Growing economic nationalism is threatening to impact M&A across Europe, as governments and regulators take an increasing interest in “foreign” acquisitions of nationally important companies in the name of national security. PE deal teams have previously focused on existing national security review regimes, including the Committee on Foreign Investment in the US (CFIUS) and ministerial clearance under the French Monetary and Financial Code. Now legislative changes in Germany, proposed changes and heightened government interest in the UK, and recent statements from the European Commission (EC), indicate a more interventionist approach to acquisitions.

Germany Increases Powers to Scrutinise and Block Sensitive Deals

Changes to the German Foreign Trade and Payments Ordinance (FTPO) regime allow scrutiny and blocking of direct and indirect acquisitions by non-EU bidders for German companies active in securitty-sensitive areas. The affected industry sectors are broad and include energy, water, nutrition, information technology, healthcare, financial services and insurance, transport and traffic, and software. We anticipate that German inbound deals will be subject to a greater number of investigations and a stricter approach from the regulator.

UK Government Demonstrates Interventionist Approach

While details of the UK government’s plans to implement an enhanced “industrial strategy” remain unclear, government’s intention to scrutinise foreign deals more closely under existing legislation is apparent. The UK government has indicated that it will propose a framework for foreign investment in companies within the UK’s “critical infrastructure”, the parameters of which are also unclear. The current position in the UK, after a series of transactions where the UK government has made public pronouncements on transactions in the technology sector, gives the appearance of the hand of politics in free market driven M&A deal-making — the sooner the terms of the UK government’s awaited proposals are released the better, in order to demonstrate the transparency global markets expect in the UK’s processes.

EC Proposes EU-Wide Takeover Screening Process

The EC has announced plans for EU-wide screening of foreign direct investment on public order and security grounds. This is in addition to requiring improved coordination between pre-existing national security review systems, and would give governments the right to seek an opinion from the European Commission.

Defining “Foreign” Private Equity Deals

Determining which international deals European regimes will classify as “foreign” is challenging. In our view, buyout firms should not limit their consideration of national security issues to Chinese-backed acquisitions. PE buyers of German entities should assess acquisition and fund structures (including LPs) to determine whether non-EU entities are present, thereby triggering notification requirements. PE sellers should consider the jurisdiction of buyers and the industry sector of the business being sold. While the German regime and the EC proposals focus on non-EU acquirers, the UK regime is broader and allows ministerial discretion. Many jurisdictions have raised concerns about the increasing role of Chinese buyers (particularly in the context of technology companies and know-how), but it is noteworthy that the UK government has cited controversial deals such as US-based Kraft’s 2009 takeover of UK-based Cadbury as grounds for reconsidering the scope of UK foreign investment review.

How Can PE Guard Against M&A Risks in an Increasingly Economically Nationalist Europe?

Government intervention disrupts deal timelines and creates barriers to closing. Dealmakers should analyse each target to assess whether it might be viewed as a key strategic asset, and if necessary, engage with authorities at the earliest stages of a transaction. Further, parties need to examine deal documents for flexibility to engage with relevant authorities and conditionality to ensure that parties are not obliged to close a deal amid ongoing government scrutiny.