National Security and Investment Act 2021

Legal background

Legal background for Government intervention in mergers on national security grounds

12. The current legislative framework for the assessment of United Kingdom ("UK") mergers between enterprises (which include outright acquisitions) is contained in Part 3 of the Enterprise Act 2002 (the "Act"), which has been in force since 20 June 2003. Along with investigation of competition issues, this provides for Government intervention on public interest grounds in three types of case: public interest cases; special public interest cases; and European merger cases.

Public interest cases

13. Section 42 of the Act allows the Secretary of State to intervene in a completed or anticipated merger where he or she has reasonable grounds to suspect it may be, or may if it comes to fruition become, a "relevant merger situation" (see the next paragraph) and believes that one or more of the public interest considerations specified in section 58 of the Act may be relevant to the case. Section 58 currently specifies national security, media plurality (an umbrella term covering a number of media-related considerations), the stability of the UK financial system, and the need to maintain in the UK the capability to combat, and to mitigate the effects of, public health emergencies, as public interest considerations.
14. Section 23 of the Act provides that a "relevant merger situation" arises where two or more enterprises cease to be distinct, and at least one of the following thresholds is met:
    1. the enterprise taken over has a UK turnover of more than £70 million (the "turnover test"); or
    2. the merger has resulted in the creation or enhancement of at least a 25% share of supply or purchase in, or in a substantial part of, the UK of goods or services of any description (the "share of supply test").
15. The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (S.I. 2018/578 ) and the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 (S.I. 2018/593 ), both of which came into force on 11 June 2018, amended the share of supply test and the turnover test, respectively. The turnover threshold was lowered from £70 million to £1 million for takeovers of "relevant enterprises", i.e., those active in any of the following sectors: military or dual-use goods subject to export control; computer processing units; or quantum technology. The share of supply test was amended so that the test is additionally met if the takeover is of a "relevant enterprise" that already had at least a 25% share of supply or purchase in, or in a substantial part of, the UK of goods or services before the merger. The goods or services must be connected to the activities by virtue of which it qualifies as a "relevant enterprise". The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2020 (S.I. 2020/748 ) and the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2020 (S.I. 2020/763 ), both of which came into force on 21 July 2020, amended the list of "relevant enterprises" to include those active in any of the following sectors: artificial intelligence; cryptographic authentication technology; or advanced materials. These changes were made to enable the Secretary of State to intervene in additional mergers which might give rise to national security implications.
16. Pursuant to section 42(2) of the Act, the Secretary of State intervenes in a merger by giving an intervention notice (commonly known as a "public interest intervention notice") to the Competition and Markets Authority ("CMA"). This requires the CMA to investigate the merger (commonly known as a "Phase 1 investigation") and to provide a report to the Secretary of State containing its advice on jurisdictional, and, if any arise, competition, issues. In national security cases the CMA is also required to provide to the Secretary of State a summary of any national security-related representations it has received about the case, including from other Government departments.
17. After issuing an intervention notice, the Secretary of State may pursuant to paragraph 2 of Schedule 7 to the Act make an interim order prohibiting or restricting any pre-emptive action, that is, any action which might prejudice the intervention or impede any remedial action that might be taken on it.
18. Once he or she has the received the CMA’s Phase 1 report, the Secretary of State may pursuant to section 45 of the Act make a "reference" to the CMA requiring it to carry out a more in-depth investigation (commonly known as a "Phase 2 investigation"), if he or she believes that the merger may be, or may if it comes to fruition become, a "relevant merger situation" and that it might operate against the public interest. In making this decision, section 46 of the Act requires the Secretary of State to accept the advice of the CMA on jurisdictional and competition matters as set out in its report. He or she must also treat a competition issue identified by the CMA as being contrary to the public interest unless this is outweighed by other public interest considerations. Alternatively, pursuant to paragraph 3 of Schedule 7 to the Act, in lieu of making a Phase 2 reference the Secretary of State may accept whatever undertakings (commonly known as "undertakings-in-lieu") he or she considers appropriate from the parties to address the public interest issues identified. Under paragraph 5 of Schedule 7, where he or she considers that undertakings-in-lieu have not or will not be fulfilled, or where he or she considers that they were accepted on the basis of false or misleading information, the Secretary of State has the power to replace them with an order imposing remedies.
19. If a Phase 2 reference is made, section 50 of the Act requires the CMA to prepare a further report for the Secretary of State. Once he or she has received this report, the Secretary of State must pursuant to section 54 of the Act make a final decision on whether the merger is against the public interest, and, if he or she does so, he or she may pursuant to section 55 of the Act take whatever remedial action in his or her power he or she considers reasonable and practicable to address the public interest issues identified. This may be in the form of final undertakings accepted from the parties, as provided for by paragraph 9 of Schedule 7 to the Act, or in the form of an order imposing remedies, pursuant to paragraph 11 of Schedule 7. Under paragraph 10 of Schedule 7, the Secretary of State has an equivalent power to that in relation to undertakings-in-lieu to replace final undertakings with an order imposing remedies.
20. Pursuant to paragraph 20 of Schedule 8 to the Act, an order may make such provision as the Secretary of State considers to be appropriate in the interests of national security. Such provision may, in particular, include provision requiring a person to do, or not to do, particular things.

Special public interest cases

21. Section 59 of the Act allows the Secretary of State to intervene in a limited number of mergers of special public interest on the basis of the public interest considerations specified in section 58 of the Act (which, as already stated, include national security) where the standard jurisdictional thresholds relating to turnover and share of supply are not satisfied. These include for example, mergers involving Government defence contractors authorised to hold or receive confidential information. The subsequent process is similar to the public interest intervention procedure set out above, except that there is no competition assessment.

European merger cases

22. The European Council Merger Regulation (No 139/2004) gives the European Commission exclusive jurisdiction within the European Union ("EU") to assess mergers (which include outright acquisitions) with an EU dimension (i.e., those in which the parties meet certain global and EU-wide turnover thresholds) for any competition issues. This Regulation still applies in the UK in respect of merger reviews that the European Commission started before the end of the transition period, in accordance with Article 92 of the Withdrawal Agreement ("live EU cases"). Before the end of the transition period the Act provided a mechanism whereby, so long as the standard jurisdictional thresholds were met (see paragraphs 14-16 above), the Secretary of State was able to intervene in EU mergers on the basis of the public interest considerations specified in section 58 of the Act (other than the stability of the UK financial system, which is expressed as not applying in these cases), including national security. This mechanism has been repealed but has been preserved for any live EU cases by the Competition (Amendment etc.) (EU Exit) Regulations 2019 (as amended). This would allow the Secretary of State to give the CMA a European intervention notice ("EIN") under section 67 of the Act in respect of any live EU case. The subsequent process is similar to the public interest intervention procedure set out above, except that it does not involve any competition assessment by the CMA, this being left to the European Commission 1 .

Legal background for Section 59 (Overseas information disclosure)

23. Part 9 of the Enterprise Act 2002 imposes a restriction on the disclosure of information that comes to a public authority in connection with, among other things, a merger investigation under Part 3 of the Enterprise Act 2002 or an antitrust investigation under the Competition Act 1998 ("specified information"). The restriction applies where the information relates to the affairs of an individual, during the lifetime of the individual, or any business of an undertaking, while the undertaking continues in existence, unless the disclosure is permitted by one of the disclosure gateways in Part 9.
24. A public authority may disclose specified information to an overseas public authority in the following circumstances:
    1. where the public authority has obtained the necessary consents (section 239(1));
    2. to comply with an EU obligation (section 240) 2 ; or
    3. for the purpose of facilitating the exercise by the public authority of its statutory functions (section 241(1)).
25. In addition, section 243(1), (2) and (12) of the Act, permits the disclosure of specified information to an overseas public authority where the disclosure is to facilitate the performance of an overseas public authority’s functions. This gateway does not currently apply to information that comes to a public authority in connection with a merger investigation under Part 3 of the Enterprise Act 2002 (section 243(3)(d)).