Proposed new powers to scrutinise takeovers

PUBLISHED: 16:59 03 May 2018 | UPDATED: 17:08 03 May 2018

The rationale of the proposed changes is to strike a more appropriate balance between national security concerns and trade

The rationale of the proposed changes is to strike a more appropriate balance between national security concerns and trade

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The government has proposed new rules to strengthen its powers to scrutinise company takeovers that may give rise to national security concerns.

On March 15, the government proposed new rules to strengthen its powers to scrutinise company takeovers that may give rise to national security concerns. This is part of a review of the Government’s powers in relation to foreign investment and national security, and will affect the technology sector in particular.

The rationale of the proposed changes is to strike a more appropriate balance between national security concerns and maintaining our standing as an open and liberal trading nation.

Under the Enterprise Act 2002 ministers can intervene in both foreign and domestic mergers that give rise to specific public interest concerns of national security, financial stability or media plurality. However, for ministers to intervene, the transaction has to meet the following thresholds:

• the target company has a UK turnover of more than £70 million, or;

• the merger takes the merging parties’ combined share of supply to 25 per cent or more (or increases an existing share of supply to 25 per cent or more).

There are limited exceptions to this related to some defence and media transactions.

The perceived weakness of the existing powers is that they do not take into account the takeover of smaller businesses which develop cutting edge technology that may have national security implications. To address this, the government is amending the test for businesses in the military, dual-use, computing hardware and quantum technology sectors (‘Targeted Sectors’) only.

The proposed changes will remove the requirement for a merger or takeover to lead to an increased share of supply before government intervention is permitted. Instead, it is proposed that the test will be met where a merger or takeover involves a target with a 25 per cent or more share of supply in the UK, regardless of whether the transaction leads to an increased share of supply.

The government also proposes the introduction of a further measure to dramatically lower the target business turnover threshold required for ministerial intervention from more than £70 million to more than £1 million (applicable to companies in Targeted Sectors only). Both of these changes remain subject to Parliamentary approval and, if approved, are intended to come into force at the same time.

Targeted Sector companies which are at an early stage in their life cycle and which have promising, newly-developed technology, need to be aware of these proposed changes. This is the case particularly if their shareholders are seeking an exit and considering possible buyers.

Another interesting aspect in the longer-term will be the issue of which economic sectors the government chooses to define as needing this special protection. It is the author’s view that, over time, the definition of these sectors will expand into other areas.

James Stephen is a partner in the corporate and commercial department of Bircham Dyson Bell LLP, 51-53 Hills Road, Cambridge CB2 1NT. He can be contacted at jamesstephen@bdb-law.co.uk.

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