Impact on deal planning
The rise of protectionism in the world’s leading economies is expected to have a significant impact on the regulatory landscape and on cross-border M&A activity in the year ahead. The shift from political rhetoric to regulatory change features across a number of major jurisdictions, with at least the US, EU and UK continuing consultations on more restrictive foreign investment measures.
Enhanced regulatory scrutiny will affect deal planning, strategy and execution risk. The main challenge for merging parties in 2018 will be to anticipate and manage political sensitivities as early as possible in the transaction timetable.
Strengthening of foreign investment controls – a global trend
Our analysis shows that all G7 countries and 55 per cent of G20 countries have recently strengthened, or are considering new, measures for government intervention on foreign investment or other public interest grounds. Our own experience advising on recent significant cross-border transactions also reflects this. Since 2014, we have seen a 30 per cent rise in the number of transactions valued at over $1bn on which we advised that have been affected by foreign investment rules or related public interest intervention.
Western economies in particular are becoming increasingly protectionist, but we anticipate that governments across most regions will take a more direct role in scrutinising cross-border M&A in the year ahead.
- In the US, the Committee on Foreign Investment in the United States (CFIUS) is grappling with a record number of cases and more cases will likely be pushed into second-stage review in 2018. CFIUS is becoming more aggressive and unpredictable in terms of process and substance, and will increasingly be pushing parties to withdraw and refile when faced with concerns.
In some of these deals, parties should consider early informal engagement with relevant authorities and allow enough time for the review process to run its course. In the US, CFIUS is likely to continue to face significant resource constraints, with an increased workload in 2018.
Shawn Cooley, Special Counsel (Antitrust), Washington DC
- Certain EU member states will be looking at adopting or amending national foreign investment screening measures on grounds of security or public order following the European Commission’s proposed regulation. The draft proposal sets out a framework for member states to consider the potential effect of foreign investment on areas including critical infrastructure, critical technologies, security of supply of critical inputs and control of sensitive information, although we expect divergence across member states in terms of national measures. The proposal gives the Commission power to review and opine on investments of ‘Union interest’, but it stops short of allowing the Commission to block such investments.
- Germany is one of the principal forces behind the EU initiative and has recently strengthened its own review procedures. Its new law is broader in scope and contains longer review periods than the previous regime. Within the last few months, the relevant ministry has opened a significant number of in-depth investigations. While, for now, these proceedings have only led to delays, it appears quite possible that Germany could seek to block specific investments in the next year, particularly in industries that the government considers critical.
- In the UK, following a period of historically low political intervention, the government has signalled that deals will be examined ‘on a case-by-case basis to ensure they are in the national interest’. The government’s short-term proposal to expand intervention powers for acquisitions of military or dual-use products and advanced technology is expected to be enacted quickly. Consultations on longer-term reforms, including a potential call-in power and/or a mandatory notification regime, will continue into 2018. We still expect, however, that the UK will in practice focus resources on cases that raise genuine national security concerns.
- Japan is another G7 country that has recently introduced more restrictive foreign investment measures. The amended rules include prior review of the transfer of shares in unlisted Japanese companies from one foreign investor to another, and strengthened criminal and administrative sanctions for breaches of regulations regarding the transfer of certain technologies.
This is an area of increased focus, particularly for the most high-profile M&A transactions. Whilst restrictions and level of regulatory and political scrutiny are increasing, our experience shows that the approaches that you need to get to a successful closing are evolving. Parties can still take a number of steps to improve their chances of successfully navigating these choppier waters.
Bruce Embley, Global Transactions Partner, London, and Co-head of Global M&A
- China, conversely, is relaxing its approach to inbound foreign investment, mostly by introducing measures to raise foreign ownership caps in sectors such as financial services and vehicle manufacturing, and by reducing the regulatory burden and improving the overall transparency of its administrative process. The political climate is welcoming of foreign investment, but parties contemplating deals that affect sensitive or key economic policy areas such as China’s cyberspace, information technology and telecommunications sectors, or critical national infrastructure such as the Belt and Road initiative, should continue to expect close scrutiny. Chinese outbound investment, on the other hand, will likely face continued scrutiny as the Chinese government seeks to manage the direction of Chinese capital outflow more proactively.
While these and other anticipated changes can create an uncertain climate for deal making, parties may want to take this opportunity to review planned investments in those jurisdictions and sectors that regulatory change will most likely affect. New rules may start coming into effect from late 2018 or early 2019.
With national governments emboldened to intervene in deals that many perceive to be politically sensitive, we will see a wider range of industries potentially affected by foreign investment and public interest considerations. Whereas intervention traditionally focused on national security and defence, our research shows the expansion of foreign investment and public interest screening into high-tech manufacturing, energy infrastructure, telecommunications, pharmaceuticals, and food and drink manufacturing.
Increasingly, questions around access to valuable technology, know-how and sensitive data are driving political intervention. In Midea/KUKA, political concerns in Germany around the protection of sensitive industrial and corporate data were addressed by implementing complex ring-fencing arrangements.
A comprehensive remedies strategy is crucial in complex, sensitive global transactions. We can help identify potential concessions early on to achieve greater deal certainty and a speedy closing.
Frank Röhling, Antitrust Partner, Berlin
Some governments, including France’s and the UK’s, have signalled a willingness to intervene in deals involving ‘national champions’. Parties therefore need to pay closer attention to political sensitivities across sectors.
Finally, an Italian decision in November 2017 blocking the proposed acquisition of an Italian software application company by the Italian subsidiary of a French company is a stark reminder that national interest and security concerns are not limited to acquisitions involving non-EU investors.
Despite increased scrutiny and political intervention, foreign investment into the G20 is at an all-time high and our experience shows that merging parties can take a number of steps to improve their chances of successfully navigating the uncertain regulatory landscape.
- Early engagement is crucial to achieving the best possible outcome. Merging parties should identify all forms of ‘political’ sensitivities from the outset to ensure a consistent and compelling deal narrative. As many foreign investment and public interest regimes are voluntary, parties will need to agree if, and how, to engage with authorities, other potential stakeholders (eg representative bodies such as works councils) and the media.
- Timing strategy will vary on each deal and requires careful planning. Going too soon can risk jeopardising deal momentum, but going too late can result in pre-emption, leaving politicians or other stakeholders feeling marginalised. We have successfully deployed integrated teams of lawyers, governmental affairs advisers and communications consultants to manage the right level of political engagement at the right time.
- Appropriate deal structuring can improve overall transaction certainty and can offer a pre-emptive solution that allows parties to avoid complex or lengthy regulatory processes. Options include dual-listed companies, reverse takeovers and ‘virtual mergers’ (created by contract only), or carving out particularly sensitive parts of the business from the outset.
- Finally, adopting a co-ordinated global remedies strategy that covers both antitrust and political concessions continues to pay real dividends in managing complex and sensitive transactions. In our experience, getting early political ‘buy in’ (for example by offering binding undertakings or upfront disposal of certain assets) can significantly reduce overall execution risk and timing pressure.
Navigating stricter legislation is only part of the story. In order to get these deals through, it is crucial to engage with all potential stakeholders and to ensure there is a consistent deal narrative from the outset.
John Davies, Antitrust Partner, Brussels and London
Looking ahead in 2018
Companies planning cross-border transactions that may implicate national security or public interest issues in any jurisdiction should:
- Identify political and other national or local sensitivities early – stay close to local politicians, other stakeholders and the media throughout the deal to anticipate and address any shifts in attitude.
- Present a consistent narrative to relevant authorities and invest in laying the political groundwork at an early stage in the negotiations.
- Carefully consider deal structuring options to increase transaction certainty and minimise lengthy pre-closing periods.
- Plan for remedies and potential disposals to address security and national interest concerns or to increase public support for the transaction.