The Rise of EU Protectionism and M&A in Life Sciences

Christine Phillips looks at how an increase in protectionism across the EU member states with respect to foreign direct investment impacts the life sciences sector.

Back in June 2018, the UK Government introduced changes to the Enterprise Act 2002 to protect national security by reducing the merger review thresholds for target businesses active in the development or production of military or dual use goods, the design and maintenance of computing hardware, and the development or production of quantum technology. Essentially, the UK Government can now intervene in an acquisition in any of these areas where the annual UK turnover of the target is £1 million ($1.3m) or more (reduced from £70 million [$92m]), or if the target accounts for 25 percent or more of purchases or sales of any goods or services in the UK (where previously, the buyer's and the target's businesses together required a combined share of supply of 25 percent or more). Changes introduced in June 2020 to the Enterprise Act 2002 now include businesses active in artificial intelligence, cryptographic authentication technology and advanced materials within these lowered thresholds for national security review.

Further changes to the Enterprise Act 2002 introduced in June 2020 extended the UK Government's power to intervene in mergers to combat and mitigate public health emergency (previously the public interest considerations included national security, media plurality and financial security only). For the UK Government to intervene the usual turnover (the target’s UK turnover exceeds £70 million) or supply test would need to be satisfied (the acquisition creates or enhances a share of supply of goods or services in the UK of at least 25%). The introduction of the new public health category will capture businesses such as those conducting vaccine research and development, vaccine or COVID-19/antibody testing production, PPE or ventilator manufacture, ISPs or those in the food supply chain. The amendment is intended to enable the UK Government to intervene where COVID-19 has caused financial problems which leave such companies susceptible to foreign takeovers.

These changes indicate that the UK Government may seek to intervene more in life sciences acquisitions and also those involving cryptographic technology, technology hardware, AI, cybersecurity and critical infrastructure networks, particularly as the turnover threshold is now so low for these businesses. This could potentially result in the UK Government requiring measures to be implemented such as post acquisition covenants or ringfencing of information and ensuring effective controls are in place. Any such intervention or voluntary notification may have an impact on M&A transaction processes and it will be important for parties looking at deals in technology or life sciences to consider and plan in advance whether UK Government intervention could be likely and to consider whether measures such as ringfencing information or a pre-acquisition reorganization could be necessary as part of the preliminary transaction structuring.

The changes introduced in UK follow the introduction in March 2019 of the EU FDI Screening Regulation (2019/452) which established a framework for EU members states to screen FDI with respect to foreign investments affecting security or public order and which comes into effect on 11 October 2020. The FDI Screening Regulation was introduced amid growing concern amongst EU member states about the impact of foreign acquisitions. Following guidelines issued by EU to member states on the protection of critical businesses and assets as a result of COVID-19 (and in particular in health, medical research, biotechnology and infrastructures that are essential for security and public order) a number of EU member states have introduced temporary screening protections for companies that may be affected by the pandemic. Member states are also preparing draft legislation to implement the FDI Screening Regulation in October.

In response in part to the FDI Screening Regulation, the UK Government intends to comprehensively overhaul the FDI regime in the UK and to introduce further changes through the National Security and Investment Bill (NSI Bill). Whilst the Enterprise Act relies on turnover and market share thresholds, the NSI Bill is expected to create a standalone FDI review process based on the buyer's identity or the target's business activities. This will enable the UK Government to call in a transaction where there is a trigger event such as the acquisition of 25% of a target company's shares or votes, significant influence or control over an entity. Acquisitions of assets (such as IP assets) will also be covered. The UK Government will check if the company or asset in question could be used to undermine national security, whether the acquisition gives someone the means to undermine national security and whether the buyer has the potential to use its control over the target to undermine national security.

As EU member states introduce FDI restrictions, some temporary and effective now to protect companies from opportunistic M&A where the pandemic has caused adverse financial consequences and other permanent national security protections to be effective from October 2020, buyers and sellers will need to consider FDI issues and how this could impact on transaction processes such as due diligence and the apportionment of transactional risk (including whether a voluntary notification should be made, the risks associated with the satisfaction of conditions precedent and any requirement for a split exchange and completion). The parties will need to consider these issues at the preliminary stages of the transaction as this may impact the setup of virtual deal rooms and information flows between the buy side and sell side transaction teams as well as the structure of the transaction itself.

Christine Phillips is Corporate Finance Partner at Fieldfisher.