National security clearance – appetite for intervention likely to grow, particularly on China, tech, and private equity transactions
In just over a year since the introduction of the National Security and Investment Act (NSIA), the Government has blocked five transactions. Proportionally, this is a much higher hit rate than comparable regimes. With Westminster broadly comfortable with NSIA outcomes so far, we are unlikely to see persuasive pressure on the Government to take a more lenient approach.
Although the UK has been at pains to pitch the regime as ‘country agnostic’, it is clear China is firmly in frame. Four of the five rejections involved Chinese acquirers (the fifth being Russian). While the Government allowed other Chinese acquisitions of sensitive assets to proceed, these were often accompanied by tough conditions which eroded deal value. In at least one case, the deal subsequently fell apart.
On the basis of both the parliamentary politics, as well as the geopolitical outlook, the UK’s position on China is likely to harden. This will continue to make transaction clearance difficult where Chinese ownership is involved. In the longer term, this could contribute to a decline in investment from China (as has already been the case elsewhere).
But it’s not just about China. Questions of sovereign capability and strategic independence have also figured prominently. Transactions involving energy and telecoms assets have been subject to close scrutiny, even when the buyers are from ‘friendly’ countries.
And across a whole range of decisions, the Government has demonstrated it sees the competitiveness of the UK tech sector as a national security issue and applied the NSIA accordingly. Part of this is a function of the current Government, which includes a number of tech-savvy Cabinet members, as well as the impact of geopolitics and tech bifurcation.
We expect private equity acquisitions to face particular scrutiny as officials will be concerned in some cases about the effect of leverage on the long-term stability of the target asset as well as the identity of upstream investors. The Labour Party is also thinking about these issues, so we see these trends playing out through 2023 and beyond.
The first year of the NSIA also demonstrated the extent to which politics can influence decision-making. The best example of this is Nexperia/Newport Wafer Fab, where the Government retroactively blocked the transaction following sustained parliamentary and media criticism of the deal.
We could see some tweaks to the regime. The appeal by Nexperia of the Newport Wafer Fab decision may end up being a useful test case. The US is actively considering a possible screening mechanism for outbound investment in sensitive sectors in China. It is likely this issue will rise up the agenda in the UK.
Competition – hawkishness to continue in sensitive sectors, but there are reasons to be hopeful for broader pragmatism
In recent years, the CMA has emerged as one of the more hawkish competition regulators internationally. In 2022, the body found competition concerns in just under 60% of the mergers it reviewed, compared to 31% in 2021. The blocking of Meta’s Giphy acquisition at the end of last year set a powerful new precedent for intervention – on the basis of risks to potential competition levels rather than existing levels.
Looking ahead to 2023, the regulator is set to receive fresh new powers under the Digital Markets, Competition and Consumer Bill, due to be tabled in Parliament next month. The legislation will bolster CMA powers to deal with ‘killer acquisitions’ – where an incumbent player acquires a new, innovative company to pre-empt the emergence of future competition – and lay out new rules with legally binding codes of conduct for tech firms with ‘strategic market status’.
We should also expect heightened scrutiny of sectors with a direct impact on the cost of living. There is a clear sense within the regulator that it has a moral duty to help protect consumers from price increases in essential spending areas such as healthcare and accommodation. Sectors involved in the net zero transition will be of continued interest.
The Digital Markets Bill is likely to include a new duty of expedition for the competition review process and ways to facilitate streamlining, for example enabling binding undertakings earlier in Phase 2. The Government has also committed to issuing more strategic steers to the CMA. While technically non-binding, the CMA will have to report progress against these and will not want to appear recalcitrant.
The new Chair of the CMA, Marcus Bokkerink, has had a long and prestigious career in professional services and is understood to be taking a more pro-business stance. Meanwhile, the new Chief Executive, Sarah Cardell, has indicated that she wants the CMA to take a more business-friendly approach. That means the CMA may be more pragmatic in its relations with businesses. However, the fundamentals of how the regulator approaches merger reviews will remain the same.
EU FDI – push for strategic autonomy will continue to drive a stronger, more coordinated FDI screening
The Commission and Member States are becoming more aligned on FDI screening. Since the EU FDI regulation entered into force in 2019, the vast majority of Member States have introduced new or strengthened FDI powers in line with EU expectations. This trend is having a material impact on transaction clearance. Overall, the proportion of cases formally reviewed by Member States has dramatically increased – the latest official data shows that reviews nearly doubled between 2020 and 2021.
This has resulted in some nasty surprises, with deals referred to in-depth reviews which would previously have been waved through. In some cases, the reviews themselves have been thorough, tough and not always approached with a strong understanding of M&A.
In addition to encouraging FDI screening at the national level, the EU FDI regulation also introduced an EU-wide coordination mechanism, whereby Member States can refer reviews to the Commission to facilitate information-sharing between Member States. The overall volume of transactions being referred to the EU coordination mechanism is rising and a greater number of EU countries are using it. This means that, depending on the nature of the acquisition, investors who face an issue in one Member State may be more likely to subsequently face an issue in another.
We expect this trend of alignment between the EU and Member States to continue. In the context of the war in Ukraine, the debate on EU strategic autonomy has evolved significantly. We are likely to see the EU gradually start to operate as a de facto bloc when it comes to FDI clearance.
Consistent with trends elsewhere, Chinese acquirers and tech targets are becoming increasingly politicised. Germany’s decision in relation to Chinese investment in the Port of Hamburg is a good example – widespread criticism internally and externally of a proposed 35% Cosco stake forced German Chancellor Olaf Scholz to approve a smaller <25% stake. Likewise, in the Netherlands, parliamentary opposition to Nexperia’s acquisition of Dutch energy start-up Nowi has led the Government to commit to a retrospective review once new FDI legislation is passed.
For 2023, the question of outbound investment screening is on the Commission’s agenda. That Germany is considering this domestically means it is likely to get some traction. And in addition to the formal FDI process, the EU is likely to be able to get its hooks into transactions via the new foreign subsidies regime, which entered into force on 12th January and is in the process of being implemented.
The rules give the Commission the power to investigate companies with non-EU government backing deemed to be market-distorting, with all transactions over specified thresholds required to notify. PE and other investors with upstream investment from SOEs are likely to be caught. The Commission will consult on elements of the rules in Q1/2, before being able to call in investigations from 12th July.
Competition – digital leads the agenda and Member States prepare to level-up enforcement
New regulatory frameworks at the EU level have entered into force and we expect Member States to level-up enforcement activities, especially in the digital economy.
The Digital Markets Act (DMA), which entered into force last year, introduced stringent new regulation of digital ‘gatekeepers’ – providers of core platform services such as search engines, cloud services, marketplaces and operating systems. While the regime does not directly give the Commission new powers over mergers, from 2nd May onwards it will require these ‘gatekeepers’ to inform the Commission of all acquisitions in digital markets.
If the Commission decides it wants to investigate, as was the case in Illumina/Grail, it can ask Member States to make a referral. Critically, EU countries can refer even if they do not have jurisdiction to review at a national level – handing national politicians and the Commission a powerful new tool to go after perceived ‘killer acquisitions’.
At a national level, Member States have already taken steps to bolster their ability to leverage the DMA’s new powers, which they will help the Commission implement. For example, the Netherlands’ competition authority is launching a communication campaign to help businesses understand the new DMA rules and how they can file a complaint about gatekeepers’ behaviour, while France is preparing a bill to beef up its national competition authority’s investigative powers. We expect similar developments in other Member States this year.
Finally, we are likely to see the conclusion of the Commission’s high-profile investigations into Apple, Google, and Meta. Having talked tough on Big Tech, the body will be under pressure to show it can back its words with action.
While these cases cover similar ground to the DMA, the Commission has said in recent months that it would like to conclude them before the DMA obligations start to apply in 2024, so that the tailored antitrust remedies and the more general DMA obligations can be enforced together. More generally, the Commission will be keen to show that the DMA will not replace competition law in digital markets, but that the two areas of law will exist side-by-side.
The lead authors on this post were Katie Whitting and Verity Ryan, directors in Flint’s transactions team. It was written with input from Adam Atashzai, who co-leads our Markets and Investor Advisory practice, and Benoit Roussel, partner in our Brussels office, and Martin Holterman, a member of our competition and regulation team and a former advisor at the UK CMA. If you would like to discuss any of the issues raised in this note, please do get in touch.