formal merger control review at Phase I.

The updated CMA merger guidance makes clear that where a merger is investigated by the CMA on competition grounds and separately on national security grounds under the NSIA, the CMA may share confidential information with the ISU and to facilitate coordination, as may be appropriate, in cases being investigated in parallel.
In order to share confidential information with the ISU, the CMA may seek a confidentiality waiver from the merger parties and/or use the mechanism provided by section 54(1) of the NSIA. This provides that, if a public body makes a disclosure to facilitate the secretary of state fulfilling its functions under the Act, the disclosure from a public authority (for example, the CMA) will not amount to a breach of confidentiality.

Osborne Clarke comment

Given the expected level of cooperation between the ISU and CMA, if parties are only intending to notify their transaction to the ISU, it is advisable to consider in advance whether a proactive approach to the CMA should be made in parallel. In addition, deal documentation may need to cater for both processes, allowing appropriate periods for regulatory reviews.

For more information about the NSIA and analysis of its scope and background, please see our previous Insight articles on its main features and powers, its implication for tech deals, the revision of its scope to catch fewer tech transactions, and changes to its thresholds for mandatory notification.