The UK Government last week gained increased powers to intervene in mergers with implications for national security, and in particular cyber-security.
The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order was laid before Parliament on 15 March 2018, and the Enterprise Act 2002 (Turnover Test) (Amendment) Order on 14 May 2018. Both came into force on 11 June. These orders amend the Enterprise Act 2002 (the "Act") to allow for greater scrutiny of mergers and acquisitions relating to certain sensitive goods, services and technologies, by changing what constitutes a relevant merger situation ("RMS") under the Act.
What is the law on mergers generally?
A merger or acquisition qualifies as an RMS if two or more enterprises cease to be distinct and either:
- the Target has UK turnover of more than £70 million (the "Turnover Test"); or
- as a result of the merger or acquisition, one person (or connected persons) will supply or purchase at least 25% of any good or service in the UK, or a substantial part of the UK (the "Share of Supply Test").
Section 22 of the Act gives the Competition and Markets Authority ("CMA") a general duty to intervene in a proposed or completed RMS that may result in a "substantial lessening of competition" within any UK market.
Where an RMS is identified but the CMA has not taken action, section 42 of the Act allows the Secretary of State to give the CMA an intervention notice identifying public interest issues he thinks are relevant to consideration of the merger, for example where he believes that the RMS raises national security concerns. If a notice is given, the CMA has to report to the Secretary of State on the public interest issues along with any competition issues raised by the merger. If the CMA concludes that the merger raises material public interest issues, the Secretary of State can decide whether to clear the transaction, refer it to a Phase 2 merger investigation, or accept undertakings from the merger parties in lieu of such a reference.
What has changed?
The amendments to the Act create a new category of "Relevant Enterprises" in merger situations. A business is a "Relevant Enterprise" if it:
- develops or produces goods which are subject to certain specified export controls;
- holds information that can be used in (and are necessary for) the development or production of goods which are subject to export controls;
- owns, creates or supplies intellectual property which relates to computer processors;
- designs, maintains or provides support for computer processor security features; or
- conducts research into, or develops or produces anything, in one of a number of fields of "quantum" technology, or supplies services in these fields.
For the purposes of defining a Relevant Enterprise, the relevant export controls apply to goods that have or are capable of having military uses, including weapons and radioactive materials but also aircraft components and a broad range of chemicals. Companies that produce equipment with national security uses, for example police riot shields, will also be caught by the new regime.
The threshold above which a merger or acquisition involving a Relevant Enterprise will qualify as an RMS is now lower than for other mergers or acquisitions. An RMS will now be created where there has been a change of ownership or control of a Relevant Enterprise, and either:
- the Target* has UK turnover of more than £1 million; or
- prior to the deal, the Relevant Enterprise** supplied or purchased 25% or more of any good or service in the UK, or a substantial part thereof, where the supply / purchase in question was connected to the reason it is a Relevant Enterprise (e.g. the supply or purchase of goods subject to export controls, or the supply of IP for use in computer processing units).
*The Target in this revised turnover test could be wider than just the Relevant Enterprise. For example, if could be a corporate group of which the Relevant Enterprise is a small part - if the target group's turnover exceeds £1 million an RMS will exist, even if the turnover attributable to the activities that make it a Relevant Enterprise is less than that.
** The distinction between this and the usual share of supply test is that the usual test refers to the combined share of supply across all the parties involved in the deal. This test concerns only the share of the Relevant Enterprise and so does not require the buyer to have any pre-existing presence in the relevant market.
These new turnover and market share thresholds give much more scope for an RMS in the relevant sectors, and so for the potential involved of the Secretary of State and/or the CMA.
Does this mean the CMA will investigate all these mergers?
In short, no. To coincide with the new law coming into force, the CMA has published guidance on how the changes will influence its review of mergers. In the CMA's view, the principal purpose of these new thresholds was not to increase the scope of its merger jurisdiction, but rather to increase the scope for the Secretary of State to use his intervention powers under section 42 of the Act. The Department for Business, Energy and Industrial Strategy (BEIS) has published its own guidance on when it anticipates these powers might be used.
The CMA's guidance therefore reminds merging parties that it will only investigate an RMS on its own initiative if there is a reasonable chance of it giving rise to a substantial lessening of competition, as set out at paragraph 2 of its market intelligence guidance. For example, a merger which does not lead to an increment in share of supply (i.e. the parties do not have any goods or services in common, or operate only in separate and distinct parts of the UK) would not lessen competition because there would be no increase in market share.
Similarly, the CMA is unlikely to conclude that any lessening in competition caused by a transaction involving a target with a turnover below £70m would be considered "substantial" unless the (original) share of supply test is also met, in which case it would have had jurisdiction anyway.
As a result, the CMA's guidance advises that it "does not anticipate opening any own-initiative competition investigations on the basis of horizontal concerns into transactions where it would previously not have had jurisdiction". In other words: no change. Merger parties dealing with a Relevant Enterprise should therefore not have to do anything differently, at least in respect of the CMA, as a result of these changes to the RMS tests.
Parties to a merger covered by the new Relevant Enterprise rules are nevertheless invited to notify the relevant UK Government department (generally BEIS) of the merger on a voluntary basis. The BEIS guidance indicates that the Government's decision on whether to prevent or impose conditions on a particular merger will be based largely on the identity of the person or company acquiring the relevant enterprise, and the particular assets or information to which the merger will give them access. It may well be that transactions involving non-UK buyers will be more likely in practice to attract Government attention.