Proposed strengthening of government powers to scrutinise takeovers will focus on technology companies
On 15 March 2018 the Government introduced to Parliament proposed new rules to strengthen its powers to scrutinise company takeovers occurring in specific areas of the economy that may give rise to national security concerns. The proposals have arisen from a review of the government’s powers in relation to foreign investment and national security. The rationale of the proposed changes is to strike a more appropriate balance between national security and maintaining our standing as an open and liberal trading nation.
Under the Enterprise Act 2002 ministers can intervene in mergers (foreign or domestic) that give rise to specific public interest concerns of national security, financial stability or media plurality. However, for ministers to intervene, the transaction has to meet certain thresholds, namely that (i) the target company has a UK turnover of over £70 million, or (ii) the merger takes the merging parties’ combined share of supply to 25% or more (or increases an existing share of supply to 25% or more). There are limited exceptions to this related to some defence and media transactions.
The perceived weakness of the existing powers is that they do not catch the takeover of smaller businesses which develop cutting edge technology that may have national security implications. To address this, the Government is amending the test for businesses in the military, dual-use, computing hardware and quantum technology sectors (‘Targeted Sectors’) only. The proposed changes will remove the requirement for a merger or takeover to lead to an increased share of supply before government intervention is permitted. Instead it is proposed that the test will be met where a merger or takeover involves a target with a 25% or more share of supply in the UK, regardless of whether the transaction leads to an increased share of supply. The Government also proposes the introduction of a further measure in the coming weeks to dramatically lower the target business turnover threshold required for ministerial intervention from the current level of over £70 million down to over £1 million (again to apply to companies in Targeted Sectors only). Both of these changes remain subject to Parliamentary approval and, if approved, are intended to come into force at the same time.
In light of the proposed reduction in the turnover test, Targeted Sector companies which are at an early stage in their life cycle and which have very promising, newly-developed, technology need to be aware of these proposed changes. This is the case particularly if their shareholders are seeking an exit and considering possible buyers. Further information can be found here.
Another interesting aspect in the longer-term will be the issue of which economic sectors the government chooses to define as needing this special protection. It is the author’s view that, over time, the definition of these sectors will expand beyond the currently defined sectors into other areas.
