City alert as Government moves to tighten grip on takeovers 

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Takeover rules were tightened earlier this year in a bid to make British companies less vulnerable to asset stripping

The UK Government is hoping to tighten its grasp on merger and takeover deals in the interest of national security, setting out fresh rules that has left some City advisers on edge.

Business and energy secretary Greg Clark has proposed new laws aimed at enabling the Government to intervene in deals in certain sectors, such as companies making military products, even if they are below a certain size.    

Currently the Government only has the power to block a deal if a business has a UK turnover of more than £70m, or where the UK market share of the merged outfit would be more than 25pc. Mr Clark wants to scrap the latter rule and drop the former figure to just £1m. 

The proposals are targeted at firms in the advanced technology sector, those which design or manufacture military products or businesses which make products that can be used for either civil or military applications.  

"We need to be alert to the risk that having ownership or control of critical businesses or infrastructure could provide opportunities to undertake espionage, sabotage or exert inappropriate leverage," read a 79-page green paper published on Tuesday afternoon. 

Secretary of State for Business, Energy and Industrial Strategy Greg Clark arrives for a cabinet meeting at 10 Downing Street in London, 21 February 
The Secretary of State for Business, Energy and Industrial Strategy, Greg Clark announced the proposals

The move follows a tightening of takeover rules aimed at making British companies less vulnerable to asset stripping if they are taken over, with bidders forced to make clear if they plan on moving company headquarters or making any cuts after the merger. 

For the bankers and lawyers advising on merger and takeover deals, there is a growing concern that foreign investors could be put off future deals involving British businesses if the rules go too far. 

"Does it put more dirt in the wheels of M&A activity? It probably does yeah," said one London-based M&A chief, adding the market will have to "watch like a hawk" to make sure the rules don't evolve from being about national security to an "excuse for the Government to block a takeover they don't like the look of". 

"Would I have been pushing for it, no - if it's protectionist elements coming in, that's not good from a market standpoint," he added. "[But] do I recognise the Government has a responsibility to consider national security implications, of course."    

Those concerns were echoed by Jeremy Furniss, a partner at mid-cap advisory firm Livingstone Partners, who said that while the final proposals remain uncertain the "existential risk is that this apparent desire to protect the UK’s technological edge becomes a backdoor means for politically-motivated merger control". 

Lawyers were equally cautious. Alex Kay, an M&A partner at Herbert Smith Freehills, warned that while it was too early to tell what impact these potential rules could have on activity, the changes "could be seen as a deterrent by certain overseas acquirors" while Hogan Lovells' partner Angus Coulter questioned the need to impose another layer of regulation.  

However one senior investment banker said that he does not expect the two-part consultation, which also looks at broadening the sectors in which deals will be subject to governmental review, to have a major impact. 

"I think this is about encouraging more conversations with the Government rather than putting up barriers or locking up doors," he said, adding that the impact will only be felt if the Government misuses its power and operates in ways people can't predict. 

Mr Clark said in a statement announcing the proposals that "no part of the economy is off-limits to foreign investment and the UK will continue to be a vociferous advocate for free trade".

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