Proposed new measures to increase the Government’s powers to intervene in M&A transactions that could pose a threat to national security are unlikely to be a deal breaker but will require careful planning.
The UK Government currently has the right to intervene in deals involving companies with a turnover of £70m and it is proposed to reduce this threshold significantly, to just £1 million. The proposals are thought to represent a gradual tightening of the Government’s powers of scrutiny over corporate deals and businesses preparing for a potential sale or merger should bear this in mind.
As more deals are likely to face such scrutiny in the future, it is essential that businesses seek the necessary advice in good time. If required, they should also adjust their deal-making timelines to allow safeguards to be put in place, ensuring transactions are able to go ahead.
The EU Referendum effect
Recent figures indicate that the EU referendum result has already negatively influenced buyer sentiment, with the volume of M&A deals completed in the first nine months of this year having decreased by 11 per cent compared to the same period last year. However, in the US, where similar powers of scrutiny already exist, only 143 out of all mergers undertaken in 2015 were notified as being a national security threat, of which the majority were not rejected. Based on this information, deal makers in the UK should be reassured that the proposed measures would be unlikely to cause significant disruption.
Currently, the proposed measures apply to companies operating in certain key areas of activity identified by the Department for Business, Energy and Industrial Strategy (BEIS). These areas include the dual use and military use sectors and parts of the advanced technology sector, although the BEIS has stated that the Government ‘welcomes respondents’ views on the precise forms of words to define the relevant areas and the new thresholds.’ The recent surge in the number of technology start-ups in the UK is attracting a lot of interest from foreign investors and it is possible that the move could signify a move from the Government to retain this vital part of the domestic economy. Widely-publicised incidents such as Russia’s intervention in the US presidential election are also likely to have raised concerns around the threat emerging technologies could pose to national security.
What’s to come?
A wider consultation due in four weeks’ time could result in the scope of these changes being broadened further to cover any transactions deemed to raise national security concerns including espionage or sabotage. With a certain amount of ambiguity around what might constitute such a threat, it is important that companies are able to identify whether they belong to a high-risk sector and plan accordingly well in advance of going to market. Those that could be affected by the rule changes are likely to find themselves with a restricted pool of foreign buyers, depending on the level of risk associated with a particular jurisdiction or marketplace. As such, businesses should enter discussions with designated government bodies at an early stage. This will help to ensure that where an organisation’s preferred overseas buyer is perceived as a threat, the appropriate safeguards are put in place at an early stage in negotiations; increasing the chance of transactions being completed successfully and in good time. With lower-value transactions also more likely to face scrutiny in future, it is essential that sellers waste no time in seeking professional advice around which deals have the best chance of going ahead.
When designing and implementing these changes, it will be necessary for the Government to provide clear and transparent information. For example, in addition to the types of activities most likely to be affected, organisations must be informed of procedures for reporting on planned deals and methods for raising any queries. More detail would also be required around the processes for unwinding historic transactions. If it is decided that the full cost and responsibility for this must fall on the buyer, this could begin to damage foreign-buyer sentiment.
Time to start planning
The full detail of these new measures is unlikely to be available until 2018. However, if experience in the US is anything to go by, there may not be much to fear. Nevertheless, with increased intervention certain to introduce an additional level of decision-making into the dealmaking process, businesses should address this now.
For more information on the impact of Brexit and other factors on your legal firm’s strategic hiring policy, contact Menzies Corporate Finance specialist Ross Wiggins by phone on +44 (0)20 7465 1902 or email at RWiggins@menzies.co.uk.