State intervention – here to stay

There are more foreign investment regimes catching a broader range of deals in far more sectors than ever before. Given the impacts the development of these regimes are having on transactions globally, foreign investment has become a key component of early stage deal planning for all potential investors.

The inexorable rise in the number of jurisdictions introducing or expanding their foreign investment laws continues apace. State intervention, accelerated by the pandemic, has now become a well and truly established feature of the global regulatory landscape. While 2020 was about putting in place rules and powers, authorities are now working out how to apply the rules without killing off foreign investment.

In Europe, aside from the pandemic, the complexity of foreign investment review has been exacerbated by the introduction of the EU FI Regulation. This Regulation established an enhanced cooperation mechanism between the EC and Member States, which means that all regulators are now becoming aware of deals notified in other Member States. We expect the FI Regulation to increase the level of scrutiny over current and future transactions affected by these regimes.

In the US, the outcome of the US election is expected to have little effect on the breadth of CFIUS’s reach, but there is likely to be a return to its traditional technocratic approach to national security, leading to longer deliberations and more transactions surviving, but subject to mitigation conditions.

Key global trends:
  • A race to the bottom for transactions that are subject to foreign investment approval, with many jurisdictions requiring approval for non-controlling minority shareholdings;
  • Broadening of sectors subject to review, from the traditionally sensitive industries e.g. military and defence, to a wider range of sectors such as critical and strategic technologies, data / access to sensitive information, critical supplies, infrastructure and healthcare;
  • Elevated counterparty risk for transactions involving buyers from “friendly” countries. While previously the focus was on high risk investors (e.g. Chinese state-owned acquirers), more recently we have seen detailed reviews in Europe - and remedies being imposed - in cases involving buyers such as North American PE firms;
  • Lengthy and non-transparent processes, featuring behind the scenes co-ordination and a certain political element in decision-making;
  • Higher degree of intervention in many countries, where typically an assurance on the continuation of business lines or the preservation of national capabilities is required when transactions are subject to in-depth investigation.

Practical tips for navigating foreign investment control: It is crucial to consider foreign investment risk at an early stage, including how to deal with allocation of risk and cooperation obligations in deal documentation. The long stop date should provide sufficient flexibility to accommodate FI review processes. Merging parties may also be required to disclose sensitive information on, e.g. holding structure, limited partners/investors (particularly country of origin) and financing arrangements.

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