William Charnley and Layla D'Monte: 'The government's long-term objective is to more comprehensively reform its powers of scrutiny over investments'
One of the constants to emerge from the Covid-19 pandemic has been the sheer volume of new rules and regulations from the UK government. Intended to combat the outbreak and protect the economy, an expansive list of laws and guidance has become the norm, including furloughs, restrictions on mass gatherings and movement, and ever-evolving rules regarding social distancing and face coverings.
The UK M&A regime was also recently added to list of recipients of a Covid-19 legal retooling when, on 23 June, the UK government amended The Enterprise Act 2002. As with other recent legislation, it was done so without much debate under the ‘made affirmative’ procedure for adopting statutory instruments quickly. The government can now intervene in a wider range of proposed takeovers, heralding a general expansion of the UK’s foreign direct investment (FDI) regime.
The Enterprise Act 2002 previously allowed for the government to step in and block (or apply conditions to) a transaction on a number of public interest grounds (ie national security, media plurality and maintaining the security of the UK financial system). The Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020, adds a new ‘public health’ category.
This enables the Secretary of State to issue an intervention notice or special intervention notice in order to ‘maintain in the United Kingdom the capability to combat, and to mitigate the effects of, public health emergencies’.
This order grants the government powers to safeguard a number of companies in the ‘public health’ sector from being picked off by foreign bidders.
Health and wealth
While the government’s focus is undoubtedly on protecting target businesses directly involved in pandemic response, such as vaccine research companies and personal protective equipment (PPE) manufacturers, the scope of the order is broad enough to cover other sectors including supermarkets, utilities, logistics, payment processing and energy.
Quite how far the scope of the new order will apply is, of course, untested, but developments will be closely watched to determine how expansive the government intends to be. Two further amendments to the Enterprise Act were also announced and will come into force once approved by parliament.
The first draft amendment (Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2020) amends the definition of relevant enterprise under section 23 of the Act which would permit the Secretary of State powers to review mergers on public interest grounds in three new sectors: artificial intelligence, cryptographic authentication technology and advanced materials.
Last month, Prime Minister Boris Johnson indicated during Prime Minister’s Questions that new measures were to be introduced, saying that the UK needed to “protect our technological base”. These changes are intended to address any national security risks that may arise relating to these sectors.
Separately, the government has laid the draft Enterprise Act 2002 (Turnover Test) (Amendment) Order 2020 before parliament. This amendment order will lower the intervention thresholds for relevant enterprises.
The turnover test for intervention in certain sectors will be lowered to £1m; and the 'share of supply' test will be met where an enterprise supplies at least one quarter of all goods of a particular description.
Powers to review takeovers relating to public health were brought in swiftly. While the government has not yet blocked a takeover on public health grounds, it has intervened on at least a dozen occasions in relation to matters of national security, the stability of the financial markets and media security. We expect the volume of deals subject to review will increase given the expanded scope of the regime.
The government's long-term objective is to more comprehensively reform its powers of scrutiny over investments that may pose a risk to national security. The intention is to implement this regime with a new piece of primary legislation. As such, market participants would be well advised to consider the risk of further government intervention in relation to FDI.
William Charnley is a partner and Layla D’Monte is an associate at King & Spalding