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Increasing foreign investment control and implications for global deals

More countries are scrutinising inward investments and, in some cases, reforming their foreign investment plans. Businesses intending to invest cross-border can expect the process to last longer and be more difficult.

As a result of growing scepticism over globalisation and a perception that national security issues may arise in industries not traditionally thought to be sensitive, more countries are scrutinising inward investments by foreign investors and reforming, or considering reforming, their foreign investment laws.

Anyone involved in strategic cross-border investment or M&A needs to be aware that they could find it more difficult to predict whether their deals are likely to be called in for review by governments or government bodies in the future. If they are, we expect longer timescales and greater execution risk to follow.

Our experience is that transaction timeframes are also subject to greater uncertainty, since many foreign investment regimes have very unclear and open-ended review timetables.

What are the implications of foreign investment control across different regions?

United Kingdom
European Union
United States
Germany
Overall implications

If we look at the UK first, the Department for Business, Energy & Industrial Strategy (BEIS) published a consultation paper in October 2017 considering broader powers for the Government to intervene in foreign investment deals which raise national security concerns. The proposals have some short-term and some longer-term implications. In the short term, the Government is taking additional powers to block takeovers of companies in the defence and technology sectors which, so far, have not been caught because they are too small.

These changes are actually narrower in scope than some had predicted and in reality amount to a fairly small and incremental change to the Government’s existing powers to intervene on national security grounds (as opposed to, say, wider political grounds). On 15 March 2018, the Government confirmed its decision (subject to Parliamentary approval) to reduce the jurisdictional thresholds for targets active in three sectors: the development or production of items for military or military and civilian use, quantum technology and computing hardware.

Longer term, the consultation looks more broadly at the way in which foreign investment in certain sectors is reviewed, with proposals for greater “call-in” powers under the current voluntary regime, or the introduction of a mandatory notification requirement. These proposals are more substantial and would involve a significant revision of the existing legislation. The Government says that it would retain an independent competition authority and a clear separation between competition assessments and national security-related ones. Thankfully, the proposals also make clear that the Government is not planning to amend the process for other public interest-related assessments – and by that we mean financial stability or media plurality.

However, there is no clear definition of “national security” in the Green Paper and we shall have to wait to see how widely the test would be interpreted in the future. We expect BEIS to consult further on more detailed proposals later this year (possibly after the May elections), which may provide more clarity. The political row over the GKN/Melrose takeover might well embolden the Government to take more protectionist powers.

Turning to the EU, calls from Germany, France and Italy for rights under EU law to intervene in investments by state-controlled and state-funded entities (especially those which give access to key technologies) have resulted in the European Commission announcing similarly themed proposals to boost its foreign investment review powers and to give itself a co-ordinating role between its Member States. The proposals set out a new framework for scrutinising foreign investment in sectors of national importance. These include technology, cybersecurity, nuclear power and financial services.

As part of this, they list factors that may be taken into account when screening foreign investment, although this list is non-exhaustive. The so-called “co-operation mechanism” it includes requires each Member State screening a proposed investment to inform the Commission and the other relevant Member States and allow them to offer opinions and comments that must be given “due consideration” by the screening Member State. Also, where the Commission considers that a foreign investment is likely to affect the “security or public order” of the EU, it may offer an opinion to the screening Member State, which must take “utmost account” and provide an explanation if the opinion is not followed.

While the proposals are intended to establish better screening of investments from third countries, they also reflect the Commission’s desires to avoid the risk of Member States adopting protectionist policies and to provide transparency to potential investors. Ultimately, the Commission wants to continue to encourage foreign investment in Europe.

It’s probably no great surprise that, given the Trump Administration’s openly aggressive protectionist stance, there are also attempts to extend the powers of the Committee on Foreign Investments in the United States (CFIUS), which conducts national security reviews of M&A activity involving a foreign investor.

The proposals being put forward envisage stricter enforcement rules and the expansion of CFIUS’ jurisdiction and authority, with a focus on countries of special concern (in particular China). They also set out longer timeframes (so a single complete CFIUS review process potentially could take as long as 120 days, as opposed to 75 days under the current law) and new filing fees (the lesser of $300,000 or 1% of the transaction value).

Meanwhile, Germany has already enacted reforms to its regime. From July 2017, the existing rules were strengthened and the notification obligations were increased for acquisitions in specified industry sectors related to public security, i.e. sectors including information technology, telecoms and critical infrastructure.

Whilst the amended legislation does not result in a material restriction on foreign investments in German companies, the extended application area, new notification requirements and extended review periods will require potential investors to engage with the regime proactively and early in the deal process.

Generally speaking, intervention under foreign investment rules is already much harder to predict than under the tried and tested merger control regimes. Our experience is that transaction timeframes are also subject to greater uncertainty, since many foreign investment regimes have very unclear and open-ended review timetables.

Going forward, potential investors can expect their cross-border deals to take longer to complete, and they will need to consider foreign investment issues upfront to mitigate any potential delays. In addition, the various reforms and proposals will mean potentially increased scrutiny and execution risk for a broader range of deals in a number of jurisdictions. It is vital for deal teams to consider the practical considerations for managing this uncertainty and addressing individual transaction challenges upfront.

In summary, here are the issues for GCs to note:

One

Potential investors can expect an increase in timeframes and complexity for a broader range of deals and will need to consider foreign investment issues upfront to mitigate potential delays.

Two

Understanding governments’ policy priorities and the regulatory hurdles that may be involved will be an essential early part of planning any major transaction and is likely to be critical to the likelihood of successfully completing your deal.
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