New legislation (the Turnover Test Order and the Share of Supply Test Order) could have an impact on south west mergers in the communications, defence and transport sectors.
Foreign Direct Investment brings considerable benefits to the UK economy. However, as was seen last year with the Hinkley Point decision making, national security issues can cool the country’s openness to FDI.
Following industry consultation last year, the Enterprise Act 2002 has been amended by two statutory instruments to enable potential impacts on national security to be assessed. As a result of the amendments, the Government can intervene in mergers:
1. in the dual use and military use sectors; and
2. in the advanced technology sector.
In its consultation, the Government assessed that some existing agencies did not have the power to intervene on national security grounds; other agencies had limited powers on change of control.
Following the consultation, the Government acknowledged that sufficient controls are in place for some sectors (through market forces, existing agencies and other safeguards). Other sectors do not. The new legislation (the Turnover Test Order and the Share of Supply Test Order) will have an impact on sectors, which, in the south west, include communications, defence and transport. The Government considered that there was no special treatment required for the space sector due to key activities being covered under the scope of the defence and communications sectors.
The new legislation enables the Competition and Markets Authority to review a qualifying transaction. “Relevant Enterprises” (those active in the development or production of items for military or military and civilian use which are subject to export control, quantum technology and computing hardware) need to familiarise themselves with the new provisions when considering foreign investment scenarios.
Under the Enterprise Act, the CMA can intervene where the acquired company has an annual UK turnover of more than £70 million. The Turnover Test Order reduces that threshold to only £1 million for changes in control of “relevant enterprises”. This will capture much more investment activity into SMEs.
The Share of Supply Test Order amends the share of supply test so that, in cases where the enterprise being taken over is a “relevant enterprise”, the test is met if the relevant enterprise has a 25% share of supply of goods or services in the UK (or a substantial part of the UK) before the merger.
For those deals that do raise national security concerns, the Government would follow the process set out in the Act (which it has followed for the previous seven instances when it has intervened on the basis of national security).
The CMA and Department of Business, Energy and Industrial Strategy are developing further guidance.
Gavin Poole is a partner in the corporate team at Stephens Scown. If you have any queries about reviewing your contracts then please do contact Gavin on 01872 265100, or by email email@example.com.