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The global rise of foreign investment regulation and enforcement has made M&A more complex. To address potential circumvention, authorities often apply ever-expanding interpretations of their jurisdictional reach, while refining their market monitoring practices. Companies engaged in M&A are familiar with the uncertainty around identifying FI filing requirements, and the fact that as a result, a large portion of filings are made on a precautionary basis. Many regimes also provide for long periods during which authorities can call in transactions that have not been notified. Even when there is only a remote chance of an authority having jurisdiction, investors often need to factor in extra time for foreign investment filings and laborious preparations to mitigate against any residual intervention risks.
While judicial review of foreign investment control decisions in the last few years has been rare, in a remarkable interim decision, a Dutch court denied the Dutch authority’s power to request a notification before it had determined jurisdiction. In a similar case, an Austrian court was called to rule on a complaint by an investor that argued that its transaction was not notifiable. But in that case, the court dismissed the application on formal grounds, ruling that the investor had not suffered any damage as the Austrian authority had already cleared the transaction.
Below is an overview of the Dutch decision as well as an examination of other European regimes and the options available to investors to confirm jurisdiction (or lack thereof).
Earlier this year, a Dutch court issued an interim decision against the Ministry for Economic Affairs and Climate Change, following its request for a filing over potential security concerns regarding a completed transaction that had not been notified. The transaction had been caught by the market monitoring of the Dutch foreign investment screening unit.
The Ministry requested the filing even though the investor had submitted that the transaction did not involve the transfer of voting rights or any other rights conferring control over the target. However, the Ministry maintained that the target’s governance was unclear and that the details of the transaction should be assessed as part of a formal notification from the investor.
The judge however, held that the Ministry must first determine whether a transaction falls within the scope of the Dutch investment screening regime before requesting a full filing. In this case, the Ministry should have first requested any missing information on the transaction structure before concluding on its jurisdiction. By requesting a full filing prior to establishing jurisdiction, the Ministry effectively placed the burden of proof on the investor to demonstrate that the transaction did not fall within the regime’s scope.
For a more detailed review of the Dutch investment screening regime, please refer to our earlier blog post.
Germany
In Germany, authorities typically follow the approach outlined by the Dutch court, whereby the initial step is for authorities to establish jurisdiction before making any further decisions. This also applies to the foreign investment screening regime, as the ministry has two months after a filing to determine its jurisdiction, decide whether to clear a transaction, or initiate a full formal proceeding. Further, the authority has broad discretion when deciding which transactions to review and, depending on the sector and investor identity, it can call in any transaction where investors acquire 10, 20, 25, 40, 50, or 75% of the voting rights, or may decide to do so in the case of lower participations where an investor gains atypical rights (a concept that has only been applied in a handful of cases to date). Where there is any doubt, the ministry typically sends requests for information to first conclude on jurisdiction before formally calling a case in.
For investors, this means that they need to make an upfront self-assessment of the following options if the need to submit a notification cannot clearly be confirmed or ruled out:
Due to the ministry’s wide discretion, combined with the extensive list of relevant sectors for the target’s local activities (which are often interpreted in a broad manner), investors typically opt for Option 3 in borderline cases. This is particularly the case when there is a pronounced risk of attention on the transaction by the Ministry - due to factors such as the sensitivity of the target’s activities, the strategic importance of the sector to the Federal Republic of Germany, or the identity of the investor. However, under certain circumstances, Option 2 may also be a valid option for investors - if the transaction timeline allows.
Italy is also a jurisdiction where, due to regulations that are not always clear in identifying the activities covered by the foreign investment screening regime, precautionary filings have long been very common. It is nevertheless notable that more than 50% of the transactions notified in Italy between 2020 and 2023 were declared not reportable by the Italian Government.
With a view to addressing this issue, a pre-notification mechanism was implemented to allow for a consultation on jurisdiction in advance of a formal filing within a fixed 30-day timeline. However, pre-notification does not suspend the mandatory deadlines for submission of a formal filing. Therefore, the pre-notification procedure may need to be initiated quite promptly to avoid the risk of needing to notify while awaiting the outcome of the pre-notification phase. In the event that, following pre-notification, a formal filing is nevertheless required, the overall timeline for obtaining clearance almost doubles - as the time spent in pre-notification is not counted towards the overall 45-day review period for the main procedure.
In addition, the overall effort required to prepare a consultation as part of the pre-notification system is often (almost) as high as simply making a full filing. Taking this into account, investors often decide to submit a precautionary filing instead of using the pre-notification mechanism, as the former provides more certainty regarding the timing of clearance. These circumstances, combined with the expansive sector triggers and the potential risk for the scope of the foreign investment screening mechanism to be interpreted widely, arguably continue to lead to many filings in Italy where the authority may not have ultimately had jurisdiction.
So far, based on publicly available information, the Italian Government has opened only a few proceedings for alleged missed filings. In such cases, assessing and establishing jurisdiction seems to have been the first step in the proceedings.
In Spain and France, the investor has to assess both jurisdiction (i.e. whether the investment requires a filing) and whether the activities of the local target fall within the foreign investment control regime. Once the investor has filed a request for authorisation, the authorities will concurrently conduct these two reviews. If the authorities conclude that there is either no jurisdiction and/or the activities of the target do not fall within the foreign investment control regime, then the authorities will issue a clearance decision confirming that no authorisation is required.
Additionally, the Spanish and French regimes provide for a dedicated consultation mechanism with a fixed deadline (30 business days for Spain and two months for France). The Spanish mechanism reviews whether the transaction falls within the scope of the national FI mechanism, but not whether approval should be granted in substance; and the French mechanism only reviews whether the activities of the French target fall within the scope of the foreign investment control regime (but does not review jurisdiction). In both the Spanish and French regimes, should the authorities decide that a filing is necessary, the time spent on the consultation process does not count towards the overall review period. Notably, case law on the Spanish and French foreign investment control regimes is very limited - so far, no Spanish or French court has considered the interpretation of these regulations.
Spain and France do not allow for voluntary filings. Investors can only decide between: (i) a consultation (which may result in a longer overall timeline); or (ii) proceeding with a full filing (which may be rejected due to a lack of jurisdiction). However, while the required disclosure in France for a consultation is lower and focusses on the target activities, the rather long consultation period can render the first option less appealing for transactions with ambitious timelines. Nevertheless, across both regimes, it is possible for investors to informally contact the authority to obtain an early, non-binding initial view on whether a filing may be required, to support the decision making between options (i) and (ii).
In the UK, the mandatory regime applies where certain thresholds (25% / 50% / 75%) are met or exceeded, and the target entity operates in a number of key sectors in the UK. Outside of the mandatory regime, the authority has broad discretion to call in transactions for review, whether these relate to asset acquisitions or investments in entities meeting certain thresholds (including a relatively low “material influence” threshold). It is, therefore, possible for parties to transactions falling outside of the mandatory regime to make a voluntary filing to obtain legal certainty on the authority’s approach to their transaction.
There is no formal pre-notification process. Informal consultations prior to filing are possible but are not a commonly used route for investors, given that they are not standardised and tend to be limited to ad hoc queries on the scope of the application of the regime, rather than relating to specific transactions. As a result of the broad scope of the regime in terms of sectors and transactions covered, investors tend to err on the side of caution in making filings (mandatory or voluntary, depending on the circumstances of each case).
Upon receiving a notification, the UK government will typically examine whether the notification (i) meets the requirements set out in the National Security and Investment Act and accompanying regulations; and (ii) contains sufficient information. Interestingly, the most common reason for rejecting a notification is that the acquisition has been notified using the wrong form (i.e. mandatory instead of voluntary and vice versa). This means that the authority does engage in an assessment of its jurisdiction as part of accepting / rejecting a notification. Once a submission has been accepted, the authority has 30 days to decide whether to clear the transaction or initiate a formal proceeding.
While the Dutch court’s decision serves as a reminder for authorities to do their homework before taking action, it is unlikely to materially impact the rest of Europe. Establishing jurisdiction is already a key part of the assessment process in Germany, Italy, Spain, France and the UK, and formal or informal consultations on jurisdiction upfront are generally possible.
However, the ongoing establishment of new regimes globally, along with changes to existing ones, is further increasing the complexity of foreign investment screening - requiring investors to factor these complexities into the planning of transaction timelines and post-closing intervention risk assessment. The lack of publicly available decisions and guidelines, coupled with expansive regimes and broad interpretations of the rules, also makes it challenging for investors to understand authorities’ jurisdictional limits.
Despite this uncertainty, investors need to carefully consider whether discussions on jurisdiction are worth having, as informal consultations and pre-notification contacts may, in a worst-case scenario, prolong the overall timeline. Nevertheless, it would certainly be advisable for investors to stay vigilant and consider judicial review where authorities may have overstepped their boundaries in seeking to review transactions that are not strictly within their jurisdiction.
2 October 2024
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