Merger control: greater scope for government intervention

Introduction
Public health emergencies – new public interest criterion
Broad application of public health emergencies criterion
Lower jurisdictional thresholds apply to certain sectors
AI, cryptographic authentication technology and advanced materials
Implications for businesses

Introduction

On 11 November 2020 the government published details of the National Security and Investment (NS&I) Bill, which will introduce a foreign direct investment (FDI) screening regime in the United Kingdom.

This follows on from revisions to the UK merger control regime in Summer 2020, which introduced a new public interest criterion (in relation to public health emergencies) and lowered the jurisdictional thresholds applicable to certain activities in the United Kingdom (relating to AI, cryptographic authentication technology and advanced materials).

Pending the passage of the NS&I Bill by Parliament (the legislative timetable is yet to be published, but the NS&I Bill could be passed within the next six months), the recent revisions to the UK merger control regime have been positioned by the government as a form of "short term" risk mitigation.(1) As witnessed by the publication of the NS&I Bill, businesses should expect further changes relating to the regulatory regime governing FDI in the United Kingdom in the coming months.

Against this background, this article considers recent revisions to the UK merger control regime and their implications.

Public health emergencies – new public interest criterion

In June 2020 the government introduced a new public interest criterion to the UK merger control regime(2) (in addition to the public interest criteria addressing national security, media plurality and the stability of the UK financial system).

Under this additional public interest criterion, the government can intervene(3) where it believes that it is, or may be, the case that a transaction:

• satisfies the general jurisdictional thresholds under the UK merger control regime(4) (which may be satisfied by the acquisition of a minority stake in a target company);(5) and
• gives rise to considerations regarding the need to maintain in the United Kingdom the capability to combat, and to mitigate the effects of, public health emergencies (the public health emergencies criterion).

If the government is minded to intervene, the secretary of state (SoS) will issue a public interest intervention notice (PIIN) and the Competition and Markets Authority (CMA) will prepare a report for the SoS addressing jurisdictional and competition issues.

The CMA is the decision maker where a transaction is investigated under the general UK merger control regime (ie, solely in relation to competition issues). However, where the SoS issues a PIIN, the SoS can replace the CMA as the decision maker and the SoS can determine whether the transaction is to be:

• cleared at the end of a Phase 1 investigation (with the parties potentially providing undertakings to address concerns in order to secure clearance);
• referred for a Phase 2 investigation on the basis of public interest concerns (or public interest concerns in conjunction with competition concerns); or
• referred to the CMA for it to consider competition issues, on the basis that the transaction does not give rise to public interest concerns.

If a transaction is referred by the SoS for a Phase 2 investigation, the SoS will decide whether the transaction is in the public interest(6) and, if not, what remedy is required to resolve concerns identified at the conclusion of the Phase 2 investigation.(7) A remedy in this context could include the prohibition of the transaction (in whole or in part).

Broad application of public health emergencies criterion

The public health emergencies criterion is widely drafted and the accompanying explanatory memorandum(8) and guidance(9) make clear that its application is intended to go beyond any direct public health response to a pandemic.

For example, in addition to noting that the government may need to intervene where a vaccine research company or a manufacturer of personal protective equipment is being acquired, the guidance gives examples of such intervention potentially being required where the acquisition target is an internet service provider or food supply chain company, given "the potential for increased demand for internet services in a lockdown situation or disruption to food supply".

Moreover, the public health emergencies criterion is not limited to the current COVID-19 pandemic, with the explanatory memorandum confirming that the government must be able to intervene in advance of public health emergencies to ensure that "critical capabilities are not degraded before an emergency strikes".

Lower jurisdictional thresholds apply to certain sectors

In June 2018 the government enacted lower jurisdictional thresholds under the UK merger control for transactions where the target (the relevant enterprise) was involved in certain activities in connection with:

• certain computing hardware;
• quantum technology; or
• items for military or dual use (ie, both military and civilian use).

These lower jurisdictional thresholds are distinct from the general jurisdictional thresholds under the UK merger control regime,(10) and are satisfied whether either:

• the annual UK turnover of the relevant enterprise exceeds £1 million (the relevant enterprise turnover test); or
• pre-transaction, the relevant enterprise supplied or procured goods or services of a particular description, and had a share of supply or procurement of at least 25% of all of those goods or services in the United Kingdom, or in a substantial part of the United Kingdom (the relevant enterprise share of supply test).(11)

Importantly, the relevant enterprise share of supply test is satisfied by the activities of the relevant enterprise alone. This means that there is no requirement for the activities of the acquirer and the relevant enterprise to overlap to satisfy the relevant enterprise share of supply test (in contrast with the share of supply test under the general jurisdictional thresholds).

Where it is, or may be, the case that a transaction satisfies these lower jurisdictional thresholds, the CMA can investigate on competition grounds and the SoS can intervene on behalf of the government where it considers that the transaction may raise public interest considerations (eg, in relation to national security), and replace the CMA as the decision maker (as outlined above).

AI, cryptographic authentication technology and advanced materials

In July 2020 the government introduced revisions to the UK merger control regime(12) which expand the sectors addressed by the activities of relevant enterprises in order to include a range of activities in connection with the following broadly defined sectors of the UK economy:

• AI;(13)
• cryptographic authentication technology;(14) and
• advanced materials.(15)

Significantly, the lower jurisdictional thresholds aim to have a broad application and will apply where the activities of relevant enterprises include:

• AI – namely:
  • research into AI;
  • developing or producing anything designed for use in AI; and
  • supplying services employing AI, where such products are reasonably expected to be used in systems critical for national security;
• cryptographic authentication – namely:
  • research into cryptographic authentication technologies;
  • developing or producing any product which has cryptographic authentication as its primary function; and
  • supplying services employing cryptographic authentication where such products are reasonably expected to be used in systems critical for national security (including, for example, authentication technologies used by a credit and debit chip-and-pin card at an ATM or retail point of sale and facial recognition technologies used in conjunction with CCTV footage);(16) and
• advanced materials – namely:
  • research into advanced materials;
  • developing or producing advanced materials;
  • owning, creating or supplying intellectual property relating to the functional capability of advanced materials;
  • developing or producing anything designed as an 'enabler' (ie, any material or process which is not an advanced material, but which is used in the manufacture of an advanced material); and
  • providing know-how about enablers or their use.

Consequently, the revisions afford the government greater scope to intervene on public interest grounds (eg, national security) where transactions affect aspects of the AI, cryptographic authentication technology and advanced materials sectors in the United Kingdom.

Implications for businesses

Against the backdrop of the government's stated intention to introduce a UK-specific FDI regime, these recent revisions have significant implications for businesses.

In the first instance, while the relevant legislative instruments do not distinguish between UK and non-UK entities, aspects of the accompanying guidance published by the government's Department for Business, Energy and Industrial Strategy (BEIS) outline concerns regarding the risk that "hostile actors" may undermine national security by acquiring certain business interests.(17)

In the context of the NS&I Bill, these stated concerns indicate that transactions involving certain non-UK entities will be subject to closer scrutiny by the government on the grounds of national security.

As a result, as well as considering potential competition law issues in the context of the UK merger control regime, businesses planning transactions that potentially fall within the scope of the revisions should ensure that they engage at an early stage with the possibility of the government intervening and the SoS assuming the role of decision maker.

This engagement is likely to include commencing a dialogue with the relevant government department, as well as giving careful consideration to potential remedies that could be offered to address any concerns that may be identified (including relating to the possible restructuring of the transaction).

The risk of intervention by the government should also be addressed as necessary within both the relevant transaction documents (eg, in the context of a condition precedent) and the transaction timetable.

For further information on this topic please contact Samuel Beighton or Bernardine Adkins at Gowling WLG by telephone (+44 207 379 0000) or email (samuel.beighton@gowlingwlg.com or bernardine.adkins@gowlingwlg.com). The Gowling WLG website can be accessed at www.gowlingwlg.com.

Endnotes

(1) See "New protections for UK businesses key to national security and fight against coronavirus", BEIS press release, 21 June 2020.

(2) See Section 58 of the Enterprise Act 2002.

(3) See Section 42 of the Enterprise Act.

(4) The general jurisdictional thresholds under the UK merger control regime are satisfied where either:

• the annual UK turnover of the target enterprise exceeds £70 million (the turnover test); or
• the enterprises ceasing to be distinct both supply or procure goods or services of a particular description and, post-transaction, will supply or procure at least 25% of all of those goods or services in the United Kingdom or in a substantial part of the United Kingdom (the share of supply test).

(5) See, for example, RWE's anticipated acquisition of a 16.67% shareholding in E.ON, which was cleared by the CMA at Phase 1 (ME/6800/19 Anticipated acquisition by RWE AG of a 16.67% minority stake in E.On SE, CMA clearance decision of 5 April 2019); and Amazon's anticipated acquisition of a minority shareholding in Deliveroo (ME/6836/19 Anticipated acquisition by Amazon of a minority shareholding and certain rights in Deliveroo, CMA reference decision of 11 December 2019).

(6) See Section 54 of the Enterprise Act.

(7) See Section 55 of the Enterprise Act.

(8) See Explanatory Memorandum to the Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020, 2020 627.

(9) See "Enterprise Act 2002: Changes to the public interest grounds for intervention in merger cases – Guidance 2020", published by BEIS.

(10) See endnote 4 above.

(11) "Enterprise Act 2002: changes to the turnover and share of supply tests for mergers – Guidance 2020", published by BEIS.

(12) As introduced by the Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020 (SI 2020/748) and the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2020 (SI 2020/763).

(13) Defined as being:

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) (a) automated data analysis or automated decision making; or (b) analogous processing and use of data or information (see Section 23A(4) of the Enterprise Act).

(14) Defined as being 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 (see Section 23A(4) of the Enterprise Act).

(15) Defined as being;

(a) 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; (b) any alloys that are formed by chemical or electrochemical reduction of feedstocks in the solid state; (c) 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 (d) any metamaterials that do not include (i) fibre-reinforced plastics in structural components, products or coatings with completely random dispersion of pigment or other filler; or (ii) any packaged device components that are designed for civil application (see Section 23A(4) of the Enterprise Act).

(16) See "Enterprise Act 2002: changes to the turnover and share of supply tests for mergers – Guidance 2020", published by BEIS.

(17) Ibid.