UK merger control: Greater scope for government intervention (part II)

Further to the UK government's recent addition of a new public interest criterion under the UK merger control regime (considered in our previous update), further revisions to the regime have now been enacted.

The revisions lower the jurisdictional thresholds applicable to certain transactions affecting the following sectors of the UK economy:

• artificial intelligence (AI);
• cryptographic authentication technology; and
• advanced materials.

Consequently, the revisions increase the ability of the UK government to intervene in specific transactions and investments (including in the context of foreign direct investment (FDI)).

The revisions are intended to mitigate short-term risks (including in relation to FDI)^[1] pending the introduction of a UK-specific FDI regime. In this context, in December 2019, the UK government announced the National Security and Investment Bill (NS&I Bill), which is expected to be brought before the UK Parliament later this year. The NS&I Bill is intended to enable the introduction of a specific legislative regime addressing FDI, and thereby grant more extensive powers of intervention to the UK government.

Against this background, this update considers the application of the current revisions and their implications for businesses.

Lower jurisdictional thresholds applicable to certain sectors

By way of background, in June 2018 the UK 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; and/or
• items for military or dual-use (i.e. both military and civilian use).

These lower jurisdictional thresholds are distinct from the general jurisdictional thresholds under the UK merger control regime^[2], 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 UK, or in a substantial part of the UK (the "Relevant Enterprise Share of Supply Test").^[3]

Importantly, the Relevant Enterprise Share of Supply Test is satisfied by the activities of the Relevant Enterprise alone; there is no requirement for activities of the acquirer(s) and the Relevant Enterprise to overlap to satisfy the Relevant Enterprise Share of Supply Test.

Where it is, or may be, the case that a transaction satisfies these lower jurisdictional thresholds, the UK competition authority (the CMA) is able to investigate on competition grounds, and the Secretary of State (SoS) is able to intervene on behalf of the UK government where it considers that the transaction may raise public interest considerations (e.g. in relation to national security). If the SoS intervenes, it will generally replace the CMA as the decision-maker in relation to the transaction.

AI, cryptographic authentication technology, and advanced materials

The revisions to the UK merger control regime^[4] expand the sectors addressed by the activities of a Relevant Enterprise, so as to include a range of activities in connection with the following broadly defined sectors of the UK economy:

• AI;^[5]
• cryptographic authentication technology;^[6] and
• advanced materials.^[7]

Significantly, the lower jurisdictional thresholds are intended to have a broad application, and will apply where the activities of a Relevant Enterprise include:

• AI:
  • Research into AI;
  • Developing or producing anything designed for use in AI;
  • Supplying services employing AI.
     
• Cryptographic authentication:
  • Research into cryptographic authentication technologies;
  • Developing or producing any product which has cryptographic authentication as its primary function;
  • Supplying services employing cryptographic authentication.
     
• Advanced materials:
  • 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" (i.e. 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.^[8]

Consequently, the revisions afford the UK government greater scope to intervene on public interest grounds (e.g. national security) where transactions affect any of the AI, cryptographic authentication technology, and/or advanced materials sectors in the UK.

However, the revisions are not anticipated to result in a material change to the CMA's approach to assessing such transactions on competition grounds.

Implications for businesses

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

In the first instance, businesses will need to consider carefully if and how the revisions may apply to their transactions, particularly if they are currently contemplating transactions that could now be affected.

In addition, while the relevant legislative instruments do not distinguish between UK and non-UK entities, the accompanying guidance published by the Department for Business, Energy and Industrial Strategy (BEIS) expressly outlines concerns regarding the risk that "hostile actors" may undermine national security by acquiring certain business interests.^[9]

In the context of the NS&I Bill, these stated concerns indicate that transactions involving certain non-UK entities are likely to be subject to closer scrutiny by the UK government on the public interest ground 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 UK government intervening, and the SoS assuming the role of decision maker.

This engagement is likely to include commencing an informal dialogue with the relevant government department, as well as giving careful consideration to potential remedies that could be offered to address any concerns identified at a later date (including in relation to the possible re-structuring of the transaction). The risk of intervention by the UK government should also be addressed as necessary with the relevant transaction documents (e.g. in the context of a condition precedent), and the transaction timetable.

Footnotes

[1] See, "New protections for UK businesses key to national security and fight against coronavirus", BEIS press release, 21 June 2020.
[2] See, sections 23A(3) and (4) of the Enterprise Act 2002.
[3] See, "Enterprise Act 2002: changes to the turnover and share of supply tests for mergers - Guidance 2020", published by BEIS.
[4] 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).
[5] 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 2002).
[6] Defined as being the method of verifying (a) the identity of a person, user, process or device; or (b) 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 2002).
[7] 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 2002).
[8] Whereby either (i) the annual UK turnover of the target enterprise exceeds £70 million; or (ii) 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 UK, or in a substantial part of the UK.
[9] The concept of a Relevant Enterprise, and the applicable lower jurisdictional thresholds, were introduced by The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (SI 2018/578), and The Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 (SI 2018/593).