UK merger control: new scrutiny powers on public health and national security grounds

On 22 June 2020, the UK government announced its intention to expand the scope of the UK merger control regime, in particular to give itself the ability to intervene in corporate transactions on a wider range of public interest and national security grounds.

The changes (some of which came into force on 23 June 2020) are, at least to some extent, connected to the ongoing COVID-19 pandemic. However, they form part of a wider set of legislative reforms introduced over the last couple of years by the UK government to increase the scrutiny of transactions on public interest grounds.

They are also intended to be relatively short-term modifications to existing legislation, pending the anticipated introduction of a much wider-ranging National Security and Investment Bill later this summer, which would give the UK government a more comprehensive set of intervention powers.

The UK regime remains voluntary. However, for the time being, investors considering acquisitions or disposals of businesses which are in some way involved in the pandemic response (most obviously, but not only, companies such as vaccine research companies or personal protective equipment manufacturers), or which are active in the fields of artificial intelligence, cryptographic authentication technology and advanced materials, should consider the potential implications of the new rules for their transactions.

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What are the UK government's existing public interest intervention powers?

National Security

As described in more detail in our January 2020 briefing, the UK government is currently able to scrutinise mergers on national security grounds in the following circumstances:

as with any merger, where the target business has annual UK turnover of over £70 million or the merger would result in the creation (or the increase) of a share of supply of 25% in the UK; or
the merger does not meet the thresholds in the first bullet but involves a current or former defence contractor who has (or had) access to confidential defence-related information and at least one of the merging parties carries on business in the UK.

In both these cases, the Secretary of State for Business, Energy and Industrial Strategy can "call in" the merger by issuing an intervention notice, enabling him or her to take the final decision on whether it should be allowed to proceed.

The government expanded this call-in power in June 2018, so that mergers involving certain military/dual use and advanced technology businesses can also be scrutinised where the target business has just:

turnover of over £1 million (as opposed to the normal £70 million threshold); or
a share of supply of 25% or more (as opposed to the normal test where a 25% share of supply must be created or increased by the merger, i.e. there must be some overlap with the acquiring party).

For more detail on the meaning of "advanced technology" businesses, see our briefing from July 2018.

Other Grounds for Public Interest Intervention

As well as national security, the UK government has also historically been able to intervene in transactions on other public interest grounds, in particular transactions involving media plurality and financial stability (the latter being added in 2008, during the financial crisis, and having been exercised only once in order to permit the Lloyds TSB/HBOS merger).

How is the UK government proposing to expand its intervention powers?

Public Health Emergencies

The UK government has added a fourth "public interest" ground for intervention in transactions, alongside the existing national security, media plurality, and financial stability grounds. This change came into force on 23 June 2020.

This change will enable the UK government to intervene in certain mergers where:

the ordinary merger control thresholds are met (i.e. where the target business has annual UK turnover of over £70 million or the merger would result in the creation (or the increase) of a share of supply of 25% in the UK); and
there is a "need to maintain in the United Kingdom the capability to combat, and to mitigate the effects of, public health emergencies."

The Secretary of State for Business, Alok Sharma, has commented that the economic disruption caused by the pandemic may mean that some businesses with critical capabilities are more susceptible to takeovers – either from "outwardly hostile" approaches, or "financially distressed" companies being sold to "malicious parties".

However, while the government has tended to focus its general press statements on businesses which are directly involved in a pandemic response (referring to vaccine research companies or personal protective equipment manufacturers), it is important to note that on a plain read of the text, no such limitation exists.

A wider range of companies may arguably be said to be involved in 'mitigating' the effects of the pandemic beyond those directly involved in 'combating' it, and the UK government's explanatory memorandum to the relevant Order also refers to a need to intervene if an internet service provider or food supply chain company becomes the subject of a takeover, given the potential for increased demand for internet services in a lockdown situation or disruption to food supply.

National Security

The UK government is also proposing to expand the scope of the lower threshold which previously (as described at 1.1 above) only applied to certain military/dual use and advanced technology businesses, so that it also encompasses businesses engaged in:

artificial intelligence;
cryptographic authentication technology; and
advanced materials.

This proposed change will be subject to the approval of Parliament.

Each of the above concepts is given more detailed description in the relevant draft Order. However, as might be expected, those descriptions appear to encompass a potentially wide range of activities (for example, development, production or research) and products (see box below). Investors should therefore carefully consider those definitions when assessing the UK merger control risk involved in a transaction.

What does "artificial intelligence" mean?

Artificial intelligence is stated to mean technology enabling the programming or training of a device or software to use or process external data (independent of any further input or programming) to carry out or undertake (with a view to achieving complex, specific tasks):

automated data analysis or automated decision making; or
analogous processing and use of data or information.

However, the draft Order appears to capture not only businesses involved in the development of AI, but businesses engaged in the supply of services employing AI.

Given the very wide range of businesses which now make use of AI in the supply of their services (including in some cases using open source software), this definition could potentially capture a considerable number of transactions involving companies which do not have any obvious connection with the development of AI or its application to new fields, which presumably would be of greater concern to the government from a national security standpoint.

What does "cryptographic authentication" mean?

Cryptographic authentication is stated to mean the method of verifying:

the identity of a person, user, process or device; or
the origin or content of a message, data or information, by means of electronic communication,

where the method of verification has been encrypted or subject to other analogous application, to protect the authenticity, confidentiality and integrity of the above information.

However, the relevant draft Order appears to also capture businesses engaged in the supply of services employing cryptographic authentication.

As with artificial intelligence, given the very wide range of businesses which now make use of cryptographic authentication in the supply of their services, this definition could potentially capture a considerable number of transactions involving companies which do not have any obvious connection with the presumably more sensitive areas of research and development into cryptographic authentication.

What are included within "advanced materials"?

Advanced materials are stated to include:

any materials that are capable of modifying (including in real time) the appearance, detectability, traceability or identification of any object to a human or to sensors within the range 1.5e13 Hz up to and including ultraviolet;
any alloys that are formed by chemical or electrochemical reduction of feedstocks in the solid state;
any manufacturing processes that are involved in the solid-state formation of alloys in or into crude or semi-fabricated forms, or powders for additive manufacturing, where “additive manufacturing” means a process of joining materials to make parts from three-dimensional model data; or
any metamaterials that do not include -
- fibre-reinforced plastics in structural components, products or coatings with completely random dispersion of pigment or other filler; or
- any packaged device components that are designed for civil application;

However, the draft Order appears to capture any business which is involved in "developing or producing anything designed as an enabler" or providing "know-how about or the use of enablers". This is notable given that "enablers" are not themselves advanced materials, but rather are used in the manufacture of advanced materials.

In effect, this definition could therefore potentially capture producers of raw materials – which may include businesses that do not normally think of themselves as being in any way concerned with national security.

How will this impact investors?

These changes mark a further expansion of the UK's public interest intervention regime, in particular as it relates to national security concerns. The UK is not alone in increasing its public interest scrutiny of transactions, and a number of countries have done so by various means in recent months, often in direct response to the effects of the pandemic on domestic companies.

The legislative changes themselves do not refer specifically to acquisitions of British companies by foreign acquirers (and in that sense they are not purely foreign investment controls). However, the UK government's commentary and explanatory memoranda on the changes clearly point towards a particular concern around overseas acquirers. Given the apparent breadth of the definitions of relevant business activities, however, further government guidance may be required for businesses to have a clearer idea of the types of transaction that may be called in.

The UK government has said that the new powers will allow it to "scrutinise certain foreign takeovers to ensure they do not threaten the UK’s ability to combat a public health emergency such as coronavirus", and the Secretary of State for Business, Alok Sharma, commented that the measures are intended to strike a balance between "the UK’s national security" and maintaining the UK's position as "an attractive place to invest".

"While the UK government's focus appears to be on transactions involving foreign acquirers, the new call in powers are broader than investors might expect"

Whether the UK government has struck the right balance in this regard, and whether the forthcoming National Security and Investment Bill also strikes the right balance, particularly in an investment climate which may also be affected by Brexit, will no doubt be a matter for debate in the coming years.

Up to now, as the UK government has noted, no transaction has ever been blocked on public interest grounds, and the government considers that the direct impact of the current changes will not be significant. However, the UK government's willingness to call in a number of recent transactions (as described in our January 2020 briefing) and the abandonment of the proposed acquisition by Chinese-owned Gardner Aerospace of avionics manufacturer Impcross in April 2020 suggest that the increase in public interest intervention powers may, in itself, impact on M&A activity in certain sectors.