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In a previous blog post, we examined numerous authorities’ ever-expanding interpretations of their jurisdictional reach, leading to many investors opting to submit precautionary filings. But authorities are also able to call in transactions outside of filing requirement considerations. In this post, we consider how relevant these call-in powers are in practice.
Many FI regimes across the globe come with call-in powers which are broad, involve long timeframes and provide the relevant authority with wide discretion. These powers often bear no reference to pre-defined filing requirements concerning sensitive sectors, the level of influence acquired, nor whether a transaction has completed already. Rather, should the relevant authority deem a transaction to be a risk to national security and public order, it will have the power to investigate it.
For example, in Germany, transactions not filed can be called in within 5 years of signing. If called in, this means that the authority can directly start an in-depth investigation (subject to the requirements of the specific screening regime being met, e.g. the relevant voting rights thresholds). If it is below the relevant voting rights thresholds, the transaction can still be screened under the concept of “atypical control”. This might apply where the foreign investor gets additional rights such as the assurance of additional seats in supervisory bodies which would give it an effective stake of control in the German target company by other means. Whilst a filing obligation would not arise, the authority may nevertheless have jurisdiction over the transaction and call it in even if it is below the relevant voting rights thresholds. However, in practice, this instrument is not used frequently and is limited to high-profile transactions, otherwise highly sensitive transactions, or transactions which have evidently not complied with filing requirements.
In Germany, we have seen that the relevant authority would typically reach out informally to one of the transaction parties (or to their legal representatives if these are in the public domain) and query whether a filing will be made. This allows transaction parties to explain the considerations which may have led to a carefully considered decision not to file the transaction for screening. Filing triggers are often highly qualitative in nature and the only information that is in the public domain may be incomplete. As such, reaching out to transaction parties engages both sides in an informal and constructive dialogue which is a welcome approach as, in our experience, most cases end with the authority closing the case without a formal call-in. Where countries have a “knowledge trigger” for their call-in right (e.g. in Germany, two months from the authority becoming aware), this dialogue and a subsequent decision by the authority not to pursue the case further, offers legal certainty and prevents a subsequent re-opening of the case.
In certain cases, transaction parties may, in response to the outreach, consider submitting a precautionary filing straightaway. The benefit of this route is to achieve legal certainty within a predictable timeframe – particularly where it is possible that an authority, after an informal dialogue, may insist on a filing being made. That filing would then go through the regular review process and may – in a few cases – end in a prohibition. This can be seen in the acquisition of the German ventilation machinery manufacturer Heyer Medical AG by the Chinese Aeonmed Group. The transaction was only notified after an initial outreach by the German Federal Ministry for Economic Affairs, and it then went through a long process resulting in a prohibition.
In a very limited number of cases, where parties don’t file in response to an informal outreach, an actual call-in may result, i.e. the ex officio opening of a formal investigation. However, in our experience the number of cases in which this happens is fairly limited; transaction parties mostly make the right determination on whether or not a foreign investment filing should be made (or at least react swiftly with a precautionary filing in borderline cases after informal outreach).
Meanwhile in the UK, the government’s call-in powers are not limited to consideration of the target’s sector of activity; the only technical limitation relates to the need for a transaction to give rise to a risk to national security, a term which is left purposely undefined.
Furthermore, the UK government has the ability to call in a transaction up to five years after completion (or within six months of the relevant authority becoming aware of the transaction). The voluntary regime also covers all types of transactions captured by the mandatory regime and in addition “material influence” over a target as well as asset acquisitions. The threshold for a call-in is therefore quite low.
In the UK, call-in powers were exercised in relation to the acquisition of Upp, a UK broadband provider, by LetterOne, a company ultimately owned by a number of sanctioned persons. This transaction had completed a year before the UK’s screening regime came into force. Regardless, the relevant authority issued a call-in notice, which eventually led to the issuance of a final order for the completed purchase to be unwound. LetterOne went on to lose its challenge of the authority’s final order in the High Court. More information about the key takeaways from this ruling can be found in our previous blog post.
Whilst a number of regimes do not have specific call-in powers (e.g. France, Italy, Spain), authorities from such regimes are often provided with very broad investigative powers to check whether a transaction should undergo (or should have undergone) screening before completion. This means that in practical terms, it is often easier for investors to simply submit a precautionary filing. This is the case in Italy, where given the breadth of the regime and the lack of specificity in defining sensitive activities, the Italian government enjoys a very broad discretion. As such, precautionary filings and pre-notifications are common in Italy, wherever the investor is not sure whether a proposed transaction might be subject to screening.
What does the broad scope of many jurisdictions’ call-in powers mean in practice? Whilst the use of call-in powers across jurisdictions has generally been light, the fact that they are used at all suggests that these powers cannot be treated as an empty threat. Precautionary filings tend to be on the high side to avoid an unexpected and unpredictable call-in – particularly when the authority has the ability to look back at transactions from up to 5 years ago. As noted in a previous blog post, this is reflected in the large percentage (44%) of requests for authorisation across the EU, which were then not formally screened, with a similar percentage (45%) reported in the European Commission’s previous Annual Report. This suggests that a significant proportion of reviews might have been unnecessary. Likewise, the combination of a flexible regime and the expansive stance of the UK screening regime has resulted in a significant number of precautionary filings, even in cases where the link with a mandatory sector is tenuous or there is a very limited UK nexus.
Whilst the European Commission intends to revise its FI Regulation to better harmonise national rules on FI and to identify a minimum sectoral scope that would require screening, it also acknowledges that each Member State has its own unique national security considerations. Thus, it is unlikely that the need to submit precautionary filings will be going away any time soon. Call-in powers remain a highly relevant consideration, and it is often safer to simply make the (potentially) unnecessary filing than risk a transaction being called in.