It is no surprise that the UK has become one of the premier global destinations for entrepreneurs and international investment during the past 40 years. The country’s liberated financial framework and robust legal regime have attracted many investors to use the UK as a global hub.
Indeed, while Britain accounts for around three per cent of global GDP and its firms make up just five per cent of global market capitalisation, the latter have been involved in a quarter of cross-border M&A activity since 1997, either as buyers or as targets, according to Dealogic. In this environment, new business ventures and leaders have emerged across all sectors, including pharma, manufacturing, technology, private equity and fintech.
The ease and accessibility to buy and sell UK-based assets, ranging from start-ups to mid-caps to national champions, is a central component to this culture. However, it is important for any fast-growth business to keep up-to-speed on the rules governing acquisitions to make their future ambitions become a reality, especially in important or sensitive areas covering UK investment, data or defence.
This becomes all the more important if a deal raises sensitive issues. In such instances, not only do the rules needs to be followed but the government can step-in to intervene in takeovers.
With Brexit on the horizon, however, entrepreneurs will be interested to see if the government is going to take a more internationalist approach, especially as the falling number of national champions means Britain may lack sufficient clout to compete on the world stage.
Two sets of proposals were outlined in September and October 2017 that would reshape the M&A regime in the UK. The first, a consultation from the Takeover Panel, would result in changes to the rules regulating the purchase of UK-based companies whilst the second, the National Security and Infrastructure (NSIS) Review, is a consultation on the national security implications of foreign ownership and control of such companies.
The rules governing conduct before and after a takeover offer have been a bone of contention for both buyers and sellers.
Perhaps the most high-profile example was Kraft Foods’ 2009 hostile bid for Cadbury, under which the US firm said it would keep a particular factory open only to announced the factory’s closure post-completion. Such was the controversy over the decision a new requirement was implemented to the Takeover Code for a potential bidder to either announce a firm intention to make an offer, or announce that it does not intend to make an offer, within 28 days of the date of the announcement in which the potential bidder is first identified.
Now, any company planning a takeover must make a firm offer for the target company within four weeks of expressing their interest and if they fail to meet this “put up or shut up” deadline, they are prevented from bidding for that company again for the next six months.
The September 2017 consultation proposes a selection of reforms to the way takeovers operate. The proposals would put more emphasis on a bidder’s pre-acquisition information, with requirements, for instance, that bidders make clear their plans for the target company earlier in the process and be more specific on key aspects of the target company’s future which often cause public concern (such as research and development functions, balance of skills and functions of the target company’s employees and management, location of the target company’s headquarters).
The consultation also allows a target company facing a bid to slow down the takeover process (at present a target company has 14 days from the publication of the offer document to publish its response to the bid) and require companies to report at least annually on how they are fulfilling their binding post-offer undertakings and to report at the end of 12 months on how they had fulfilled their post-offer intention statement.
The proposals follow a selection of other high-profile bids that have attracted criticism. Pfizer’s attempted hostile takeover of AstraZeneca in 2014 came amidst concerns about the disenfranchisement of R&D resources and technology from the UK, while Post Offer Undertakings were first utilised in June 2016 when Softbank, the Japanese technology entity, undertook in connection with its takeover of the UK-based microchip company, ARM, to double ARM’s UK headcount.
Companies of particular importance or sensitivity, meanwhile, have also been subject to takeover bids. For example, the government insisted it was “closely” following the London Stock Exchange’s £21 billion merger with German rival Deutsche Boerse, which was ultimately blocked by the European Commission. The nuclear power station at Hinkley Point C is another case of the government taking a more interventionist approach to overseas investment in the country; to mitigate concerns about foreign government backed investment in Britain’s critical infrastructure, a number of conditions were attached to the government’s approval, including a provision that the government must be consulted if EDF attempts to sell its controlling stake.
While these cases involve big-name organisations, October’s NSIS report moves the focus on to protecting national security, adding another dimension to the existing takeover process for companies, including smaller ones, involved in sectors such as technology or defence.
Protecting national security
The NSIS report, published on 17 October, 2017, sets out the government’s intention to make changes to the merger control regime which are “necessary and proportionate to protect national security”. It would allow the government to examine and potentially intervene in mergers that currently fall outside the thresholds in two areas: (i) the dual use and military use sector, and (ii) parts of the advanced technology sector. For these areas only, the government proposes to lower the turnover threshold from £70 million to £1 million, imposing a very low threshold, and remove the current requirement for the merger to increase the share of supply to 25 per cent or more.
The government’s proposals include:-
An expanded version of the ‘call-in’ power, modelled on the existing power within the Enterprise Act 2002, to allow the government to scrutinise a broader range of transactions for national security concerns within a voluntary notification regime; and/or a mandatory notification regime for foreign investment in key parts of the economy”. Mandatory notification could also be required for new projects that could reasonably be expected in future to provide essential functions and/or foreign investment in specific businesses or assets.
Importantly, the NSIS Consultation makes clear that the government is only concerned with transactions that might raise national security concerns, and the paper is at pains to reassure that no part of the UK’s economy would be off-limits to foreign investment.
While such high-level rules and regulations may not be on the immediate radar, as entrepreneurs and young business grow in key sectors, coupled with lowering the turnover threshold to £1 million, these issues will become more prevalent when it comes to buying and selling companies. On the positive side of things, with the publication of the NSIS Consultation, it would appear that the government has decided, for now, not to implement a more protectionist general merger control regime. The proposed Takeover Code changes noted above are relatively modest in nature although they continue the trend for affording target companies additional protections against hostile bidders.
There is still the larger unknown of Brexit but, even so, entrepreneurs should take comfort that these recent proposals appear to strike a balance between encouraging investment and protecting national security and businesses from hostile approaches.
Marcus Young is a counsel and Kelly Nash an associate in King & Spalding’s London office