ForeignInvestmentLinks turns one – and what a year it has been!
It’s been a whole year now since FI Links was first launched – a younger sibling to our more established LinkingCompetition blog. As we celebrate this milestone, we look back at the global developments in the world of foreign investment over the last year (covered in over 50 posts) and consider what is in store for foreign investment regimes in the year to come.
UK’s new regime is in force
Much of the last year has been focused on the coming into force of the UK’s National Security and Investment Act – see our post from last July setting out the key considerations for investors ahead of commencement on 4 January this year. The regime has marked a sharp shift in the UK’s approach to screening investments; catching acquisitions above certain thresholds in 17 “mandatory” sectors, including in defence, communications, and energy. It also leaves the door open to the government calling in certain transactions in other areas of the economy, which they consider may be of interest from a national security perspective, for up to five years post-completion. See our NSIA Q&A document for a helpful overview.
After some back and forth, the UK government has recently confirmed it is reviewing the China-backed acquisition of the UK’s largest semiconductor manufacturer, Newport Wafer Fab under the NSIA. As the regime beds down, we expect many more high-profile reviews to hit the press, given the wide scope of the regime.
We should also get some clarity over the numbers of transactions notified under the new regime, the average review period and signs of the types of remedies and mitigation likely for problem deals – we will shortly be posting on what we have seen after 5 months of the NSIA being in operation.
Foreign investment in Europe
It has only been a year and a half since the EU screening mechanism came into effect. And based on our experiences and the EC’s first annual review report, there are still a number of improvements that could be made to reduce delays and costs to parties and increase predictability of process by better coordinating multi-jurisdictional filings.
However, we also expect an increase in focus by individual Member States on strengthening their foreign investment regimes in the months to come – particularly in light of the EC’s recent communication in the context of Russian and Belarusian investments into Europe, in which it has encouraged the scrutiny of such investments. See for example, our post on Italy’s recent reforms, which followed a national decree issued in response to the economic repercussions of the invasion of Ukraine, and Germany’s intervention against the transfer of critical infrastructure to a Russian company purportedly run by a DJ.
Indeed, the EC has also repeatedly urged the remaining Member States that do not yet have dedicated foreign investment regimes, to enact such regimes as quickly as possible. Following the entry into force of the Czech and Danish regimes last year, the bill for a national security regime was adopted by the lower house of parliament (Tweede Kamer) in the Netherlands on 19 April and is due to come into force later this year, once approved by the upper house (Eerste Kamer) (see our previous post on the Netherlands). In principle, the upper house may only pass or reject the draft bill, but not amend it. The bill has been recently amended to include real estate investments in “high tech campuses”. New regimes are also expected to come into play in Ireland, Sweden, Luxembourg and Romania.
Foreign investment in the US and further afield
Meanwhile, in the US, we have been tracking a variety of legislative developments aimed at expanding CFIUS jurisdiction even further beyond its historical focus on corporate acquisitions. We do not expect most of these initiatives to amount to anything, but look forward to seeing how Congress resolves the internal conflict in proposed legislation that on the one hand, would require CFIUS reviews of certain gifts to US universities, but on the other, specifically prohibits any such reviews by CFIUS.
We’ve also followed CFIUS’s notable clearance of some investments from China – for example, its post-closing clearance, subject to mitigation conditions, in the gaming sector. CFIUS’s clearance of Genimous’ acquisition of Spigot, a data-driven marketing company, also offered a possible roadmap for clearance of future Chinese investments involving personal data. We saw more of this when CFIUS cleared at least one of Tencent’s acquisitions in the gaming sector. On the other hand, CFIUS has also demonstrated its authority to suspend transactions pending review and to review transactions in which the parties believed there was no US business.
In addition to tracking significant developments such as these, we also advised our readers on CFIUS strategy. This included a discussion of the use of carve-outs to limit CFIUS exposure, as well as the increasing CFIUS clearance rate for short-form declarations, demonstrating the benefits of judicious use of that filing option.
Looking ahead, President Biden recently appointed a new leader for CFIUS. We are looking forward to his swift confirmation, which we hope will lead to clarification on a number of issues, including whether the US rules require parties to file burdensome pre-closing filings for internal reorganisations that have no substantive relevance for national security. We also anticipate the release later this year of CFIUS’s annual report for 2021, which we expect to reflect even more use of short-form declarations, as well as increasing activity by CFIUS’s Office of Monitoring and Enforcement with respect to previously closed, “non-notified” transactions.
What’s driving the regulators? We asked them!
There is no better way to find out than hearing from the regulators themselves. Our podcast series includes discussions with high profile speakers from global FI regulators, to bring a different viewpoint on the practical issues, quirks and thoughts on the review process of the respective regimes. We recently heard from two officials in the Investment Security Unit implementing the new UK legislation, as well as from the German Ministry of Economics. Keep an eye out for our next instalment on France and further interesting insights from other key regulators.
As the pandemic recedes, foreign investment regimes have emerged strengthened and with far greater reach compared to just a few years ago – and with a huge focus on areas such as energy, healthcare and tech. And as the pandemic is succeeded by geopolitical turmoil, we expect authorities to continue focussing very closely on these key areas, and to use their enforcement powers to the fullest extent.
As noted in our post last June, prohibitions in foreign investment reviews – although few in number – are not off the table and could become more common. Although traditionally a behind-doors discussion leading to investors withdrawing their application, various unfortunate recent leaks and public statements have given insight into factors which may increase the likelihood of a prohibition. These include (i) the sensitivity of the activity (in particular national defence and military), (ii) nationality / identity of the investor (including whether state owned) and (ii) the level of influence acquired. In addition, foreign investment “theories of harm” increasingly emerge, such as in last week’s leak of Germany’s prohibition against Chinese Aeonmed/Oricare acquiring insolvent German ventilators manufacturer, Heyer Medical. In this case, the concerns were centred around the protection of European manufacturers against what is regarded as undue (low-cost) competition from China, potentially driving domestic suppliers out of the market and thereby increasing dependency.
And indeed the risk of action from a regulator for a missed filing seems more likely – see the recent annulment in Italy, following a Chinese acquisition of shares in a military drone manufacturer in 2018.
In our post on foreign investment reviews involving financial investors, we highlighted certain themes we’ve seen emerge from interaction with regulators in recent years. Regulators appear to be particularly keen to identify the ultimate controlling interests behind an investment, but also to understand the investor’s plans for the acquired assets. Part of this relates to concerns regarding the access, possession or usage of sensitive information (i.e. who could gain access to the data?). Regulators also commonly have a desire to preserve the target’s operations and activities in a given country, to ensure that certain (government) contracts are honoured.
One area which has seen increased investor (and regulatory) attention in recent years is data centres. As we explored in our 3-part series, interest in these has surged in recent years, as demand for cloud computing capacity continues to soar globally. And correspondingly, given their “hot” status, investments into such data centres have remained high on regulators’ radars. However, individual regulators have taken a different approach as to how to handle such transactions (notably across the EU, UK and US, Australia and Asia, and Canada and New Zealand). While some (including the EU and UK regimes) expressly include data centres within the scope of their FI regulatory regimes, other countries have traditionally been more welcoming to inward investment in the sector, including India and Malaysia. And this is a fast-moving landscape – for example, Australia has very recently expanded its regime to include certain data centres.
Watch this space as we gear up for another year of foreign investment developments, and what they mean for investors.