UK publishes reforms to its public interest regime to address national security concerns

On 21 June 2020, the UK Government (“Government”) announced proposed reforms to strengthen its existing powers to intervene in mergers on public interest grounds under the Enterprise Act 2002 (“EA02”). These changes are clearly intended as stop-gap measures to address the perceived risk that the Covid-19 pandemic may facilitate the “opportunistic” acquisition of sensitive UK businesses.

The immediate reforms, which were made under Covid-19 emergency legislation and entered into effect on 23 June 2020, introduce an additional ground of intervention under the EA02 to allow the Government to review transactions involving UK companies involved in the pandemic response.  The Secretary of State for Business has indicated these include those active in vaccine development, PPE production and, less proximate to the health response to Covid, those active in internet services and the food supply chain. Whether the new ground was required is debatable, given the existing power of Government to intervene in deals raising “national security” concerns - public health related concerns would seem clearly within the purview of “national security”.

As a second step, the Government intends to bring three additional technology sectors (AI, cryptographic authentication technology and advanced materials) within the purview of the reduced jurisdictional thresholds (£1m target turnover, down from the previous £70m turnover requirement) that were introduced in June 2018 under the May Government for businesses in the military / dual-use, computing hardware, and quantum technology sectors. These latter reforms will need parliamentary approval; however, as these are statutory instruments rather than primary legislation, debate on the second step is expected to be relatively limited.

The Government’s reforms are consistent with comparable reforms adopted by a number of countries worldwide to augment and expand the sectoral coverage of their foreign investment controls in response to the Covid-19 pandemic. These include: Australia, Czech Republic, France, Germany, Hungary, India, Italy, Japan, New Zealand and Spain. The European Commission issued guidelines in March 2020 which urged more Member States to adopt a vigilant approach to screening FDI in light of Covid-19 and, most recently, published a policy paper on 17 June 2020, which proposes a new bloc-level “one-stop-shop” system to review foreign-subsidised acquisitions.

We consider that the practical impact of these reforms will be comparatively limited. The Government anticipates that the number of interventions under the new pandemic-related ground of intervention and the lower jurisdictional thresholds for the further three technology sectors will be relatively small in number. There is likely to be significant ambiguity, however, regarding what constitutes a firm active in combatting public health emergencies (particularly given that the Government has signalled that this applies beyond the healthcare sector). Given this uncertainty for investors, it is key for deal teams to consider how best to manage all this uncertainty at the outset and to address individual transaction challenges upfront in order to mitigate any potential risk and delays.

The reforms are intended to mitigate perceived risks in the short term and the Government has reaffirmed its intention to introduce “more comprehensive” reforms by way of the forthcoming National Security and Investment Bill (“NSI Bill”). This is expected to radically overhaul the UK’s existing public interest regime by introducing a standalone foreign investment regime: the first legislation of its kind in the UK which is unique amongst Western countries in not having CFIUS style legislation.

Background and current powers

The Government’s powers to scrutinise transactions on national security grounds are contained in the EA02, as part of the UK’s merger control regime. This allows the Government to issue a Public Interest Intervention Notice (“PIIN”) on certain strictly defined public interest considerations, but only where a transaction meets the jurisdictional thresholds under UK or EU merger rules (subject to limited exceptions).

In 2017, the Government published a Green Paper, which concluded that the Government’s existing powers under the EA02 were no longer fit to address national security risks posed by foreign ownership of critical UK businesses.  As an interim measure to address “urgent” gaps in the Government’s enforcement powers, secondary legislation was introduced in June 2018 to reduce the merger control thresholds for transactions involving businesses in the military and dual-use, multi-purpose computing hardware, and quantum technology sectors. In addition, the Government published a White Paper in July 2018, which proposed a sea-change in the review of deals from a national security perspective, with an expansive call-in power that would cover a wider range of transactions (the White Paper, eye-catchingly, projected that this standalone regime could result in circa 200 notifications a year).

With Brexit negotiations and the Covid-19 pandemic consuming the vast majority of political attention, reform to the UK national security reform has been delayed since July 2018. In the interim, the Government has adopted a more interventionist approach using its existing powers under the EA02. This is evidenced by the fact that four of the 12 PIINs on national security grounds under the EA02 were issued in the past year alone. Moreover, while no transactions have been formally blocked to date, two recent interventions (in Aerostar / Mettis Aerospace and Gardner Aerospace/ Impcross, both involving Chinese acquirers) resulted in the transactions being abandoned (and in the latter case, an undertaking being given to the UK Government not to re-bid for the target for at least a year).

Detail of the reforms

The immediate reforms, which were implemented by way of a statutory instrument1 and entered into force today, 23 June 2020, amend section 58 of the EA02 to specify an additional ground of intervention, namely “the need to maintain in the United Kingdom the capability to combat, and to mitigate the effects of, public health emergencies”. This additional ground of intervention will only apply to transactions that meet the ordinary jurisdictional thresholds under the UK merger control rules i.e. (i) the enterprise has a UK turnover of more than £70 million; or (ii) the merger has resulted in the creation or enhancement of at least a 25% share of supply.

As an illustration of likely concerns, the Government cites the example of a company active in the fight against Covid-19, such as a vaccine research company or a manufacturer of personal protective equipment. However, it is clear that this new ground of intervention extends beyond those healthcare companies involved in the immediate fight against the virus. For instance, the Government notes that it may be appropriate to intervene to protect an internet service provider or food supply chain company, given the potential for increased demand for internet services in a lockdown situation or disruption to food supply.

In addition, the Government laid further statutory instruments2 that will bring three further tech sectors within the scope of the lower jurisdictional thresholds that were introduced in June 2018 for the military / dual-use, computer processing and quantum technology sectors. The June 2018 reforms (i) lowered the turnover test threshold from £70 million to £1 million; and (ii) amended the share of supply test to remove the requirement for an increment.

The Government’s latest reforms will extend these lower jurisdictional thresholds to the artificial intelligence, cryptographic authentication technology and advanced material sectors. These three areas were identified as sectors of the economy where national security risks were most likely to arise as part of the Government’s consultation on changes to its proposed national security reforms published in July 2018. The immediate imperative for these reforms, however, also appears to be the impact of the Covid-19 pandemic. The Government notes that the depreciative effect on sterling coupled with financial uncertainty for many enterprises means the risk of “hostile actors” exploiting the situation through aggressive acquisitions of UK businesses has increased.


These reforms represent a further  addition to the Government’s existing powers of intervention under the Enterprise Act to mitigate short-term risks, while the more radical reforms expected to usher in a standalone UK foreign investment regime will wait until the forthcoming NSI bill.

It is clear from these reforms that increasing the Government’s powers to scrutinise foreign investment is high up the political agenda. Indeed, the reforms occur against a backdrop of growing political unease in the UK over the perceived national security risks posed by foreign ownership of sensitive areas of the economy – particularly technology sectors. These concerns were heightened following the Government’s recent action to thwart an attempt by Canyon Bridge (backed by Chinese state-owned China Reform holdings) to obtain creeping board control over UK semiconductor chipmaker Imagination Technologies. They also occur against a backdrop of renewed scrutiny and resistance from the Tory backbench over the involvement of Huawei in manufacturing components for Britain’s 5G networks.

The focus of the second set of reforms on the AI, cryptographic and advanced materials sectors also clearly demonstrates that sensitive technology sectors are perceived to be of central importance to the UK’s national security and industrial strategy. Transactions involving UK companies active in sensitive technology sectors can therefore expect to be subject to ever increasing scrutiny in the UK - a trend we have already seen played out in jurisdictions like the US, France and Germany.

1 The Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020

2 The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2020 and the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2020 (which will be subject to the negative procedure).