Brexit's Big Brother effect on M&As

Kate Ball-Dodd, partner at leading law firm, Mayer Brown, discusses what impact Brexit could have on the Government’s involvement in mergers and acquisitions

After the Brexit vote, many predicted that the fall in the pound would lead to an influx of foreign bids for the UK’s assets and companies – aptly coined the “Great British sell-off”.

So far this has not been the case; the dip in the strength of the pound – until recent events – has been a bonus for foreign dealmakers, rather than the deal-driver itself, and the number of UK companies being taken over by overseas acquirers is actually down compared to previous years.

Despite this, foreign firms’ takeovers of some of the UK’s most ‘iconic’ companies has been met with antipathy.

This has caused a spotlight to be shone on the circumstances in which our Government can block overseas companies from buying UK businesses.

The public interest regime

If a merger between two or more companies reaches certain turnover thresholds, it will be within the European Commission’s jurisdiction, according to EU Merger Regulation.

The UK Secretary of State (SoS) has the power to review a merger in parallel with the European Commission, and may intervene or block a proposed merger to protect the UK’s ‘legitimate interests’.

The scope of these interests is currently confined to national security, plurality of media, and the stability of the financial system.

Theses powers have only been invoked eleven times and the majority of the mergers involved have gone ahead following intervention.

The third interest – maintaining the stability of the financial system – was created by the SoS in response to the planned merger between Lloyds TSB Group and HBOS during the financial crisis of 2008.

The merger was expected to result in a “substantial lessening of competition” within the UK market for personal current accounts, mortgages, and banking services to SMEs.

It was argued that the concerns over a substantial lessening of competition were far outweighed by the significant benefits to the public interest in ensuring the stability of the UK financial system, and so the merger was approved.

Expanding the UK public interest test

In addition to the three existing ‘legitimate interests’, it is proposed that ‘critical national infrastructure’ be introduced as a fourth ground for intervention.

In line with the Government’s plans for a modern industrial strategy, created to strengthen the global influence of British businesses, the Prime Minister has stated that the Government should be given greater powers of scrutiny over takeover bids for targets in the economy’s “key industries”.

In the same context, the Prime Minister has indicated that the following sectors will also receive ‘special support’: technology and communications, nuclear energy, low-emissions vehicles, and pharmaceuticals.

France, traditionally seen as more protectionist than other European states, has similar powers, and approval is needed from the Economy Minister for mergers in sectors including energy, water, transport, telecommunications, and public health.

Brexit – now what?

How a corporate gains “national champion” status under the new industrial framework works is not yet clear.

The Government’s Green Paper Building our Industrial Strategy does not contain plans to adopt an overtly interventionist approach to merger control. It is acknowledged that any form of protectionism discourages inward investment, which is not in our economic interests as we enter difficult trade negotiations.

European technology and life sciences businesses are arguably the merger targets of the moment, with firms, particularly Chinese investors, snapping these up at an increasing rate.

In the first half of 2016, Chinese enterprises were acquiring German targets at the rate of one target per week. Germany is now seeking to introduce an EU-wide law which will provide every Member State with an absolute right to veto takeover offers for high-tech companies by Chinese investors.

Sino-American relations are also facing similar unease as the US Government continues to block Chinese takeover offers with increased frequency, purportedly under the auspices of national security.

It is clear that technology, pharmaceuticals and firms specialising in ‘R&D’ will fall under the scope of critical infrastructure. So, is it possible the UK Government would seek to block a takeover of, as an example, a large pharmaceutical company, to protect the nation’s critical infrastructure?

Conversely, with the rest of Europe considering shutting its doors to Chinese mergers, should the UK follow suit and risk losing out on important capital, and importantly, can we afford to?

In any event, parameters must be set as to what exactly is encompassed by critical national infrastructure, and these parameters should form part of the wider industrial strategy for UK economic growth.

A lack of clarity may lead to politics overreaching its powers in deal-making. It is also worth noting that, currently, if the UK (or any EU Member State) attempts to block an acquisition of a target which is deemed to be of “strategic importance”, it may be found to be in violation of the European Single Market policy, in particular, freedom of establishment and free movement of capital.

As the current Government approaches the one-year anniversary of the Brexit vote, it is interesting to note that it has not yet had to deal with its position on foreign takeovers.

However, if and when that does happen, it is hoped that the Government’s reaction will shed light on how it proposes to achieve its agenda of protecting British companies in key economic industries, whilst maintaining the flow of investment as we leave the EU.

Kate Ball-Dodd is a partner at leading law firm, Mayer Brown.