The new UK national security regime: quick guide to the key changes

On 15 March 2018, the Department for Business, Energy and Industrial Strategy (BEIS) announced that it was introducing reforms to the existing UK merger control regime to strengthen the Government’s power to scrutinise mergers on the grounds of national security.¹ This is the first significant amendment to the UK merger control regime since the Enterprise Act 2002 (EA02) came into force.

These changes take place in a context of heightened concern about national security issues, in particular in the high tech sector, the approach of Brexit, and that fact that similar regimes exist in several other countries. However, there are concerns among business and practitioners that the new regime should not add to red tape for transactions, particularly where there is no likelihood of national security issues arising.

We set out below the specific amendments to the merger control regime announced earlier this month, along with a brief overview of the longer term reforms in this area that have been proposed by the Government.

Background

Currently, the UK Government is only able to intervene in a merger on grounds of national security concerns where a “relevant merger situation” occurs, meaning either: (i) where the business being acquired has a UK turnover of more than £70 million; or (ii) where the merger takes the parties’ combined share of supply of particular goods or services in the UK (or a substantial part of it) above 25 per cent (or incrementally adds to an existing share of at least 25 per cent).²

Once a “relevant merger situation” is created, the Competition and Markets Authority (CMA) has jurisdiction to review the transaction on competition grounds. The Government can only intervene on national security grounds once the CMA has established jurisdiction.³

In Autumn 2017, the Government consulted on a twin package of proposals to reform and strengthen its powers to scrutinise acquisitions and investments on national security grounds.⁴ In particular, the Government raised concerns that, under the existing regime, certain transactions are not open to Government scrutiny (as they fall outside CMA jurisdiction) and that these may give rise to opportunities for foreign nationals and/or hostile states to undertake espionage, sabotage or exert inappropriate leverage intended to damage the UK’s national security interests.

Short-term reforms

On 15 March 2018, BEIS published its response to the Autumn 2017 consultation. The response set out the Government’s intention to introduce changes to the jurisdictional thresholds that determine whether or not a “relevant merger situation” has been created in respect of enterprises operating in the following three defined sectors:

1. the development or production of items for military or dual-use;
2. the design and maintenance of aspects of computing hardware; and
3. the development and production of quantum technology.

The changes mean that where an entity that is being acquired is active in one of these sectors, the test for CMA jurisdiction has been revised such that it arises where:

• the business being acquired has a UK turnover of over £1 million (rather than £70 million under the current regime); or
• the business being acquired has an existing share of supply of the relevant goods and services in the UK of at least 25 per cent before the merger (as opposed to requiring an overlapping share with the purchaser to “create or strengthen” the share as a consequence of the transaction).

These changes are significant in giving the CMA jurisdiction both for very small transactions, and those where the buyer is not active in any of the sectors listed above.

Introduction of the short-term reforms

The Government proposes to introduce the amendments to the EA02 via secondary legislation shortly. The first amendment order introducing changes to the share of supply component of the jurisdictional test has been tabled⁵, with the second amendment order concerning changes to the turnover test expected shortly. There is no indication as to when the amendment orders will be enacted; however, it is understood to be imminent.

Although the thresholds are changing notification will not become mandatory. Parties can take a view on the risks of not filing, and facing a possible investigation post-signing or even once a deal has completed.

Guidance on the short-term reforms

Alongside the consultation response, the Government has published draft guidance on which it has invited comment.⁶ The draft guidance seeks to provide parties with clear and practical advice on the changes. Importantly the draft guidance includes further detail on the sectors covered: including indicating that items for military and dual-use will be those that fall within one of four existing Strategic Export Control Lists. The guidance also provides an explanation as to what constitutes “computing hardware” and “quantum technology”.

In parallel, the CMA has also published its own draft guidance.⁷ While the CMA recognises that the revisions to the merger thresholds will result in a greater number of transactions falling within its jurisdiction, it makes clear that it does not anticipate opening own-initiative competition investigations on the basis of horizontal concerns into transactions over which it has jurisdiction only on the basis of the new national security thresholds.⁸

Further proposed reforms

The Government has yet to publish its response to the part of its Autumn consultation setting out its proposed longer-term reforms to address its concerns around foreign investment and national security. Under the long-term reforms, the Government proposes the introduction of:

• an expansion of the Government’s existing powers to intervene in transactions raising potential national security concerns within a voluntary notification regime; or
• a mandatory notification regime for foreign investment connected to the provision of certain “essential functions”.

A mandatory regime would mark a significant departure from the existing regime, but may be seen as justified in a context of national security concerns. This is an area which business will wish to monitor closely as some of the reforms proposed could impose significant new regulatory burdens on transactions.