Foreign direct investment (“FDI”) regulation has featured increasingly on the radar for cross-border M&A, against a backdrop of amplified protectionist rhetoric.
Even before the COVID-19 pandemic, a number of countries which have traditionally been seen as open to foreign investment were moving towards stricter public interest and FDI scrutiny of transactions (such as the UK, USA and Australia).
Following the outbreak of the pandemic, this trend towards protectionism has only increased. In particular, governments have sought to move quickly to protect businesses (affected by the COVID-19 economic fall-out) from opportunistic acquisition by foreign buyers. Indeed, while there is still a degree of uncertainty and volatility in the global markets, there is nonetheless scope for such opportunistic acquisitions, perhaps especially by Chinese buyers (with the wider Asian region emerging sooner from the COVID-19 restrictions). Conversely, many businesses in Europe are still subject to stringent restrictions. Europe, therefore, may provide a more fertile ground for opportunistic takeovers of distressed targets by foreign investors. The rhetoric surrounding the introduction of the EU-level guidelines on FDI screening during the pandemic (as further explored below) is telling in this respect: on 25 March 2020 the European Commission urged EU Member States to be “particularly vigilant to avoid that the current health crisis does not result in a sell-off of Europe’s business and industrial actors”.
European countries such as Spain, Italy and France have responded by making specific amendments to their FDI regimes to address these concerns such as lowering thresholds for review for certain/all foreign investors and/or expanding the list of sectors subject to review. However, these changes have not been limited to Europe, with Australia, Canada and India all imposing stricter restrictions on FDI to protect domestic targets from opportunistic takeovers. These changes are summarised below.
- EU-Level Guidelines
At the outset, it is worth noting that the changes described below in France, Spain, Italy and Germany have been implemented in the context of new EU-level guidelines published by the European Commission on FDI screening during the pandemic, on 25 March 2020. These guidelines do not create new law, but they strongly encourage EU Member States to strenuously enforce their national FDI screening mechanisms, where these exist, to protect sensitive assets from foreign takeovers during the pandemic (see HSF blog post here). Significantly, healthcare – including medical research and biotechnology – is specifically identified in the guidelines as a sector which is considered to be particularly vulnerable to increased exposure to FDI in light of the current pandemic.
Prior to the pandemic the FDI regime in Spain was liberalised, with certain exceptions pertaining to specific sectors and transactions for which prior authorisation was required. However, on 18 March 2020, Spain became the first EU Member State to significantly tighten its rules on FDI, primarily due to the impact of the pandemic on the value of domestic companies.
Firstly acquirers based outside of the EU (or where the ultimate owner is outside the EU), must now obtain prior approval for an acquisition of a shareholding of 10% or more, or a management right, in a Spanish company in a very broad range of sectors. These include critical infrastructure and technology, healthcare, communications, energy and transport, and also the supply of key inputs such as energy, raw materials and food security. Furthermore, where the foreign investor is directly or indirectly controlled by a foreign government, the stricter FDI regime applies for investments across all sectors. Therefore the new rules appear to be specifically targeted at non-EU or state-owned enterprises (“SOE”) acquirers. This chimes with rhetoric across Europe regarding the possibility of opportunistic takeovers by government-controlled acquirers from China.1
The French FDI regime had already been significantly strengthened with the implementation of pre-planned reforms which predated the pandemic. These wholesale reforms came into force on 1 April 2020 and, in short, widened the scope of investments covered by the regime, expanded the list of strategic sectors to which the regime applied, required substantial information to be provided in order to receive approval, and strengthened sanctions for non-compliance.
However, on 28 April 2020 it was announced that France will lower, until the end of the year, the threshold for control in respect of the acquisition of stakes by non-European investors in the share capital of strategic French listed companies to 10% (against 25% currently). This represents a significant step-change from the pre-1 April 2020 regime, by further tightening a control threshold that had been lowered only a few weeks earlier to 25% by the pre-planned reforms described above. This amendment comes in the context of the French Government announcing its intentions to protect national companies from the threat of foreign takeovers during the COVID-19 crisis. Furthermore, the French Government recently demonstrated its extensive use of FDI powers in prohibiting the acquisition of the French company Photonis (which develops applications with military uses) by the US group Teledyne – while the decision was not related to COVID-19, it represents an important milestone nonetheless.
Prior to the pandemic, there had been an increased tendency for the Italian Government to exercise its powers to review FDI. However, on 7 April 2020, the Italian Government significantly extended its powers, both to new sectors and within the sectors already subject to the FDI regime.
Specifically, prior approval is now required for acquisitions of 10% or more by non-EU-controlled investors in new sectors – finance, insurance, food and health. The inclusion of health (and possibly insurance) as a strategic sector appears to be a direct response to the pandemic. It is notable that these tighter rules have also been extended to EU-controlled investors until the end of the year. This represents a divergence in approach from countries such as Spain and France where the focus of restrictions has been on non-EU investors and is a potentially worrying precedent.
The German FDI regime will be subject to significant change in 2020. Although the general plans for this pre-date the pandemic, it may have provided a catalyst for the recent publication of the draft changes, and certain specific elements of the same, as further described below (with further changes expected).
On 8 April 2020, a ministerial draft was published which (if approved) will lower the intervention threshold for official orders to be made in respect of FDI. Currently, the intervention threshold for non-EU investments requires an actual threat to public safety or order (which already affords the Government significant flexibility) – under the draft it shall be sufficient if the foreign investment is likely to affect the security or public order. A standstill obligation will also be imposed for all transactions (both EU and non-EU) subject to the FDI regime. Note, this ministerial draft has not become binding law as at the date of this article and so may be subject to change. It is expected to pass parliament in June/July.
On 20 May 2020, the German Federal Government passed another amendment extending the business activities triggering a mandatory filing for FDI from any investor (both EU and non-EU) above a 10% voting right threshold. This draft (which will become binding shortly) proposed to increase the list to include, inter alia, personal protective equipment, various medicinal products, and in-vitro diagnostics. These proposed changes come in the context of (unsubstantiated) media reports that President Donald Trump attempted to acquire German pharmaceutical company CureVac to secure exclusive COVID-19 vaccine production for the USA.
On 29 March 2020, a number of temporary but significant amendments to the Australian FDI regime were announced. The Australian Government described these measures as “necessary to safeguard the national interest as the coronavirus outbreak puts intense pressure on the Australian economy and businesses”, and, in doing so, implicitly recognised the possibility of takeovers of distressed Australian assets.
These changes effectively make all FDI reviewable for the duration of the pandemic by lowering the financial threshold for review in terms of a target’s valuation to AUS$0. This represents a significant tightening of the regime, especially when combined with the already relatively low shareholding threshold for review (20% or lower in some cases). Furthermore this is a particularly significant change for investors from countries which have free trade agreements with Australia (such as the USA) – such investors could previously benefit from a threshold of approx. AUS$1.2bn for investments in certain (non-sensitive) sectors. Therefore, the Australian changes have a wide application to all foreign investors (to the potential benefit of domestic investors) and are in contrast to the more targeted approach adopted in Spain, France and India.
India has undergone a significant relaxation of its FDI laws over the past few years, in particular since 2017. However, in contrast to this previous direction of travel, on 17 April 2020 the Indian Government announced a tightening of FDI restrictions to curb “opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic”. This amendment came in the context of the People’s Bank of China acquiring a 1% stake in HDFC in early April 2020 (India’s largest mortgage bank).
The new restriction applies to investors from countries which share a land border with India (or where the beneficial owner is a citizen of that country), being China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan. Such investors will now need approval for FDI in any sector in India (as an exception to the sector-by-sector approval process). The requirement for approval also applies to subsequent changes in beneficial ownership of any existing or future FDI which would fall within the scope of the new restriction. This amendment is therefore expected to have to have a large impact on the ease of investment from China.
Since Justin Trudeau’s liberal Government came to power in 2015, Canada has generally seen a relaxation in monetary thresholds for the review of FDI, although the number of transactions being reviewed under national security provisions have increased (consistent with the trend seen in Europe and the USA). However, on 18 April 2020, the Canadian Government issued a COVID-19 policy statement explaining that “many Canadian businesses have recently seen their valuations decline as a result of the pandemic…[which]…could lead to opportunistic investment behaviour”.
In short, the policy statement explains that, until Canada has recovered from the pandemic, the Government will scrutinise with particular attention FDI of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the Government. The Canadian Government will also subject all foreign investments by SOEs, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments, to enhanced scrutiny. Therefore, Canada can be seen as adopting a comprehensive approach, with FDI restrictions raised both in relation to the identity of buyers and specific COVID-19-related sectors.
In summary, FDI regimes are being tightened across the world in response to the pandemic, the effects of which are two-fold: (i) generally lowered thresholds across a wide range of sectors in many regimes (see Spain and Italy) increase the risk of regulatory review in a wide range of sectors, particularly in respect of certain sensitive buyers (SOEs, non-EU investors etc.); (ii) within this general lowering of thresholds, the specific classification of medical assets as sensitive or critical in some regimes (see Germany) will increase the risk of regulatory review in the health sector.
As illustrated by the above, the global FDI landscape is changing on an almost daily basis. Other jurisdictions, particularly those in the EU (in light of the European Commission’s recent guidelines), may be encouraged to introduce their own FDI regime or tighten existing regimes in response to the pandemic. At the same time, many jurisdictions are emphasising that they do not want to deter all FDI and will only intervene where a particular case gives rise to real concerns. In many cases, it may be possible to deal with these concerns through offering remedies proactively as part of the review process. Keeping up to date with these new rules will be critical in terms of transaction planning and risk allocation in the challenging COVID-19 cross-border M&A environment. We have produced a detailed country guide to FDI regimes around the world: please request your copy here. We also post regular updates on regime change on our blog – please register here if you would like to receive these going forward.