New UK merger rules on national security and public health

The UK Government has laid before Parliament on 22 June 2020 a number of changes which will give the Government greater power to intervene in certain mergers on national security grounds. Some of these changes will have immediate effect and some are still just proposals. These national security rules run alongside, but are separate to, the UK Competition and Market Authority's review of deals on competition grounds.

Combatting public health emergencies

The first is The Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020. This was laid before Parliament through the so-called negative procedure, meaning this order will come into effect from 23 June 2020, unless Parliament annuls it. This order amends Section 58 of the Enterprise Act 2002, which specifies the public interest considerations in relation to which the Secretary of State may intervene in relevant mergers. The current public interest grounds available to the Secretary of State are national security, plurality of the media and stability of the financial system.

Article 2 of the order inserts a new subsection (2E) into section 58 of the Enterprise Act 2002 specifying as a public interest consideration the need to maintain in the United Kingdom the capability to combat, and to mitigate the effects of, public health emergencies. Practically speaking, this will mean that the Government can intervene in relation to acquisitions of target companies directly active in responding to the pandemic response (so, for example, involved in researching a vaccine or in manufacturing PPE), provided that the deal satisfies the turnover and share of supply thresholds under the regular merger control system. Where the Government intervenes, it can trump the CMA's competition clearance decision if it considers that the deal raises public interest concerns.

AI, cryptographic authentication technology and advanced materials

On the same day, a separate draft Order was also laid before Parliament which seeks to extend the scope of a previous 2018 amendment to the rules regulating the Government's ability to intervene in relation to acquisitions on national security grounds. The 2018 amendment lowered the regular merger control (turnover and share of supply) threshold at which the government can intervene in acquisitions in three areas: military and dual-use goods; computing hardware; and quantum technology. The changes proposed on 22 June 2020 will apply those lowered thresholds to acquisitions of target companies directly active in artificial intelligence, cryptographic authentication technology and advanced materials.

Article 3 of the draft order, called The Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020, amends section 23A of the Enterprise Act 2002 to add these new categories of the target business to which the lowered thresholds would apply. The Order applies to developing, supplying, researching any of these types of goods. For advanced materials it also includes owning any relevant intellectual property, as well as supplying or sharing know-how relating to any material used in the process of manufacturing advanced materials. Advance materials relate to those materials used for camouflage, including any which serve to reduce vibration, acoustic or electromagnetic energy.

This draft order must first be voted on and approved by both houses of Parliament before it becomes law.

The new rules - as with the current rules - will only bite when there is an acquisition of material influence in the target business. This is a level of control which, although subject to some discretion on the part of the CMA, has a defined meaning in UK merger control.

Whereas there has always been a recognition that UK national security risk will be higher in the context of a takeover by a foreign buyer - because a foreign investor is less likely to have the UK's interests at heart - the statement from the Business Secretary makes explicit reference to the fact that the new rules extending the public interest consideration to combating public health emergencies - a direct response to the consequences of the Coronavirus pandemic - are aimed at foreign takeovers.

The Government is planning a wider overhaul of its foreign direct investment rules, with the introduction of the National Security and Investment Bill, which will give the Government significantly broader powers to review acquisitions and investments in UK businesses. The 22 June actual and proposed amendments serve as something of a stop-gap. That wider reform is still to come.