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Despite the proliferation and strengthening of foreign investment regimes around the world, the instances of remedies being imposed on deals remain relatively low. But do these low rates translate to low risk?
In Part 1 of this post, we look at how six major jurisdictions (Germany, France, Italy, Spain, the UK and the US) are addressing the most difficult foreign investment cases, what we can learn from the (reportedly) rare instances of deals requiring conditions, and why remedies might not actually be as rare as they seem – at least when it comes to deals in the more sensitive sectors.
Part 2 of this post will look at some of the latest trends on remedies across behavioural and structural solutions, as well as some of the (known) prohibitions.
Conditions remain relatively rare, with exceptions…
The European Commission’s (EC) latest report on the EU FI screening mechanism reported that the vast majority of cases in 2022 (86%) were authorised without any conditions, with remedial measures required in only 9% of notified transactions. This was a notable decrease from the year before, where 23% of cases required remedies. But, as we are seeing that many EU FI regimes are being refined, it can reasonably be expected that the percentage of cases requiring remedies may increase somewhat as regimes start cutting through the red tape.
However, the US, as a more established player in the FI sphere, already shows a move towards more cases being cleared with conditions – a trend that might be reflective of parties taking a more aggressive approach (and filing deals that are at higher risk) alongside CFIUS taking a more hardline approach in its evaluation of transactions. France also has a relatively high rate of deals requiring remedies, both for 2021 (approximately 20% of notifications received were authorised with conditions) and 2022 (approximately 22%). This is likely reflective of France’s determination to retain control over supply chains in highly sensitive sectors and to protect activities considered as sensitive on French territory, to the benefit of French customers.
On the other hand, we have observed that for many countries the absolute number of interventions has remained stable, while the number of filings has increased considerably. For example, in Germany while the total number of interventions has been fairly consistent - with 10 cases in 2018,14 cases in 2021, 12 cases in 2022 and 10 cases in 2023 (the 2023 number might slightly increase) - the number of filings has increased gradually from 78 (in 2018) to 306 (in each of 2021 and 2022) with only a modest decline in 2023 to 257. Likewise, the number of Phase II investigations between 2018 and 2023 remained stable in Germany, ranging between 20 (in 2013) and 49 (in 2020). Therefore, while the percentage of deals requiring remedies appears to have been decreasing steadily in Germany over the last 5 years (see Figure 1), this is not actually the case when looking at the absolute number of remedies cases which have remained rather stable.
*All figures based on publicly available sources. Percentages based on number of cases notified (see Figure 2 below). Figures for Germany reflect all restrictive measures (including prohibitions, side conditions, public-legal contracts, and administrative orders) received through the national (German) FDI screening procedure based on 30 January 2024 statistics. US statistics have been adjusted to account for double-counting of transactions as a result of re-filings.
Why the numbers might be misleading, and why your deal could still be at risk
Are deals being over-screened?
There has been an uptick in the number of deals being notified and screened in some key jurisdictions. We have seen a similar trend across the EU more broadly, with 423 notifications made in 2022 compared to 414 in 2021, despite a notable fall in deal-making and foreign investment into the EU during this period.
This suggests that, where there are low rates of deals being cleared with conditions and also large numbers of total cases reviewed (as is the case, for example, in the UK), a significant proportion of the reviews being carried out may be unnecessary – particularly where the screening mechanisms are broadly crafted and catch transactions without any apparent sensitivity. (But note in this context the UK Government’s recent Call for Evidence, which aims to narrow and refine the scope of the UK’s investment screening regime).
Italy is another jurisdiction that receives many notifications when compared to larger economies. But of the total number of notifications made, approximately 50% of these across 2021 and 2022 (for example) were deemed to be out of scope. Also, with the aim of reducing unnecessary notifications, Italy introduced a pre-notification procedure in 2022 which should – if it works in accordance with the Italian Government’s intentions – contribute towards reducing those transactions that were formally notified only for legal certainty due to the extensive scope of the Italian foreign investment rules.
It is not yet clear whether all jurisdictions will move in this direction (of fewer notifications) and at what speed.
*All figures based on publicly available sources, based on calendar years. Figures for Germany reflect the number of notifications received through the national (German) FDI screening procedure and exclude those cases that are notified to Germany via the EU Screening Mechanism. Figures for the US exclude re-filings for the same transaction; please see here for more detail. Figures for Spain reflect the numbers of consultations received for 2020 and 2021 and the numbers of consultations and approval applications received for 2022 (the number of approval applications received in 2020 and 2021 is unavailable. It is not clear whether the figure available for 2022 includes a consultation and an approval application received for the same transaction, so it may include double counting). The number of notifications received in the UK is slightly less than the number of qualifying acquisitions that have been notified, as in some (rare) cases the authority will accept a single notification to cover multiple qualifying acquisitions.
Sensitive sectors are still seeing a high incidence of remedies
Low remedies rates do not translate to low risk when it comes to certain sectors, such as those related to energy, aerospace, telecommunications, transportation, or the manufacturing of critical infrastructures and/or technologies (such as semiconductor technologies). These sectors are subject to heightened scrutiny due to the potential risks they pose to national security and technological sovereignty. As a result, transactions involving these sectors tend to be subject to more rigorous regulatory review and are therefore at greater risk of requiring conditions or - at the farthest end of the review spectrum - prohibition.
For example, in the UK, there have been 18 final orders since the NSIA came into force, with 13 having been cleared with conditions and five blocked. Of those deals that had conditions imposed, the sectors involved appeared to relate to areas such as military and dual-use items, energy, communications, and advanced materials. In Italy, a number of cases requiring conditions related to manufacturing, energy and telecommunications. In particular, in the last three years, the Italian Government has heavily scrutinised - and required remedies for - deals relating to 5G technologies. Likewise, in Germany, deals in the semiconductor industry have attracted particular scrutiny in the recent past.
A focus on these sectors is consistent with what was reported by the EC in its third annual assessment of the EU FI screening mechanism, where Manufacturing (a category that includes Aerospace, Defence, Semiconductors, Energy, Communications and Data Processing) accounted for 59% of Phase 2 cases across the EU in 2022.
Origin of investor: when it comes to remedies, it’s not all about China
While investment from China in semiconductor technology has taken centre stage in the trade war between China and the US and its allies, when it comes to remedies, certain sectors of the economy will inevitably be subject to scrutiny, irrespective of the jurisdiction involved.
For example, in the UK, remedies were required for investment from countries such as France (in the acquisition of UK subsidiaries of General Electric), Canada (for licensed technology from the University of Southampton involving underwater optical solutions), the US (in the acquisition of a gear and gearbox manufacturer), Germany (in the acquisition of assets and subsidiaries of Truphone, a mobile network operator), the UAE (in the acquisition of an aerospace manufacturer, and the recent increased shareholding in Vodafone) as well as from the UK itself (in the acquisition of a supplier of radiowave equipment).
In Italy, remedies were also required for investment from countries such as France (for the indirect acquisition of a stake in Inwit S.p.A., an Italian Tower Operator) and Turkey (in a joint venture between home appliance suppliers Whirlpool and Arcelik).
Nevertheless, the conditions imposed in these cases have tended to interfere less with the overall deal rationale, with the remedies required having generally been more preservatory in nature. The bigger question when investing in sensitive sectors for investors outside of China (or other jurisdictions perceived to be of higher risk) tends instead to be focused on how quickly any issues can be addressed to manage the overall deal timeline – a factor that can be particularly important during periods with higher interest rates.
So, what does this mean?
While the imposition of remedies in sensitive cases - and the number of interventions taking place across jurisdictions - is expected to continue at largely the same pace, we may see the number of notifications decrease as regulators seek to clarify and hone their screening regimes.
Stay tuned for Part 2 of this post in which we look at some of the trends that we are seeing (where such information is publicly disclosed) across both behavioural and structural remedies, including some of the specific restrictions that parties might face. Where remedies are not viable, we look briefly at some of the known prohibitions, and the deals and sectors where these have occurred.