Mergers And Acquisitions » UK government introduces new national security merger review thresholds

Financial directors should be aware that the UK government has introduced new rules to make it easier to intervene in mergers that potentially raise national security concerns due to the target’s ownership of sensitive technology. Under the new rules, acquisitions of companies that produce or own intellectual property relating to military and dual-use products or ‘advanced computer technology’ will be reviewable by the government.

This is for the purpose to assess their potential impact on national security if the target has UK revenues of at least £1 million or a ‘share of supply’ of more than 25%. This is a significant change from the previous regime, under which a transaction was reviewable only if the target had UK revenues of more than £70 million or if both parties supplied the same product and together had a UK share of supply of more than 25%.

Intended as a short-term measure, the amendments are due to be followed by more far-reaching reforms, possibly including the introduction of a mandatory filing regime for all transactions involving foreign investors that could impact national security.

Military and dual use technology

The new rules apply to businesses that:

  • develop or produce ‘restricted goods’, meaning “goods, software or information” that are subject to export control; or
  • hold information that is “capable of use in connection with the development or production of restricted goods”.

Categories of restricted goods are set out in export control lists, many of which reflect the UK’s international export control obligations. The government has advised companies that are unsure whether their products are listed to use its online Goods Checker Tool. The government has also said that it will endeavour to provide “clear, informal (non-binding) advice” as quickly as possible.

Advanced computer technology

The expansion of the national security regime to ‘advanced computing technology’ is another important change. The government’s primary concern in this area appears to be the scope for hostile actors to acquire technology that can be used to engage in cyberwarfare against the UK.

This could include taking control over connected products, which may be widely dispersed in homes, businesses, public institutions or utilities, to cause harm to businesses, critical national infrastructure or other public services.  Reflecting this objective, the new regime is intended to catch a wide range of technology businesses, including those involved in the design of chips, Internet of Things products and connected home devices and the development of certain security products and services, including the design of firmware with cryptographic functionality.

The regime also covers companies that are involved in quantum computing, including businesses supplying quantum technology components or offering services (such as consultancy or data analysis) which use quantum-based technology.

It is not necessary that the target is actually involved in producing such products – ownership of relevant IP is sufficient.

Additional thresholds

Even if a party to a transaction is within the scope of the new rules, it does not necessarily follow that the transaction will be reviewable. The expanded regime will continue to apply only to qualifying mergers, which arise where one business acquires control or material influence over another one. While the boundaries are blurred, a passive minority investment in a relevant business should therefore not be caught by the new regime.

Acquisitions of businesses that are purely involved in research and development activities which don’t generate any income yet, should not be caught. This should also be the case for companies acquiring IP rights in isolation, although the inclusion of additional assets or personnel would probably take a transaction across the line.

The very low level of the new UK turnover threshold for transactions involving relevant enterprises means that a large number of mergers may still be caught by the new regime. While only a small number of these transactions may raise actual national security concerns, the new regime introduces the potential for government scrutiny of such transactions that did not exist before and therefore introduces an element of political uncertainty for such transactions.

The way ahead

Potential buyers of UK-based technology companies will need to undertake an assessment to determine whether their targets are within the scope of the new regime. While it may be possible to exclude some companies based on a cursory check, others may require a detailed examination of the specific characteristics of the technology concerned alongside the lengthy definitions in the relevant legislation.

If a target is within the scope of the regime then an informal notification to government may be advisable, especially if the acquirer is established in a sensitive jurisdiction.  This process should enable parties to establish whether national security concerns arise and, where possible, provide comfort that there will be no ministerial intervention.

A notification to government for a national security assessment will remain distinct from any merger notification that the parties may choose to make to the CMA for a competition assessment and there will be no need to notify the CMA purely on the grounds that the parties have made a national security notification to government.

It will take some time for the regime to bed down and for companies and their advisers to assess the risk of intervention in individual cases and the analysis will be highly fact-specific.  It remains to be seen whether ministers will seek to expand the scope of ‘national security’ to protect British technology companies from foreign acquisition but officials are likely to resist any such move, given the likely adverse impact this would have on inward investment.