New UK foreign investment screening rules come into force

New provisions, which came into force on 11 June 2018, introduce lower merger control thresholds for transactions in certain sectors. These revised thresholds are designed to provide the UK Government with increased scope to scrutinize foreign investments and transactions that raise national security concerns.

The changes were accompanied by guidance from the UK Competition and Markets Authority (CMA) and the Department for Business, Energy and Industrial Strategy (BEIS) on how they expect the regime to operate in practice.

Increased jurisdiction over military, dual-use and advanced technology sectors

In October 2017, the UK Government consulted on short and long-term reforms to the public interest regime (see our previous briefing note). The new provisions, which amend the Enterprise Act 2002, implement the short-term proposals by expanding the UK merger control regime to include smaller businesses active in the military and dual-use sectors, and the advanced technology sector. Since the Enterprise Act 2002 came into force, the UK Government can formally intervene in cases caught by the UK thresholds (and smaller transactions involving government contractors) only where specified public interest considerations are engaged. In expanding the UK merger control regime to encompass smaller transactions in certain sectors, the new provisions increase the scope for the UK Government to use its powers to intervene in transactions in the relevant sectors.

Transactions in the affected sectors will now fall within the UK merger control regime, and therefore be susceptible to intervention from the UK Government, where either of the following reduced tests is met:

  • the target's turnover exceeds £1 million (reduced from £70 million); and/or
  • the target alone has a share of supply or purchase of at least 25% of any goods or services in the defined sectors (dispensing with the need for an increment to the share of supply).

In all other sectors, the rules remain unchanged. It is therefore important for parties to know whether or not they fall within the new thresholds. The BEIS Guidance provides details of the types of business activities, goods and services which fall within the new thresholds. Briefly put, they include the development and production of military items and dual-use items which are subject to export control, and the holding of related information. The advanced technology sector comprises activities relating to computing hardware and quantum technology:

  • Computing hardware – this covers businesses that own, create or supply intellectual property relating to the way that computer processing units function and that provision or manage roots of trust in relation to processing units.
  • Quantum technology – this refers to businesses that carry out research into, design or manufacture quantum technology (ie quantum computing or simulation; quantum imaging, sensing, timing or navigation; quantum communications; and quantum resistant cryptography). The use of quantum goods or services provided by others is not in scope.

The role of the CMA

Where the Secretary of State has intervened in a transaction, the CMA is required to review the transaction from a competition perspective, and to collate representations on the public interest issues in a report to the relevant Secretary of State. However, it is the Secretary of State who will make the decision on the outcome of the review (ie, approve the transaction, impose conditions, or block or unwind the transaction). The CMA's workload will now include reviewing those transactions caught by the new regime where the Secretary of State has intervened.

The changes also have the effect of extending the CMA's jurisdiction to assess transactions caught by the new thresholds on competition grounds alone. However, the CMA has confirmed in its Guidance that it does not expect the new provisions "to bring about a material change in its approach to the assessment of mergers on competition grounds". This is on the basis that transactions that meet the lower thresholds (but not the original thresholds) are unlikely to raise competition concerns, and accordingly the CMA does not anticipate opening any own-initiative competition investigations in transactions where it previously would not have had jurisdiction.

Impact on transactions in the affected sectors: what should you do?

The real effect of the new provisions will be in relation to transactions that raise national security concerns in the relevant sectors. The BEIS Guidance explains that, based on the UK Government's analysis, the lower thresholds will catch between 5 and 29 additional transactions a year, but it expects "only a small minority of these (1 to 6 per annum) to raise national security concerns requiring the issue of a Public Interest Intervention Notice by the Secretary of State". By comparison, since the Enterprise Act 2002 came into force, there have only been a total of 13 public interest interventions (on any ground) over a period of 15 years and, of these, 7 raised issues of national security.

Parties to mergers in the affected sectors will be well advised to assess if they fall within the scope of the rules, and if so, should start engaging with the relevant Government department at an early stage to establish whether an intervention (and therefore CMA review) is likely. The CMA has indicated that parties should engage with the relevant Government department, as the CMA will not be in a position to provide substantive guidance. The relevant departments are the UK Ministry of Defence in respect of activities in the military sector, the UK Department for Culture, Media and Sport in respect of quantum technologies, and BEIS in respect of the dual-use and computing hardware sectors as well as general queries.

What's next?

It is important to remember that the UK continues to operate a voluntary merger control regime, and parties continue to be able to decide whether to notify transactions (including those which raise national security concerns). The changes implemented last week do not change the voluntary nature of the regime. However, the long-term proposals (the details of which are not yet clear) include an expansion of the CMA's call-in power as part of a voluntary regime and the introduction of a mandatory notification regime in relation to foreign investment in certain areas of the economy.

At the European level, proposals for a framework to screen and review foreign investments on the grounds of security or public order are going through the legislative process. If approved, the EU proposals are likely to come into force in 2019, but it remains to be seen what impact, if any, these will have on the UK Government's intention to increase further its ability to intervene in mergers on national security grounds. The timing of the proposed long-term reforms in the UK also remains unclear, as the UK Government has commented that it will publish a response to the consultation on these "in due course".

The Hogan Lovells global competition and trade teams are uniquely placed to advise affected businesses on transactions which may raise national security issues in the UK and/or elsewhere in the world.

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