The UK Secretary of State recently imposed novel government step-in rights and other national security remedies on a major French company's acquisition of two UK businesses that supply naval propulsion systems, among other things.
The transaction. A wholly owned subsidiary of EDF Energy Holdings Limited agreed to acquire control of GE Oil & Gas Marine & Industrial UK Limited and GE Steam Power Limited. This transaction was reviewable under the UK National Security and Investment Act 2021.
The issue. The Secretary of State considers the acquisition to be a risk to national security due to the fact that both UK companies deliver critical national security and defense capabilities relating to naval propulsion systems.
The remedies. The Secretary of State imposed a bundle of remedies that (1) seek to protect sensitive information and ring-fence these within the target company, (2) place a UK government-appointed observer on the target companies, (3) set up a steering committee on the acquiring company's board to oversee compliance, and (4) impose an obligation to maintain capacity and capability with respect to critical Ministry of Defence programs in the UK. Crucially, the order also imposes step-in rights in case of serious breaches of the order which would jeopardise Ministry of Defence programs whereby the Secretary of State can take operational control of the relevant part of the business to fulfil those Ministry of Defence programs.
What does this mean for other deals? The decision is interesting in a number of respects when put into context with other decisions under the National Security and Investment Act 2021. We have seen full prohibitions and divestment orders, mainly in relation to acquisitions involving Chinese or Russian acquirors and remedies, particularly regarding supply remedies. Here, the goal of the order is to ensure information security and security of supply remain intact within the UK, even where the transfer of ownership is between ultimate parents from two friendly nations and NATO allies (i.e., U.S. and France). This happened in the context of the acquiror group EDF, which has a long-established relationship in UK operations including in sensitive areas such as nuclear installations. Finally, the existence of step-in rights are significant and appear to be wide-ranging in the case of potential prejudice to the UK Ministry of Defence programs even if much of the detail is non-public.
How does the UK action compare with U.S. remedies? The UK Secretary of State's action also provides an interesting counterpoint to the United States' regulation of takeovers affecting national security interests. Like the UK regime, the U.S. regime can impose a variety of remedies to address national security risk including a full prohibition of the deal by the president, and a range of structural, organizational, administrative, and behavioral requirements and conditions. While step-in authority to take over a business after it closes does not have a direct equivalent in the U.S., parties that have agreed to comply with requirements and conditions in order to obtain regulatory approval are subject to U.S. enforcement action if they breach those requirements and conditions. Parties seeking approval of transatlantic merger and acquisition deals should anticipate and coordinate their filings and discussions with two or more national security bodies, as well as antitrust and trade regulators.
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