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A “historically unprecedented” global surge in foreign investment regulation and enforcement has resulted in a significantly broader array of transaction structures being brought within the ambit of FI screening – increasingly including some outside of traditional M&A activity, such as contractual arrangements. It is a delicate balance that a regime has to walk, where – on the one hand – it carries the term “investment” in its name and – on the other hand – it tries to counter potential circumvention attempts by “investors” adopting more creative structures.
This blog post looks at some notable situations across a number of key jurisdictions where a contract (even absent an acquisition of equity) could trigger FI filings, some key takeaways for businesses to consider when entering into contractual arrangements that touch on sensitive sectors – and some upcoming changes which might see even more instances of contractual arrangements triggering a filing.
In the UK, one of the trigger events for the National Security and Investment Act 2021 (NSIA) – including for the purposes of the mandatory notification regime – relates to the ability to block or pass a class of resolutions regarding the affairs of an entity. As a general rule, for the purposes of the mandatory regime, contractual rights do not confer the ability to block or pass all resolutions of a particular class, although (either alone or in conjunction with other rights) they may give an acquirer material influence over the policy of an entity and therefore allow the government to call in a transaction for review. This trigger event is only likely to be engaged where a company has set alternative thresholds to those that usually apply for ordinary and special resolutions under UK company law.
The German regime generally refers to an “acquisition” of voting rights. However, the interpretation of the Ministry for Economic Affairs and Climate Action is that such an “acquisition” does not necessarily require the full transfer of voting rights. Under certain circumstances – for example, trusteeships or other arrangements through which a third party determines how voting rights are to be exercised – can amount to a relevant “acquisition”. With such arrangements, the devil lies in the detail and, depending on the specific parameters of the arrangement, the trustee, the trustor, or even both parties may qualify as holders of voting rights.
Also, contractual arrangements (like shareholders' agreements) may result in an attribution of voting rights between transaction parties that results in relevant thresholds being met.
Further, contractual arrangements can result in tipping acquisitions that would otherwise be below the threshold into a situation of “atypical control”, giving rise to a voluntary filing situation and allowing a below threshold transaction to be called in. This would be the case, for example, where voting rights below the 10% or 20% threshold were acquired, but where the investor obtained further rights (like seats on the board, veto rights, or certain information rights) as the result of a contractual arrangement.
While “atypical control” does not currently give rise to a mandatory filing obligation, the government is now considering whether, in certain sensitive sectors, a mandatory filing obligation should also apply to such cases of “atypical control”.
In the United States, CFIUS may review contractual arrangements, potentially on a mandatory basis. CFIUS principally reviews foreign acquisitions of control of US businesses, which includes US operations of non-US companies. CFIUS regulations define control broadly, but explicitly list contractual rights as a potential form of control, alongside “other arrangements to determine, direct, or decide important matters affecting a US business.” As a result, governance rights and related contractual provisions feature prominently in CFIUS analysis. Examples of transactions that could trigger a foreign acquisition of control include debt instruments with contractual control provisions and voting agreements among shareholders.
CFIUS also reviews transactions involving US businesses engaged in critical technology, critical infrastructure, or sensitive personal data, even for non-controlling investments. In these cases, filings can be mandatory, and can be triggered by material governance rights and information access rights, such as board representation, access to “material non-public technical information,” or substantial involvement in key decision-making.
The rights that trigger CFIUS jurisdiction over – and (sometimes) mandatory filings for – noncontrolling investments are often found in the same types of agreements as for acquisitions of control, but may also result from other sources, such as the terms of limited partnership agreements and side letters, or from cumulative voting rights (often provided in corporate articles or bylaws) giving minority investors the ability to elect members of the company’s board of directors.
Under the Golden Power Rules (GPR), a mandatory filing can be triggered by the acquisition of control in a sensitive company. The concept of control is broad and may encompass situations where an investor is able to exercise a dominant influence over another company because of contractual obligations.
Under the French regulation, a mandatory filing is triggered by the acquisition of control in a sensitive company. Similar to Italy, the concept of control is broad and encompasses situations where an investor is able to exercise a dominant influence over another company because of contractual obligations (e.g., through a shareholders’ agreement).
| Takeaway: It is important to think about whether agreements (such as shareholders’ agreements, information sharing agreements, voting rights, board representation, etc) result in control (or material/dominant influence) both on their own or alongside an acquisition of shares – even where only a minority shareholding is being acquired. |
Financing arrangements (such as loan and security agreements, the issuing of debt instruments, or the financing of underlying transactions) can also, in principle, fall within the scope of the NSIA at the stage where the security over shares is enforced. For example, in an insolvency situation, the appointment of a liquidator over a shareholder entity (where that entity is a qualifying entity in one of the mandatory sectors) could require mandatory notification where the liquidator or receiver has voting rights over the shares of the solvent entity. However, the UK Government has recently announced plans to introduce targeted exemptions from mandatory notification requirements for the appointment of liquidators, official receivers and special administrators. This would be in addition to the existing carveout for administrators who have the same type of control over distressed assets and entities.
Financing arrangements can trigger a CFIUS review where it gives a foreign party an interest in profits or other financial rights in a US business which could be viewed as control or material governance or information access rights. Debt covenants often grant these rights effective at the date of funding, but in some cases, the relevant point for assessment is when a security interest attached to the loan is enforced or exercised. Syndicate loans, because they typically spread the relevant rights over several lenders, are less likely to be a concern for CFIUS unless there is some agreement among the lenders to act in concert or the lenders are acting through a single financing vehicle that holds the consolidated governance or information access rights.
Similarly, in Germany, the transfer of shares by way of security to back up a loan can trigger a filing in circumstances in which the arrangement gives the secured party the right to determine or influence the exercise of such voting rights, and such arrangement is sufficiently far reaching to amount to an “acquisition” in the Ministry’s rather broad interpretation. However, typically, such far-reaching rights are not awarded prior to enforcement and, hence, a filing would typically only be due in an enforcement setup, similar to the position in the UK.
Unlike in the UK and Germany (where, typically, only the enforcement of security triggers a filing), several Italian Government precedents demonstrate that the creation of a security over shares or strategic assets of a sensitive company may also trigger a filing in Italy. The enforcement of security remains as an additional triggering event regardless of whether the creation of the same security was notified.
The enforcement of a security over shares or strategic assets of a sensitive company can also trigger a filing in France.
| Takeaway: Because creating and/or enforcing security can constitute a trigger event (depending on the jurisdiction), lenders may wish to consider the contractual restrictions they impose within transaction documents. In particular, it is important to consider whether a loan agreement confers influence or control (see above on contractual rights that confer control). For example, while most standard loan agreements would not grant lenders control or material influence rights, lenders may wish to consider whether terms might inadvertently trigger an FI filing at the stage of granting a loan. This could be the case where, for example, the loan agreement gives a lender the right to participate in a fund advisory committee or a fund’s investment decisions. |
The UK government has made it clear that it is willing to scrutinise licensing arrangements, particularly in the advanced technology space. In fact, the first prohibition imposed by the Secretary of State related to a licence agreement between the University of Manchester and Beijing Infinite Vision Technology Company Limited, which would have enabled Beijing Infinite Vision Technology to use intellectual property (IP) related to the University’s SCAMP-5 and SCAMP-7 vision sensing technology. This transaction was not subject to a mandatory notification requirement, as it did not entail the acquisition of shares or voting rights. Instead, the notification was made on a voluntary basis. However, if it had not been notified, it would have been subject to a call-in review for up to five years post-completion.
CFIUS has jurisdiction over certain investments in US businesses as well as certain real estate transactions. However, the licensing of IP by itself falls under neither category. In general, CFIUS relies on export control authorities overseen by other government bodies to identify critical technologies and to address licensing transactions outside the scope of corporate investments. However, this may change, and Congress, which has expressed concerns that too many technology transfers are slipping through the regulatory cracks, could seek to amend Section 721 to give CFIUS independent jurisdiction over IP licensing transactions. So far, there has been no movement in this direction.
While licensing arrangements don’t typically trigger a filing in Germany, as discussed in our earlier blog post on the proposed German FDI reforms, the government has indicated plans to potentially include licensing agreements within the foreign investment regime, broadening its remit beyond traditional M&A transactions.
Licensing agreements may also trigger a foreign investment filing in Italy when they relate to assets such as technologies that are seen as strategic to the national interest. Past precedents in this respect mainly relate to the defence sector, but the same principle applies to all other sensitive sectors.
A licensing agreement may qualify as the acquisition of a branch of assets of a French law entity operating in a “sensitive” sector (or sectors) and as such trigger a filing in France. The guidelines published by the French Ministry for the Economy notably define the branch of assets as all the elements required for its autonomous operation, i.e. capable of functioning by its own means under normal conditions.
| Takeaway: In many jurisdictions businesses acquiring IP rights through a licensing agreement may wish to consider whether the IP relates to a sensitive sector and, if so, whether a filing is triggered. |
A mandatory notification is required if certain suppliers of goods or services enter into a supply contract with the Government or certain emergency services. For example, a contract to supply firearms or ammunition to the police, or a contract to supply secure data processing services to the Government, would likely trigger a mandatory notification. Additionally, all suppliers to the Ministry of Defence are in scope, even where the contract doesn’t relate to goods or services with a clear ‘military’ application, such as catering or cleaning.
With the exception of supply to the Ministry of Defence, mandatory notification requirements do not apply to sub-contractors, although the Government is currently considering whether sub-contractors should be brought into scope with respect to emergency services.
Government contracts and subcontracts – especially those supporting government programs relating to defense, homeland security, intelligence activities, and law enforcement – can raise the sensitivity of transactions that are within CFIUS’s jurisdiction. Because transactions involving government contracts can increase post-closing call-in risk, voluntary CFIUS filings may be advisable even if a mandatory filing is not triggered.
Moreover, companies that hold defense and intelligence related contracts may be more likely to hold facility security clearances (FCLs) because the contracts involve access to classified information, and defense contracts may also require registration under the International Traffic in Arms Regulations (ITAR). Material foreign investment in companies holding FCLs will require pre-closing mitigation of foreign ownership, control, or influence of the contractor by the Defense Counterintelligence and Security Agency, while foreign acquisitions of ownership or control over ITAR-registered entities may trigger pre- and post-closing notifications to the Directorate of Defense Trade Controls.
A voluntary notification can be triggered where the target company has a contractual relationship with the German State (including public authorities, ministries or state-owned enterprises, the German armed forces or defence companies). In the wider military sector where the “possession” of sensitive goods can be a trigger, a filing may be mandatory - whereas in most sensitive sectors, mere supply relations would only trigger a voluntary filing (but could still form the basis for a call-in, where the products at hand are highly sensitive).
Similarly, in France, one contract with a public authority can be enough to trigger a foreign investment filing. Sub-contractors can also fall within the scope of the FI regulation where they indirectly act for the Ministry of Defence or where they provide certain services in relation to information security.
As in the US, Government contracts and subcontracts can raise the sensitivity of a given transaction, increase call-in risks, and in certain circumstances be sufficient to consider a Target strategic to national interests (e.g. because the contract involves access to classified information).
| Takeaway: Suppliers (and occasionally sub-contractors) to government entities (or other public bodies) may wish to consider whether their supply is likely to trigger a filing – even where they don’t necessarily operate in a ‘sensitive’ sector. |
With the global proliferation of FI regimes, and many jurisdictions considering new rules to capture conduct outside of traditional M&A, it is more important than ever that prospective investors and suppliers assess at an early stage whether FI screening regulations apply. Planning early and identifying “unexpected” filing requirements will be key in this constantly evolving regulatory environment.