New research from Baker McKenzie reveals that the number of deals subject to scrutiny potentially increases by 156% or £1.35bn

Coming into force on 11 June, new UK merger control rules addressing national security will potentially impact a large number of deals, leading global law firm Baker McKenzie found. According to data from the last two years, the new regime could result in a 156% increase in deals subject to UK scrutiny in the affected sectors. This would represent at least £1.35 billion worth of additional deals now under scrutiny. 

The reforms introduced to the existing UK merger control regime strengthen the Government’s power to review, and potentially block or unwind, mergers on the grounds of national security. The new legislation amends the UK merger control filing thresholds to targets with revenue exceeding £1 million instead of £70 million in three specific categories: military and dual use, quantum technology and multi-purpose computing hardware. According to our data, at least 91% of deals in these sectors are now subject to scrutiny compared with at least 35% before the change.

Commenting, partner and London head of Baker McKenzie's Competition &Trade practice, Samantha Mobley says: "There is no doubt that the regulatory burden of doing deals is increasing and so are the challenges for global businesses. While the UK government will now have more power to review cross-border deals, there needs to be a balance between continuing to encourage foreign investment and protecting national security interests."

Mobley adds: "The new thresholds are likely to lead to a greater number of merger notifications to the UK competition authority. This will have a significant impact on resources, at a time when the competition authority is already predicting that its mergers workload will increase by 50% as a result of Brexit."

The new UK merger control rules are a precursor to a new UK foreign investment control system planned to be introduced within the next two years. In taking these steps, the UK is echoing similar movements around the world. Last month (on 25 May 2018), the European Parliament's  International Trade Committee voted to approve new tools for the EU to check that foreign investment in EU countries doesn't threaten their security or public order. Germany has also recently tightened its foreign investment screening rules and the US Committee on Foreign Investment (CFIUS) process, which is also in the process of being changed, is now seen as a major gating item for inbound M&A to the United States. 

All these changes are taking place in the context of a shifting investment policy landscape and heightened concern about national security issues in the face of globalisation and Brexit. Moreover, this activity is highlighting the need for investors to prioritise foreign investment review risks. While most cross-border transactions have a high likelihood of being approved under these new foreign investment regimes, those in sensitive sectors may encounter more scrutiny and face a prolonged approval process. 

Managing this process will become more critical. Mobley says: "Businesses need to take the time to understand the rules and identify a regulatory strategy early in the deal process which can minimize the risk of delays, last-minute changes to the deal structure, or even failed transactions. Added to this, as the new merger thresholds explicitly focuses on military and dual use items, it is crucial that acquirers and targets get their arms around whether the target’s product portfolio includes controlled items. Having export control expertise will be critical to this assessment."

Overseas regulatory intervention is already taking its toll. Our recent China FDI report showed that tougher security screening was responsible for more than two-thirds of the $12 billion of formally announced and then withdrawn or cancelled deals involving Chinese investors in 2017. Around $5 billion of Chinese investments are currently under regulatory review in the US and Europe.
 
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