UK Government Strengthens Powers To Scrutinise M&A On National Security Concerns

There's something ruffling the air around UK corporate governance. Could it be Brexit ?

Today the UK government amended the threshold tests for businesses in the military, dual-use, computing hardware and quantum technology sectors which it described as "most likely to have implications for national security in the future."

In order to "address changes in the market", it made changes to the UK’s merger regime "to recognise the growing importance of small British businesses in developing cutting edge technology products with national security applications", according to a statement by the Department of Business, Energy and Industrial Strategy (BEIS). 

The changes allow ministers to intervene on certain grounds when the target business’s UK turnover is more than £1 million ($1.34m)-  a staggering drop from £70 million ($94m)  under the previous rules. Listen closely: small innovative businesses focused on technology, digital transformation and the future via automation and artificial intelligence might be heard cheering.

The changes also remove the requirement that a merger or takeover in these sectors must lead to an increase in the parties’ combined share of supply of relevant goods or services before the Government is able to intervene.

“These new rules ensure mergers and takeovers in key areas of the economy cannot risk our national security, while maintaining the openness to trade and investment that is underpinned by our modern Industrial Strategy” said Business Minister Richard Harrington.

This does not come as a surprise. The changes follow a consultation launched last year to amend the Enterprise Act to reform and strengthen the Government’s powers. Today’s new rules are the first step, with broader changes to be announced in a White Paper later this year.

The changes, while said to be made for national security-related reasons, also amend the thresholds that allow the independent Competition and Markets Authority (CMA) to scrutinise mergers for competition concerns. Neither the Government, nor the CMA "expect that the changes will bring about a material change in the CMA’s approach to the assessment of mergers on competition grounds" said BEIS.

The CMA have today also published their technical guidance in relation to these changes: Guidance on changes to the jurisdictional thresholds for UK merger control - and the draft guidance published in March is here.

UK Prime Minister Theresa May has in the past indicated her willingness to intervene in the economy. But the government has been keen also to show Britain is still 'open for business' as it prepares for Brexit. Now, it seems, that theme might be subtly shifting.

At the weekend BEIS took media outlets by surprise with the midnight announcement that the UK will require large listed companies to publish and justify the pay gap between chief executives and their staff from 2020 under new legislation presented to parliament on Monday.

Mainstream media was so busy covering the inability of politicians to agree on Brexit policy, that this story was covered either by reporters who happened to be on night duty, or ignored.

Importantly, the UK government also said that listed companies are to be required to show how future share price rises will affect executive pay - a critical subject that has been much debated  over the last few years.

Theresa May first publicly and unexpectedly embraced corporate governance and a commitment to the responsible element of capitalism even before she became Prime Minister in a speech ignored by much of media at the time and revisited later. Since then it has been largely a guessing game on how much her commitment is born of ideology, and how much is just politics.

Melrose Industries, the turnaround group behind a £8.1bn hostile takeover of engineer GKN, is a good example of a UK company that was both hit by a shareholder protest vote over pay, as well as in sharp focus on national security. But its takeover of GKN was approved in April.

And although the weekend's announcement on new rules to rein in the pay gap  between those at the top and the workers sounds revolutionary, the detail on how it is implemented will be key, alongside other corporate practices with a direct impact on governance.

If the corporate governance landscape seems at all muddled by Brexit, consider the latest announcements from the regulator, the Financial Conduct Authority, around premium listings in the UK in the future.

Andrew Bailey, CEO of the FCA, wrote this opinion piece in the Financial Times less than 24 hours ago.

"The UK listing rules must meet the needs of both issuers and investors. Rules that get in the way of legitimate corporate transactions and discourage companies from listing in London will not do so. They will not provide value to investors." he said.

"If we get the regulatory requirements right, however, we can succeed in two ways: more companies will meet the highest realistically achievable standards, and we will widen the opportunities for investors in UK markets" he added.

Getting the regulatory requirements "right" for opportunity and "realistically available standards" is clearly a trade-off, even if 'Saudi Aramco' is never mentioned. And any notion of trade-offs at all in the pursuit of truly higher standards for corporate governance should be met with scepticism.

As Stephen Martin, Director general of the Institute of Directors put it : “The IoD is deeply disappointed that the FCA has decided to press ahead with the creation of a new premium listing category which reduces key corporate governance requirements. This decision has been made despite opposition from across the governance spectrum and without providing evidence as to the necessity for the reduction in standards."

"The FCA fails to provide a convincing justification for why listing rules relating to premium category issuers should be waived or removed in cases where the issuer has a controlling sovereign shareholder. If anything, we believe that listing rules should be strengthened for this category of issuer given its distinctive governance challenges and risks" he added.

The trouble with Brexit is that we do not know what the "distinctive governance challenges and risks" will be, going forward - indeed, we know almost nothing despite the time that has lapsed since that vote in the EU referendum in June 2016.

To get too excited about any commitment to changes in corporate governance standards at a time like this seems both like folly, and a demonstration of corporate naivety.

Mr Martin may have had some bad press recently in his clumsy attempt to speak truth about (deeply vested power) but his instincts are spot on when he says: "Far from being an imposition on companies, these (existing standards for a premium listing)  should be a kite-mark of the best way to do business. Good corporate governance is only a burden on companies who fail to practise it."

Amen to that for post-Brexit Britain.