LawFlash

Potential UK Reforms Could Increase Screening of Certain Foreign Takeovers

04 июня 2020 г.

The UK Parliament’s Foreign Affairs Committee has issued a “call for evidence” as part of its ongoing review of the UK government’s role in intervening in certain foreign takeovers of UK companies and potentially blocking foreign asset stripping in the United Kingdom where a transaction could have national security implications therein.

Although similar reforms have been in the cards for a while, the timing coincides with a general trend among European lawmakers to increase the screening of foreign acquisitions in strategic industries at a time of financial instability arising out of the coronavirus (COVID-19) pandemic.

Current UK Merger Control Regime Regarding Transactions Having Effect on UK National Security

Under the Enterprise Act 2002, the United Kingdom has a voluntary merger filing regime. However, the UK antitrust agency, the Competition and Markets Authority (CMA), has jurisdiction to review a transaction on its own initiative (1) if the UK turnover of the target business exceeds £70 million (approx. $88 million) (the turnover test); or (2) if, as a result of the transaction, a share of 25% or more in the supply or consumption of goods or services of a particular description in the United Kingdom (or a substantial part thereof) is created or enhanced (the share of supply test).

Currently the UK merger control rules do not distinguish between foreign and domestic investments. However, the UK government can intervene in mergers where there is a public interest consideration, including with respect to national security; media quality and plurality; or the stability of the financial system.

With a view to protecting the United Kingdom’s national security interests, in June 2018, the UK government introduced reforms reducing the merger filing thresholds in the following 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. In these sectors, the CMA has jurisdiction to review the following transactions:

  • Where the target’s UK turnover is more than £1 million (approx. $1.26 million). This is a lower merger filing threshold than the UK £70 million (approx. $88 million) turnover for all other sectors; or
  • Where the target has an existing share of supply of at least 25% of goods or services in the United Kingdom. This is different to the ordinary share of supply test in all other sectors, which requires an overlap between the target and the purchaser in the supply of the relevant goods or services in the United Kingdom.

Under the 2018 reforms, the UK government can intervene in a merger in these three specific sectors on national security grounds where one of the lower merger filing thresholds referred to above is satisfied and the CMA has taken jurisdiction. The expanded regime is not premised on there being a foreign investment element—the powers apply equally to UK acquirers. However, the UK government indicated when it adopted the reforms that, in practice, foreign investments are more likely to raise national security concerns.

Under the proposed reforms going through the UK Parliament now, UK lawmakers are considering giving the UK government wider powers to intervene in certain foreign takeovers of UK companies and potentially to block foreign asset stripping in the United Kingdom. This is part of a wider trend among European lawmakers to increase the screening of foreign acquisitions in strategic industries at a time of financial instability arising out of the COVID-19 pandemic.

COVID-19 and Foreign Direct Investment Control in the European Union

As a result of the COVID-19 pandemic, the European Commission (Commission) has issued guidelines in relation to foreign direct investment (FDI) screening and free movement of capital from non-EU countries with regard to foreign investments likely to affect the security and public order of EU member states.[1] The Commission states that "[a]mong the possible consequences of the current economic shock is an increased potential risk to strategic industries, in particular but by no means limited to healthcare-related industries," and it has asked EU member states with national screening mechanisms to use them or, if they do not have such screening mechanisms in place, to introduce them in order to avoid “a loss of critical assets and technology.”

The Commission appears concerned that, as a result of the COVID-19 pandemic, certain EU companies may come under financial strain or otherwise become easier targets for non-EU acquirers, and that certain acquisitions of EU companies in the healthcare or other strategic sectors by non-EU purchasers could threaten the security or public order of EU member states. As a result of this, recently, both France and Germany have tightened their FDI screening regimes.

Proposed Reforms in the UK Merger Control Regime to Introduce FDI Screening

In December 2019, the UK government announced that the proposed National Security and Investment Bill will be introduced in the United Kingdom, giving the UK government enhanced powers to scrutinize and intervene in transactions of national security. By enacting the bill, the UK government intends to establish a new screening regime for acquisitions of UK businesses and assets (including intellectual property) with national security implications. The UK government’s stated objective is that the new regime will provide businesses with certainty and transparency, while at the same time ensuring that the United Kingdom remains open to foreign investment.

The new regime will involve a notification system for businesses to identify transactions raising potential national security concerns for UK government approval. The UK government has previously indicated that its preferred approach would be for a voluntary (rather than a mandatory) notification regime, with the government having the ability to call in relevant transactions for review, and for such reviews to be quick and efficient.[2]

No date has yet been set for the next stage of the bill’s legislative process. However, in this context, and no doubt taking into account the financial strain faced by some UK companies with the current pandemic and the enhanced FDI screening mechanisms being put in place by EU member states, the UK Parliament's Foreign Affairs Committee has issued a “call for evidence” and is seeking third-party views on the following:

  • The role that the Foreign Office should play in guiding UK government interventions in foreign takeovers of UK companies, where such takeovers may involve national security risks
  • How the Foreign Office should assess whether a potentially hostile party is seeking to secure significant influence or control over a UK company
  • The circumstances in which the Foreign Office should seek to intervene in decisions on takeovers due to the impact on bilateral relations or the United Kingdom’s geopolitical interests
  • What safeguards are required in the forthcoming National Security and Investment Bill to ensure that the Foreign Office has a full role in the decisionmaking process regarding such interventions

The Foreign Affairs Committee has invited comments from third parties by June 30, 2020.

Key Takeaways

Taking into account the growing trend in Europe and in major western economies to tighten FDI screening of foreign acquisitions in strategic industries, we are likely to see greater government intervention and a stricter application of foreign investment regimes for the duration of the current COVID-19 pandemic, and potentially over the longer term. Companies can expect that governments will closely follow FDI into their respective economies, and that cross-border transactions may face increased national scrutiny.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Frances Murphy
Omar Shah

Brussels
Izzet Sinan
Christina Renner

Frankfurt
Michael Masling

 

CFIUS Contacts

Washington, DC
Kenneth Nunnenkamp
Giovanna Cinelli
Ulises Pin

Boston
Carl Valenstein



[1] The United Kingdom exited the European Union on January 31, 2020; however, EU law continues to apply as if the United Kingdom were an EU member state during the transition period until December 31, 2020 (unless extended).

[2] To date, the UK government has stated that it envisages a 15-working-day review period, extendable to a total of 105 working days for in-depth reviews. Transactions giving rise to concerns would be subject to divestment or behavioral undertakings or could even be blocked, with parties anticipated to have the right to appeal. The UK government also anticipates penalties for noncompliance.