BEIS White Paper on National Security and Investment

Background

On 24 July 2018, the Department for Business Energy and Industrial Strategy (BEIS) published a White Paper inviting comments on its new legislative proposal for national security mergers. The White Paper follows on from a Green Paper published in October 2017, which led the Government to put forward a series of changes to the jurisdictional thresholds for national security mergers in the UK.

The White Paper includes a legislative proposal which would radically change the way national security mergers are reviewed in the UK, including amending of the Enterprise Act 2002 to create a clear distinction between competition and national security assessments. The White Paper suggests that this regime could apply to around 100 transactions a year.

The Legislative Proposal

The first proposed change of note is that, whereas currently all statutory powers of intervention rest with the BEIS Secretary of State, under the proposed new regime any “Senior Minister” would be able to exercise intervention (or calling-in) powers. This would include the Prime Minister, the Chancellor, as well as all other Secretaries of State. In practical terms, it is expected that the Secretary of State for Defence would use this power most often.

Furthermore, there would be new thresholds (or trigger events) under the proposed legislation. These would be:

• the acquisition of more than 25% of shares or votes in an entity
• the acquisition of significant influence or control over an entity
• the acquisition of further significant influence or control over an entity beyond the above thresholds
• the acquisition of more than 50% of an asset; or
• the acquisition of significant influence or control over an asset.

The White Paper explains that “significant influence or control” would be understood as whether a party has the practical ability or means to be able to use the entity or asset to potentially undermine national security:

• For entities, there would be significant influence or control when a person can direct the activities of an entity or can ensure that an entity generally undertakes or performs the activities which they desire.
• For assets, there would be significant influence or control when a person has absolute decision rights over the operation of an asset or can ensure the asset is being operated in the way they desire (eg being able to use, alter, destroy or manipulate the asset).

Where a trigger event has occurred, a new two limb test would dictate whether a Senior Minister may exercise the calling-in powers. This new test would be that the Senior Minister has:

1. reasonable grounds for suspecting that it is, or may be, the case that a trigger event has occurred or is in progress or contemplation, and
2. a reasonable suspicion that the trigger event may give rise to a risk to national security due to the nature of the activities of the entity, or the nature of the asset, to which the trigger event relates.

In relation to this second limb, the notion of “risk to national security” is further divided in three factors:

Target risk:

This is where the entity or asset subject to the trigger event could be used to undermine national security. The legislative proposal explains that this risk is stronger in certain “core areas” which are listed in Annex A of the White Paper. They include:

• infrastructure (including but not limited to civil nuclear, telecommunication, energy defence and transport)
• advanced technologies (including but not limited to artificial intelligence, cryptography, nanotechnology, quantum technology, synthetic biology and material sciences); and
• critical government assets (such as public buildings and emergency services), as well as any entity vital to the supply chain of the above core areas.

Whilst the core areas would increase the target risk in case of a trigger event, the calling-in power would apply to the entirety of the UK economy.

Trigger event risk:

This risk relates to where the trigger event could give the acquirer the means or ability to undermine the UK’s national security through disruption, espionage, inappropriate leverage or some other means.

Acquirer risk:

This risk relates to where the person itself acquiring control over the target has the potential to use this to undermine national security.

Process for calling-in, remedies, sanctions and appeals

Process and remedies

The White Paper does not suggest any time limits for the Government to use its calling-in powers (as opposed to the current regime where it must intervene within four months of a transaction being made public). Transactions with a national security dimension would either be notified voluntarily or would be investigated by the Government at its own initiative.

To exercise its calling-in powers, Government would need to serve a “Call-In Notice”. Once a Call-In Notice has been served on the parties, there would be a suspensive effect for yet-to-be completed transactions. For an already completed transaction, the Government would be able to issue “interim restrictions”, similar to those that can be issued by the Competition and Markets Authority (CMA).

The Government would have up to 30 working days to assess whether the trigger event which it has called in does indeed give rise to a national security risk. The assessment period would be extendable by an additional 45 working days by the Government (ie up to 75 working days).

Beyond those initial 75 workings days, parties to the transaction could agree to extend the deadline voluntarily. Information requests of the Government could also stop the clock, and the White Paper does not suggest any limit on the Government’s ability to issue such requests (while acknowledging this power could be used to significantly extend the process).

The proposed regime would grant the Government powers to impose remedies similar to those granted to the CMA under the Enterprise Act (eg divestitures, behavioural remedies).

It is worth noting that, much like the special public interest regime, no fee would be levied on transactions reviewed by the Government.

Sanctions

The regime would create both civil and criminal sanctions for non-compliance, with the maximum criminal sentence being five years and/or an unlimited fine, and the maximum civil fine being 10% of the relevant business’s worldwide turnover for the previous financial year.

Appeals

Decisions by a Senior Ministers under the propose regime would be of “quasi-judicial”, and therefore would be subject to judicial review, and appeals would be heard at the High Court, however, it is unclear (from a public law perspective) whether only allowing judicial review of a criminal conviction will be satisfactory.

Interaction with Competition Regime

The regime would abolish “national security” as a “specified consideration”1 for public interest intervention under sections 42, 59 and 67 of the Enterprise Act 2002, including the new thresholds introduced in June 2018 (see our previous article). However, in practice the regime would interface with the competition regime in a similar fashion. Specifically, the Senior Minister would not interfere with the CMA’s investigation into the effect of the transaction on competition grounds (and would be bound by that decision). However, if the Senior Minister believed that a merger should (or should not) proceed based on national security grounds, these considerations would override the CMA’s analysis.

Comment

The White Paper’s proposals would provide for a significant expansion in the Government’s powers. If enacted, the proposals could have a sizeable impact on merger control analysis for the UK given how many companies could fall within the “core areas” as described above. While it is expected that, in practice, the suggested powers would be focused in on “frontline” national security sectors like aerospace and firearms, the suggested regime would add some additional complexity for many industries.

Interested parties have until 11:45pm on 16 October 2018 to contribute to the consultation. Following this consultation, the Government is expected to issue its policy statement and prepare a bill for Parliament to pass the relevant legislation. It will be interesting to see then how the new regime will interface with other regulatory regimes. 

1 UK law allows for the BEIS Secretary of State to intervene on specific public policy grounds and replace the CMA as the relevant authority for reviewing a given transaction. There are currently four types of specified considerations: national security, transfer of a newspaper, broadcasting and cross-media, and stability of the financial sector. The current legislation also includes a mechanism to create additional specified exemption.