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The UK government has tabled changes to the Enterprise Act 2002 to expand the circumstances in which the government will be empowered to review foreign takeovers of UK companies. The new rules will allow the government to intervene in foreign takeovers of businesses that are directly involved in the Coronavirus response.
Preserving the UK’s Coronavirus-critical companies
In recognition of the vulnerable state that the COVID-19 outbreak has left many businesses, the government laid amendments to the Enterprise Act 2020 before Parliament on 22 June 2020. The Enterprise Act 2002 already allows the UK government to intervene in mergers based on public interest considerations including national security, media plurality and financial stability. The new amendments add a fourth category to this list – the ability to combat and mitigate a public health emergency.
Once approved, these changes are set to take effect from 23 June 2020, and will allow the government to issue a Public Interest Intervention Notice (“PIIN”) in cases where a potential merger causes concern on one of these public interest grounds. The addition of the new public health category will capture businesses active in, for example, vaccine research and development or production of vaccines, personal protective equipment manufacturers, or those perceived as vital to the food supply chain. The measure is intended to allow the UK government to intervene where liquidity issues caused by the outbreak may have left such companies susceptible to foreign takeovers.
“The UK is open for investment, but not for exploitation.”
UK Business Secretary, Alok Sharma
These new measures are part of a general trend towards stricter foreign direct investment scrutiny around the world that has escalated in the wake of the COVID-19 outbreak to ensure that governments can protect key industries and prevent the debilitating impact of the virus on business operations from enabling foreign investors to ‘snap up’ companies weakened by the pandemic. Other jurisdictions that have expanded their foreign direct investment review powers to tackle the impacts of COVID-19 have included, inter alia, France, Germany, Hungary, Italy, Poland and Spain (for an overview of measures implemented to date, please see our previous alert).
New national security measures
As well as expanding the scope of public interest considerations to include the protection of public health, the government is also proposing to expand the list of activities that will be considered to present national security concerns. In June 2018, the government lowered the merger review threshold involving a target active in the development or production of military or dual use goods, the design and maintenance of computing hardware, and the development or production of quantum technology; all for reasons of national security protection. The new changes contemplated would expand this list to include artificial intelligence, advanced materials and cryptographic authentication. Under these rules, the government is able to intervene in cases where the target is active in these specific activities if the target had UK turnover of only GBP 1 million in its last financial year, or alone accounts for more than a 25 percent share of the supply of any goods or services in the UK.
This amendment was also laid before Parliament on 22 June but will need to clear both Houses of Parliament before it is adopted. The government has always had the ability to add new public interest categories – indeed, the financial stability limb was added during the 2008 global financial crisis to enable the government to review deals between British banks. The timing of this amendment is to pre-empt possible M&A activity that involves companies active in the response to the Coronavirus crisis.
Next steps: more comprehensive reform
These latest changes to the Enterprise Act 2002 are seen as an interim changes ahead of the adoption of the new National Security and Investment Bill (“NSIB”), due later this summer, which is expected to more comprehensively reform the foreign direct investment regime in the UK (for more information on the details of the expected reform, see our previous client alert). Whereas the Enterprise Act’s powers rely on turnover and market share thresholds, the NSIB is expected to create a stand-alone FDI review based, inter alia, solely on a target’s business activities or the purchaser’s identity without reference to the merger control regime.
Even though these powers are only expected to be operative in the short -term, i.e. until the adoption of the new regime, the UK government has not been shy about using them. Twelve PIINs have been issued on national security grounds thus far, although no transaction has ever been blocked. As such, investors in any of the sectors added by virtue of the new public health protection category, or the expected additions to the national security activities of interest, will need to factor the prospect of FDI review into their risk assessment. As will financial sponsors of targets in these areas, similarly, when selecting acquisition partners for future exits.
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