Recent developments show the UK Government’s desire to expand their powers to block foreign takeovers. We explore the nature and scope of the proposed legislation and assess its likely consequences.
The Conservative Government recently announced a deal with the Democratic Unionist Party to provide it with an overall Parliamentary majority. The present Administration is therefore expected to stay in power for the foreseeable future and it is likely to be able to force through some relatively uncontroversial legislation in the current session. However, many of the more contentious Conservative Government manifesto pledges in relation to education and healthcare have now been quietly dropped.
Where does this leave the Conservatives’ manifesto pledge to force more public interest concerns into the consideration of mergers? More specifically, will there be particular scrutiny of mergers in the telecoms, defence and energy sectors on wider national interest grounds than at present? The Manifesto alarmed business commentators and regulators by proposing what seemed a possible extension of the merger control regime to expand ministerial control of “telecoms, defence and energy”. This would alter the current position whereby the competition test is the only test for clearing transactions except for in some limited exceptions. Those exceptions are cases involving national security, plurality and quality in the media, and the stability of the UK financial system.
As yet it is unclear the extent of the Government’s ambitions in this regard. Only when draft legislation sees the light of day will things become clearer. Is a return of a public interest test in UK merger control on the cards and if so, how will it differ from the present system? Alternatively is the Government preparing to introduce a UK equivalent of CFIUS to vet some types of foreign acquisitions?
We believe the latter is more likely. Contacts in the Competition & Markets Authority (“CMA”) before the election indicated that the Government has plans to create a UK version of the US CFIUS system. As many readers will know CFIUS stands for ‘Committee on Foreign Investment in the United States’, and is the US foreign investment control regime, sitting alongside the US merger control regime. The US merger control regime is an evidence based assessment of competitive effect on competition-only grounds rather than being based on political determinations. CFIUS on the other hand is more political in nature and concerned with the need to stop technology and control of strategically important businesses being transferred to countries not aligned to the US or otherwise sanctioned. The idea is to prohibit investments and takeovers that harm US national interests.
The UK Prime Minister, Theresa May, and her colleagues have repeatedly stated their desire to have more political control over foreign takeovers and to protect national interests. Theirs is a sense that this is not just a military and national security issue (as powers exist for intervention on these issues under the Enterprise Act 2002 ((EA 2002)) already), but rather it is about protecting fledging UK companies from acquisitions as well as the jobs and value these companies bring to the UK economy. Therefore their desire could extend as far as blocking some foreign mergers altogether through whatever system is put in place to regulate these types of transactions.
To date, we understand the CMA have consulted with the UK Government and advocated to keep any proposed UK regime separate to the antitrust merger control regime, mimicking the US model. The UK CFIUS alternative could therefore be run separately from the CMA by for example the Government Department of Business, Energy & Industrial Strategy (BEIS).
The two key questions for any future UK system are: first, is it necessary, and second, will investment to the UK be dampened as a result? With regard to the former, it is arguable that sufficient regulatory powers already exist to cover national security under the EA 2002 whilst the UK Takeover Code already allows binding post-offer undertakings by the acquirer in public companies, including as to jobs and assets remaining in the UK post-acquisition. The current Conservative Government in fact gave its public support to the acquisition of British chipmaker ARM by Japanese company Softbank. Softbank had given, under the Takeover Code, a 5 year undertaking to double the UK workforce, as well as keeping ARM’s headquarters in the UK.
The wider question of whether such measures might deter investment is hard to answer as the investment environment consists of variables such as taxation, which could easily be altered alongside any changes to foreign investment in the UK. However, any overtly political future actions such as trying to safeguard large UK pharmaceutical firms from acquisition would be a slippery slope to protectionism, especially if the CMA had already cleared the merger on competition grounds. The slope could become slipperier still should the Government expand the number of sectors under protection in its new industrial strategy to also include prized sectors such as automotive technology and parts suppliers.
The recent Queen’s Speech, which lays out the Government’s upcoming legislative agenda, did not elaborate on this area of merger control and the industrial strategy in much detail, except to say that ‘critical infrastructure’ would be protected for national security purposes, without elaborating on how. This has been widely interpreted to refer to civil nuclear power stations and associated infrastructure, after the controversy at the Hinkley Point site. There, the presence of a Chinese minority investor in the site raised concerns about national security and the influence the company could then bring on the Government and UK energy industry.
Given the way it was expressed in the Queen’s Speech, perhaps the UK CFIUS regime will be limited to critical infrastructure (but could this include rail?). Businesses and the CMA may be breathing a sigh of relief if this is the extent of it. It would be particularly welcomed if a new system based on political considerations is not being shoehorned into the UK merger control regime. However, given the unpredictability of recent events, nothing much seems certain for now. It could take only one politically unpopular foreign acquisition to tip the balance back the other way.