Potential national security concerns
The government is not proposing to set out an exhaustive list of activities which may give rise to national security concerns – but there will be an indicative list identifying "core areas" which may be of concern. Unsurprisingly, this is likely to include defence-related and dual use technology businesses, together with suppliers to the police, security and emergency services. However, it will also allow the government to scrutinise transactions involving a much wider range of businesses/assets than has been scrutinised in the past, including:
- energy, transport and communications infrastructure and potentially also infrastructure relating to chemicals, finance, food, health, space and water (although these appear to be considered less of a concern);
- advanced technology businesses, including a broader range of computer technology than at present, together with other areas which are currently out of scope, such as nanotechnology and discovery and development of new materials;
- critical suppliers (such as key IT suppliers) to businesses which are engaged in national security-sensitive activity; and
- land adjacent to national security-sensitive sites.
What is a trigger event?
Trigger events under the proposed new regime would include:
- Acquisition of (i) an interest of over 25% in a business; or (ii) "significant influence or control" over a business.
- Acquisition of over 50% of an asset or "significant influence or control" over it.
Even if a 25% or 50% interest is not ultimately considered to pose a national security risk, the acquisition of further interests above that level would still constitute a trigger event, enabling the government to review the position afresh.
In relation to a business, "significant influence or control" is likely to be defined as the ability to direct its activities or ensure that it generally acts in accordance with the acquirer's wishes. In relation to an asset, the test is likely to be met where the acquirer has absolute decision rights over the operation of the asset or can ensure that it is operated in accordance with his/her wishes. This represents a significant change compared with the current regime, where the acquisition of bare assets is unlikely to be caught.
However, save for this extension to bare assets, we think that the influence/control concept proposed is likely to be interpreted similarly to the "material influence" standard under current UK merger control. It is also worth noting that the current material influence standard can apply to relatively low levels of shareholding e.g. 15% plus.
How will national security risk be assessed?
In order to call in a transaction, a Minister must have a reasonable suspicion that the relevant trigger event may give rise to a risk to national security. The government's draft statutory guidance on this issue indicates that this will be approached by considering the target risk, the trigger risk and the acquirer risk in combination. However, it is not necessary for a Minister to conclude that each of those risks is high in order to exercise the call in power. For example, high acquirer risks are likely to be attributed to potential owners which have connections with states considered to be hostile to the UK's national security interests, such as (potentially) Russia or China. Where such a risk is considered to exist, a Minister could potentially still call in a transaction even where the trigger risk provided only limited scope for interference with the target business or asset.
Prudence or protectionism?
There is certainly potential for these proposals to be perceived as a sign of the UK adopting a more protectionist approach. However, these proposals are probably better viewed in the context of a wider trend to broaden the scope of national security scrutiny powers internationally. For example, as the government points out, authorities in many other developed Western economies (including the US, Australia, France, Germany and Canada) are already able to scrutinise mergers on grounds of national security with a broader scope to do so than the UK. In response to pressure from some Member States, the European Commission has also tabled proposals for an EU-wide framework for screening of foreign direct investment. This involves a certain level of harmonisation and coordination of EU Member State regimes, as well as provision for screening by the European Commission on the grounds of security or public order in certain cases.
Beware the US experience
This is not to say that businesses/investors can afford to be entirely relaxed about the UK proposals, as demonstrated by experience of the CFIUS regime in the US. CFIUS allows certain acquisitions by "foreign persons" to be scrutinised on national security grounds. In one recent case, Chinese investors were forced to divest their interest in a wind farm close to a naval weapons training facility in Oregon. CFIUS has also been used to block a Chinese-owned firm taking over an equipment supplier to the semi-conductor industry. Whilst such cases are still limited, there is some evidence that an increasing number of transactions relating to the US are being abandoned in the face of security concerns.
What does the Huawei affair tell us?
Concerns have recently been expressed over the future involvement of Chinese firm Huawei in the roll-out of 5G telecoms infrastructure in the UK. However, no merger is involved and any action taken to block Huawei's role would be based on powers that the government already has under UK telecoms legislation (rather than the merger regime). Nevertheless, the controversy highlights the potential for national security concerns to be raised in the context of acquisitions of businesses involved with key UK infrastructure – and in certain cases, the conditions already imposed on Huawei in relation to its existing involvement in non-5G UK telecoms infrastructure could provide a model for remedies imposed under the proposed reforms.
What happens next
Once the government has considered responses to its consultation, it will then likely move to table draft legislation. However, with Brexit consuming most of the government's attention and a considerable amount of Parliamentary time, we would not expect draft legislation to be put before Parliament until later this year. The new regime is therefore unlikely to be brought into effect until 2020 at the earliest.