2018 was the year in which the global move towards greater protectionism in economic and trade policy translated into significant developments in foreign investment regimes in a number of countries. These developments potentially complicate the regulatory landscape for companies seeking to invest overseas, making it more important than ever for in-house counsel and their external advisors to prepare adequately for scrutiny under foreign investment regimes.
These developments are particularly important for readers familiar with Canada’s well-established foreign investment regime pursuant to the Investment Canada Act, which, for nearly a decade, has included the power to review investments which potentially raise national security concerns. By contrast with the relative predictability and long-standing nature of Canada’s foreign investment and national security review regime, the implications of recent developments in other jurisdictions are not yet clear. Nevertheless, the trend in the medium to long-term is towards a more interventionist approach to foreign investment regulation across the globe.
In only the first month of 2019, we have already seen how global trade and geo-political tensions can potentially influence domestic foreign investment policy, with the former head of the Canadian Security Intelligence Service calling for the Chinese tech giant Huawei to be prevented from investing in Canada’s developing 5G mobile networks. The potential for spillover effects from the political arena into foreign investment policy is both significant and increasingly likely.
What lessons may be learned from 2018’s developments?
- First, changes require political capital. Even with the turbulence caused by Brexit, the UK government found the time to push forward radical proposals to expand the UK’s foreign investment review regime in 2018. The government published a White Paper in July 2018 setting out plans to increase its powers to scrutinize investments on national security grounds. A month earlier, the UK passed secondary legislation amending its jurisdictional merger control thresholds for transactions involving the military, dual-use or advanced technology sectors, effectively providing its government with the power to review any in-bound investment in these sectors. These reforms are significant – if the White Paper passes into law, the government expects around 200 notifications per year, of which 100 are anticipated to raise national security concerns, with approximately half of those being subject to intervention. There is no specific timetable for the White Paper’s implementation, even though the public consultation completed in October 2018. In practice, it may be difficult for a minority government to push through such radical change in the current environment. If the reforms are implemented, a wide variety of investments – including minority investments and asset acquisitions – would likely fall within its scope; and criminal sanctions would deter non-compliance.
- Second, governments can move quickly. The introduction of new foreign investment regimes can be achieved in a short period of time. In November 2018, the European Commission announced it had reached agreement with the European Parliament and European Council on an EU-wide framework for screening foreign direct investment (“FDI”). The mechanism will not replace existing foreign direct investment regimes at Member State level (there are national regimes in 13 of 28 Member States currently) but will enable the European Commission and other Member States to intervene in the on-going review of a transaction under national powers by a Member State. This will provide a greater degree of co-operation on foreign direct investment and will be particularly important given Hungary, Sweden and the Czech Republic are likely to introduce their own regimes in the near future. The EU has acted swiftly; the FDI Regulation is expected to enter into force as soon as May 2019. In common with other regimes, the Regulation will in particular emphasise the careful scrutiny of investments made by state-owned enterprises and investments into critical industry sectors, such as energy, transport, communications and defence.
- Third, the introduction of foreign investment screening is not exclusively tied to populist politics. The French government – headed by the liberal Emmanuel Macron - announced in November 2018 a considerable expansion of the national security screening regime that has been in force in France since 2014. The regime has been expanded to capture investments into sectors such as energy, water supply, transportation, telecoms and public health, as well as lengthening the list of sensitive sectors in which transactions are subject to prior authorization by the Ministry of Economy. R&D activities in cybersecurity, artificial intelligence, robotics and sensitive data storage are now included, as of January 1st This represents a significant expansion of the regime and is a good example of a mainstream government reacting to the current trend in public sentiment towards protectionist economic policy.
- Fourth, existing foreign investment apparatus can be used flexibly to expand the jurisdictional reach of reviewing governments. A good example in 2018 was in the United States, where the Committee on Foreign Investment in the United States (“CFIUS”) took the unprecedented step of blocking a transaction – Broadcom’s hostile takeover of Qualcomm – before an acquisition agreement was signed. This action was taken in the context of Broadcom (domiciled in Singapore) taking steps to re-domicile to the United States, a relocation which would have removed CFIUS’ jurisdiction over Broadcom’s takeover bid. In early March 2018, before Broadcom had completed re-domiciliation, CFIUS issued an interim order requiring, inter alia, Broadcom to give CFIUS advance notice of any further re-domiciliation steps, having identified possible national security concerns with Broadcom’s connections with “third party foreign entities”. One week later, President Trump issued an Executive Order prohibiting the transaction. Some commentators have interpreted this action as evidence of CFIUS taking an increasingly assertive stance on jurisdiction, driven at least in part by the current geo-political landscape. Such assertions of jurisdiction in the United States may become more commonplace in the future, if the Foreign Investment Risk Review Modernization Act of 2017 (“FIRRMA”) is passed into law. This legislation contemplates broadening CFIUS’ mandate to certain real estate transactions, outbound contributions of critical technology and to minority investments.
What does this mean for 2019?
The foreign investment landscape is developing quickly, but with different emphases in different jurisdictions. In some jurisdictions, such as the EU and France, amendments to existing regimes or the introduction of entirely new screening mechanisms have proceeded at pace. In other parts of the world, such as the UK, change is moving more slowly, although potentially with similar results. Even in jurisdictions with more mature regimes, such as Canada and the United States, the current instability in global geo-politics increases the likelihood of unpredictable outcomes in foreign investment and national security review. In all cases, there appears to be a growing public expectation that governments will intervene in a wider array of deals to protect national or pan-national economic and security interests. Governments around the world are responding to these concerns, and are using foreign investment screening as an increasingly important piece of their toolkit.
In-house counsel and their external advisors need to be aware of these changes and to act carefully when reviewing which regimes may be triggered by the acquisition of assets or businesses abroad, including minority investments. Investments that pertain to critical national infrastructure such as telecoms, rail networks and energy facilities; to sectors that have a bearing on national security, including defence, cyber security, and dual-use technology; or investments involving a purchaser that is state-owned or influenced, will require particularly careful consideration.
The increasing complexity of the global foreign investment landscape, and the regulatory uncertainty that this causes companies, can partially be mitigated by proactive deal planning. While preparations will always vary from case to case, it is worthwhile considering:
- early engagement with relevant stakeholders and the media to create a persuasive and consistent deal narrative;
- early consideration of the appropriate deal structure, which can help to improve overall transaction certainty by taking particular regulatory processes off the table; for example in a national security context by carving out the sensitive parts of a target business at the outset to pre-empt review; and
- a timing strategy that balances the need proactively to approach the relevant governmental departments with the need to coordinate these efforts with other parts of the regulatory timetable.
Foreign investment screening is undergoing a period of flux similar to the decade from 2000-2010 when many of the world’s merger control regimes were reformed or introduced. In this environment, staying on top of changes to screening processes in real-time will greatly assist private practitioners and in-house counsel as they advise their clients on the risks associated with deal-making in 2019 and beyond.