Draft Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2020 published

June 25, 2020

The Draft Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2020 has been published. Under section 42 of the Enterprise Act 2002, the Secretary of State may issue an intervention notice to the CMA if they believe that it is, or may be, the case that one or more public interest considerations are relevant to a relevant merger situation.

The 2018 Share of Supply Order inserted a new section 23A into the Enterprise Act to define a “relevant enterprise” for these purposes. This covered enterprises that are involved in certain activities related to: military or dual-use goods that are subject to export control; computer processing units and quantum technology.

The Department for Business, Energy and Industrial Strategy has now announced that the government had decided three further sectors that it considers are central to national security (artificial intelligence, cryptographic authentication technology and advanced materials) should be included in the regime.

Therefore, the draft Order extends the government’s powers and amends section 23A of the Enterprise Act so that an enterprise is a “relevant enterprise”, subject to the revised share of supply test, if its activities consist in or include:

  • Developing or producing advanced materials or any product where cryptographic authentication is its primary function.
  • Owning, creating or supplying intellectual property relating to the functional capability of advanced materials.
  • Research into artificial intelligence, cryptographic authentication or advanced materials.
  • Developing or producing anything designed for use in artificial intelligence.
  • Supplying services employing artificial intelligence or cryptographic authentication.
  • Developing or producing anything designed as an enabler (a material or process used in the manufacture of an advanced material).
  • Providing know-how about or the use of enablers.

The Order’s explanatory memorandum explains the rationale.

Most investment into the UK’s economy raises no national security concerns. However, the government needs 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. As a consequence of the COVID-19 pandemic, the depreciative effect on sterling coupled with financial uncertainty for many enterprises means the risk of hostile actors exploiting the situation through aggressive acquisitions of UK businesses has increased. Furthermore, there is also an increased threat of the UK losing capability to act as a sovereign nation with its own capabilities.

AI technologies are transforming the global economy. They can be seen as new industries in their own right, but they are also transforming business models across many sectors. They deploy vast datasets to identify better ways of doing complex tasks. AI applications have the potential to be programmed remotely, misdirected or misused in other ways that raise national security concerns should, for instance, a hostile actor obtain access or control over them.

The opportunity to use AI positively across the UK economy can only be harnessed if sensitive and critical applications of AI, especially in defence and security and national infrastructure, can be protected from the risk of hostile actors intending to do harm to the UK and its interests. The draft Order defines the relevant enterprises as those that produce, develop and design digital AI and machine learning technologies (excluding physical robotics), including components and service providers and all relevant intellectual property. This definition aims to ensure that the UK government is able to exercise its duty to protect national security in this rapidly developing sector.

Cryptographic technology enables information to be protected whilst in storage or in transit by making it inaccessible or unreadable by everyone except those who have the information needed to access or read it. The technology is integral to a well functioning economy. Hostile actors may be able to access critical systems and undermine national security if they gain access to this technology by acquiring a business in this sector. Significant damage to the UK could result if authentication systems are compromised or bypassed, including through sabotage and espionage, to allow a hostile actor to gain unauthorised access to systems critical for national security.

As enterprises increasingly rely on advanced, digital means to protect their intellectual property and operational activity, having the ability to intervene against hostile actors to mitigate risk in this area is more pressing than ever. Consequently, the Order enables the government to intervene on national security grounds where a hostile actor could affect the activities of an enterprise producing solutions, researching technology or providing services relating to cryptographic authentication.

Breakthroughs in materials and manufacturing science are fundamental enablers across all areas of societal and economic development. The UK government says that it will act to maintain advantage in its defence and security capability and there may be a risk of loss in this advantage if UK companies (and the IP that they generate) in this area are controlled by hostile actors.