The UK government has intervened in the proposed £4 billion takeover offer for aerospace and defence firm Cobham plc by US private equity firm Advent International, which was notified to the European Commission (the "Commission") on 1 October 2019. According to Business Secretary Andrea Leadsom, the intervention was made on grounds of national security. Consequently, the Competition and Markets Authority (the "CMA") has been tasked with investigating and carrying out a review of the national security implications of the transaction. Whilst the nature of the deal is in itself interesting, the intervention provides insight into the government’s appetite for scrutinising transactions for national security concerns, which is particularly topical in the light of proposed legislation in this area.
Cobham is a FTSE 250 company specialising in air-to-air refuelling. It has extensive contracts with the British military, including for refuelling, electronic warfare systems and training for military personnel in the use of software platforms in combat aircraft. Cobham has experienced shortages of capital in recent years: in 2016 and 2017 it issued a series of profit warnings which required it to raise funds from shareholders.
Advent, a firm with a track record of buyouts in Western and Central Europe, made a £4 billion offer to buy Cobham in July 2019. Shareholders approved the deal last month. The deal is controversial for some because Advent plans to break up the company and sell off individual assets, resulting in potential negative impacts on British industrial and security interests.
Current and proposed legislation
Under current rules, the government’s authority to intervene in mergers is based in competition law. Ordinarily, the Commission would have had sole jurisdiction over the Cobham transaction within the European Economic Area. However, the government has issued a "European Intervention Notice" to enable it to investigate the "public security" aspects of the merger.
In such a case, any other aspects remain subject to review by the Commission, subject to a (narrowly construed) exception in Article 346 of the Treaty on the Functioning of the European Union. That provision enables an EU Member State to take measures for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material, in order to prevent notification of such aspects of mergers to the Commission or the provision of sensitive information to it.
Under the Enterprise Act 2002, the government is allowed to intervene where there is a "relevant merger situation" (this covers mergers between companies where the target company meets a certain turnover threshold or a "share of supply" test) and the merger raises issues of either "national security, financial stability or media plurality". National security for this purpose is deemed to include "public security".
In June 2018, the UK government lowered the target turnover thresholds for review of mergers from £70 million to £1 million concerning businesses involved in the development or production of military and dual-use items subject to export control; the design and maintenance of aspects of computing hardware; or the development and production of quantum technology. It also broadened the "share of supply" test, so that a transfer of a market share of 25 per cent. or more is sufficient with no increment being required.
As explained in our previous update article,2 the law in this area is set to undergo further major changes following the publication of a White Paper by the government in July 2018.3 The proposed system would create a separate review process for certain categories of investments, acquisitions or other transactions, led by agencies that are responsible for national security, foreign policy and export controls. Similar to the US CFIUS regime, the proposed UK system would provide for a voluntary notification mechanism, by which parties to the transaction could proactively submit a deal to be reviewed by the government, with the possibility of prior informal discussions. The government would then either confirm that the deal may proceed, clear the deal with conditions intended to mitigate the perceived security risks, or block the transaction. The review process could also be activated by the government intervening in a transaction ("calling-in"), either before or after completion. The government would have the authority to unwind completed transactions during a certain period post-completion (the current proposal is six months).
Although the CMA would no longer have jurisdiction over the national security aspects of transactions following introduction of the proposed regime, it would continue to review such transactions from the competition perspective subject to the ability of the Senior Minister to overrule the CMA.
In relation to Brexit, if there is a Withdrawal Agreement with the European Union, the existing competition regime is likely to remain in place until the end of any transitional period, and the new regime, if implemented during that period, would apply alongside it.
The CMA must report its initial decision on the Cobham takeover by 29 October 2019: if sufficient concerns exist, the government has the power to refer the deal for in-depth investigation and ultimately to prohibit it or to require remedial action as a condition of clearance. Since 2002, the government has made previously nine national security-based interventions: eight of the transactions were cleared, and one remains under review.
If the planned legislation proceeds and a CFIUS-style system is established in the United Kingdom, national security reviews are likely to be more common. Acquisitive companies are now accustomed to submitting deals for approval to CFIUS, and a number of other jurisdictions have introduced or are planning to introduce foreign investment regimes. The UK government anticipates receiving 200 voluntary notifications per year, and has indicated that half of these would be likely to undergo a full national security review.
Many of the legal and procedural issues that are likely to arise under the proposed new regime will be familiar from the existing "voluntary" UK merger control regime. However, many uncertainties remain in relation to how the proposed new regime will work in practice. Not least, in a report published in July 2019, the House of Commons International Trade Committee stated that:
Whether or not the new regime will result in many blocked deals is unclear, but a bespoke national security review process led by key stakeholder agencies will bring a different level of scrutiny to transactions that could affect UK national security.