“A veritable ‘arms race’ towards stricter foreign investment controls is in full swing in many jurisdictions. This is having a real impact on timing and strategy for M&A deals.” - Christian Ahlborn
There has been a global shift in approach to foreign investment. Authorities are taking a far closer look at proposed investments, imposing conditions or even blocking transactions. The reasons for the greater scrutiny range from perceived heightened threats to national security, to anxieties about challenges to technological superiority in some sectors and, more generally, a political mood swing against the benefits of globalisation.
What does this all mean for potential investors?
Generally speaking, intervention under foreign investment rules is already much harder to predict than under the tried-and-tested merger control regimes. Our experience is that transaction timeframes are also subject to greater uncertainty, since many foreign investment regimes have very unclear and open-ended review timetables. Going forward, potential investors will have to navigate an increasing number of regimes, with significant differences in approach. The various reforms and proposals will mean potentially increased scrutiny and execution risk for a broader range of deals in a number of jurisdictions, as well as longer timeframes to completion.
It is key for deal teams to consider how best to manage all this uncertainty at the outset and to address individual transaction challenges upfront in order to mitigate any potential risk and delays.
In the United States, President Trump recently signed into law the Foreign Investment Risk Review Modernization Act (see Linklaters client alert here). With Chinese investment particularly in mind, FIRRMA makes significant changes to the U.S. foreign investment regime run by the Committee on Foreign Investment in the United States (CFIUS), including:
- significantly increasing CFIUS’s scrutiny of transactions involving companies in critical infrastructure, or critical technologies, and involving access to U.S. citizens’ personal data; and
- expanding the U.S. government’s jurisdiction in certain real estate transactions when in or part of airports, seaports or in close proximity to U.S. government or military facilities – even if the transaction does not involve an acquisition of a U.S. business.
Meanwhile, in Europe, a number of countries, including France, Germany and the UK, have proposed changes which would significantly increase their national security screening of foreign investments.
In the UK, new lower thresholds came into force in June for deals involving targets active in certain sectors perceived to be potentially sensitive (see Linklaters client alert here). Then, in July, the UK published a White Paper setting out a number of “longer term” reforms. The scope of these proposals is vast, capturing all sectors and all types of investment (even new projects and loans), with no minimum thresholds or safe harbours. The powers would also extend to transactions taking place abroad if they met an expansive UK nexus test. While notification would remain voluntary, the Government would have broad powers to “call-in” and suspend any transaction if it had a reasonable suspicion that it may raise national security risks. The Government expects roughly 200 notifications a year, with 100 going to a full national security review – a huge increase on the one review per year under the existing rules. For more information on this topic, click here.
Germany is way ahead of the game, having strengthened the rules and increased the notification obligations just last year for acquisitions in specified industry sectors related to public security such as IT, telecoms and critical infrastructure. These reforms have already resulted in more investigations since July 2017 than for the first 13 years of the regime’s existence. Then, in August, the German government issued its first ever veto decision against the takeover of a German company, due to concerns around the transfer of information to China and potential Chinese use of that technology (see Linklaters client alert here). Shortly thereafter, the German government confirmed it intends to tighten even further the rules it introduced just a year ago.
This is all against the backdrop of draft EU-wide rules for vetting inward investment, which would see the European Commission taking on a co-ordinating role between Member States (see Linklaters’ client alert here). The proposals are progressing rapidly through the EU legislative process – much more rapidly than expected – and are likely to be adopted by the end of 2018.