The proposals are the second stage “longer term” reforms to the UK’s national security rules. The “short term” changes, which lowered the UK merger control thresholds for transactions in the military or dual-use goods, computer processing units and quantum technology sectors, took effect in June 2018 and will remain in place on a temporary basis until the longer term reforms are adopted. The White Paper argues that the latest proposals are in line with steps taken around the world by other countries to protect national security interests.
As set out in the White Paper, the proposed new rules are incredibly far-reaching – the Government recognises that they are “a significant expansion in its powers”. They potentially capture transactions regardless of the parties’ revenues or market share, and in any sector. They also include powers not only to scrutinise the acquisition of companies or businesses, but also acquisitions of assets with national security implications, such as intellectual property or land (the aim being to ensure an acquirer cannot “circumvent” the rules by acquiring an asset rather than the business itself). New projects or even loans could also be caught in certain circumstances. Finally, the rules do not formally discriminate between domestic or foreign investors/acquirers, albeit this is likely to be a factor relevant to the Government’s (and therefore to deal makers’) assessment of the likelihood that national security issues may be relevant to any given transaction.
A voluntary regime
Similar to the current UK merger control regime, the White Paper sets out a voluntary notification system. However, businesses and investors are “encouraged” to notify the Government in advance of any relevant transactions which may give rise to national security issues.
Where transactions are not notified, the Government will be able to intervene by “calling-in” a deal which it believes raise national security concerns. It will be able to do this both before the acquisition has completed, and post-completion for a specified period – the White Paper proposes six months.
As noted above, there are no turnover or market share thresholds below which transactions will fall outside the remit of the Government’s national security review procedures (as there is in relation to the current UK merger control regime). However, the White Paper proposes a set of “trigger events” which enable the Government to review a deal. These include any investment or activity involving the direct or indirect acquisition of:
- more than 25% of an entity’s shares or votes;
- significant influence or control over an entity (this is wider than the test of “material influence” under the existing UK merger control rules, and broader than the meaning of significant influence and control under the Companies Act 2006 – it will apply where a person can direct the activities of an entity or can ensure that an entity generally adopts the activities they desire); or
- further acquisitions of significant influence or control over any entity beyond the above thresholds (including the acquisition of over 50% or 75% of shares/votes, or new or additional rights e.g. board appointment rights). In effect, this means the UK Government will be able to intervene where future acquisition/control thresholds are met even where it decided not to call-in a transaction following an initial trigger event(s).
In relation to the purchase of assets (in which the Government expects to intervene “relatively rarely”), the trigger events are the acquisition of:
- more than 50% of the asset; or
- significant influence or control over the asset (i.e. absolute decision rights over the operation of the asset or ensuring the assets is being operated in the desired way).
Further guidance for merging parties will be available. Alongside the White Paper the Government has published a draft “Statement of Policy Intent”. This gives more detailed guidance on when the trigger events described above may give rise to national security concerns, based on three risk assessments:
- The target risk – could the entity or asset subject to the trigger event be used to undermine the UK’s national security? The Statement notes that this is more likely to be the case in “core areas” of the economy, e.g. certain parts of national infrastructure (listed as civil nuclear, defence, communications, energy and transport), certain advanced technologies, critical suppliers of the Government and emergency services, and dual-use technologies. ‘Critical suppliers’ of these core areas are also more likely to raise national security risks.
- The trigger event risk – does the trigger event give someone the means to use the entity/asset to undermine the UK’s national security, e.g. through disruption, espionage or inappropriate leverage?
- The acquirer risk – might the person acquiring control over the target use this control to undermine national security? Here, “hostile states and other hostile parties” are most likely to pose a national security risk, with foreign states and foreign nationals being more likely to raise issues than UK-based acquirers.
In addition, the Government notes that it is happy to give informal advice to merging parties prior to them deciding whether to submit a formal notification.
For deals which are voluntarily notified, the White Paper sets out that a Senior Minister (i.e. a Cabinet-level minister) will screen the notification to decide whether to call in the trigger event for a full national security assessment. This can take up to 15 working days (extendable by a further 15).
For deals which are not notified, the Government may request information in order to decide whether there is a trigger event and if so whether to formally call that deal in for a national security review.
In order to make a decision to call in a trigger event, the Senior Minister must have a “reasonable suspicion that the trigger event may give rise to a risk to national security” and any intervention must be “necessary and proportionate”. The decision to call in a trigger event will be published.
The full national security assessment itself will take up to 30 working days (extendable by up to a further 45 working days where more detailed scrutiny is needed, or even longer if the parties agree and/or fail to respond to information requests in the time period prescribed). Notwithstanding that the overall regime will remain ‘voluntary’ (in the sense that parties will not be required to notify), once a transaction is subject to a national security review, parties will be prohibited from completing until approval is granted, although preliminary or preparatory steps (such as discussing contractual or commercial terms) will be possible.
The White Paper envisages three possible outcomes of the assessment: (1) confirmation the deal can proceed; (2) clearance but subject to the imposition of conditions to prevent or mitigate any national security risks; or (3) blocking the transaction (or ordering it to be unwound if already implemented).
Interestingly, the White Paper contains an indicative but non-exhaustive list of the types of conditions that may be imposed, which may be either structural, e.g. not acquiring control over a particular division or asset, or behavioural, e.g. limiting access to certain sites or information to those with appropriate security clearances. Breaching conditions (as well as non-compliance with other areas of the regime), opens the parties and relevant individuals up to civil financial fines and criminal penalties (including up to five years in prison in certain circumstances). Director disqualification for up to 15 years is also possible.
Resulting uncertainty and burden for merging parties?
The Government is not taking forward the proposals in its earlier Green Paper to introduce a mandatory notification regime (read our previous Alert for more information on this). An important factor in this decision was no doubt the many protests against the burden of such a system which were put forward by respondents to the Green Paper.
But a voluntary regime does not avoid administrative burden. The Government expects there to be around 200 notifications made each year under the proposed rules, of which around 100 will raise national security concerns (and therefore be subject to a full assessment). Compared to the current position, which sees only a handful of transactions being reviewed under national security grounds in any given year, this is a huge increase. The White Paper states that the Government expects around 50 deals to be subject to conditions each year.
The proposals will also introduce a significant degree of uncertainty in relation to deal timetable. If acquirers decide not to notify, they may face up to a six month period following completion during which the Government would be able to call in their deal for a national security review – substantially longer than the equivalent four month period under the existing UK merger control rules. Assuming the proposals are adopted in their present form, we would therefore expect to see even more deals than the predicted 200 being notified on a cautionary basis.
On a more positive note, one element of the White Paper that is to be welcomed is the proposal that a single “Senior Minister” will be the decision maker under the regime. After the publication of the Green Paper there was some concern that, if ministers across different Government departments were to be responsible for decisions in their own areas, this could give rise to inconsistent applications of the rules and outcomes. Having one decision maker removes this risk, but the selection of the ‘right person for the job’ will clearly be extremely important.
Untying the national security review from the merger control/public interest regime
The UK is relatively unusual in that the possibility of Government intervention on public interest grounds (including national security) is currently embedded within the existing competition-based merger control regime. The White Paper proposes removing national security considerations – but not other public interest considerations (such as media plurality or financial stability) – from the scope of the merger control regime entirely. On the one hand this is to be welcomed, as it enables the Competition and Markets Authority (CMA) to concentrate on competition (or media/financial stability) related assessments of mergers, leaving the national security aspects to the Government. However, one of the benefits of the public interest and competition assessments being linked was that the parties were effectively subject to a single assessment process. In untying national security reviews from this process, merging parties may face the additional burden of parallel reviews and potentially inconsistent outcomes. The White Paper tries to address these concerns by enabling the Government to link the timing of the competition assessment with any national security review, and providing that the Government can effectively 'trump' the CMA’s competition findings if they are inconsistent with the outcome of the national security assessment. But we can foresee that knotty issues in terms of both procedural and substantive consistency are likely to arise.
The timing of the White Paper is interesting in light of the recent high profile failure of Gardner Aerospace’s attempted acquisition of Northern Aerospace. That deal was reviewed under the short term changes to the UK merger control rules (which, as noted above, will be reversed if the reforms set out in the White Paper are adopted) and eventually cleared on both national security and competition grounds. However, by this point the parties had already abandoned the deal on the basis that the national security intervention alone meant they would miss their agreed completion date.
Notwithstanding the result in this case, it is clear that the current UK Government remains keen to push forward with wider reforms to upgrade the UK national security rules, while at the same time stressing that it will maintain “an open approach to international investment”. It remains to be seen whether the proposed White Paper reforms will successfully strike this balance.
The Government is consulting on the White Paper and the Statement of Policy Intent until 16 October 2018.
You can read the White Paper here.
For specific advice on the proposals and their potential impact, including developments as they make their way through the UK legislative process, please contact the authors of this Alert or your usual A&O contact.