Talking about FI remedies – Part 2: what might they look like?
Last week, we looked at how Germany, France, Italy, Spain, the UK, and the US are addressing the most difficult foreign investment cases, what we can learn from the (reportedly) rare instances of deals requiring conditions, and why remedies might not actually be as rare as they seem.
In Part 2 of this post, we delve into some of the trends that we are seeing (where such information is publicly disclosed) across both behavioural and structural remedies, including some of the specific restrictions that parties might face. Where remedies are not viable, we look briefly at some of the known prohibitions, and the deals and sectors in which these have occurred.
What remedies look like: some trends
Conditions often consist of behavioural remedies, with the remedies required being very fact-specific to each case. Behavioural remedies fall into three general categories: governance restrictions, operational restrictions, and audit requirements.
Governance restrictions
Some restrictions are aimed at limiting the acquirer’s governance rights, typically with the aim of ensuring the business meets security requirements under new ownership. For example, when Grindr Inc (a social networking app for the LGBTQ+ community) was acquired by a Chinese company, CFIUS imposed governance obligations to keep operations headquartered in the US and required three CFIUS-approved personnel (all US citizens) serve on the Board of Directors until Grindr Inc could be divested. This condition appeared to be aimed at protecting sensitive data held on the app.
Another clear example of governance restrictions is the conditions that the Italian Government imposed in relation to the governance of Pirelli & C. S.p.A., which posed a significant limitation on the possible governance rights of Pirelli’s relative majority shareholder (China National Tire & Rubber Corporation Ltd). Other governance conditions recently imposed by the Italian Government in the context of Telecom Italia network sale to KKR include, for example, the creation of an internal security task force.
Alternative governance restrictions may be less onerous. This was the case in the acquisition of UK subsidiaries of General Electric by the French investment vehicle of EDF Energy Holdings. In that case, the concern was that a risk to national security arose because of the defence capabilities relating to naval propulsion systems which are delivered through GE’s UK facility. The final order required the establishment of a steering committee on the board to provide oversight of security requirements and allowing government-appointed individuals to observe board meetings.
Operational restrictions
These types of restrictions are typically aimed at addressing capacity or quality concerns related to the new ownership, such as concerns that the foreign acquirer may not maintain local operations, or continue to service local customers, or that local standards will not be met. For example, when Spanish aerospace ITP Aero company was acquired by Bain Capital, a US private equity firm, the acquisition was conditional on maintaining Aero’s employment levels and headquarters in Spain, as well as complying with ongoing contractual arrangements.
Similarly, when Italian refinery G.O.I. Energy was acquired by a Cypriot private equity firm, according to publicly available sources the Italian government required that jobs be protected at the refinery, environmental standards be maintained, and oil continue being supplied to the refinery from countries other than Russia. Again, in relation to the sale of Telecom Italia network to KKR, the Italian Government requested that all activities linked to the maintenance and monitoring of the infrastructure be maintained in Italy.
Operational restrictions may also accompany governance restrictions, as was the case in the acquisition of UK subsidiaries of General Electric by the French investment vehicle of EDF Energy Holdings, mentioned above. In that case, the parties were also required to maintain capacity and capability in respect of critical Ministry of Defence programmes in the UK.
Similar remedies were also required in a range of other cases of which we are aware, where decisions are not publicly available.
However, not all operational restrictions relate to capacity, and some may solely be aimed at ensuring the company continues to meet certain standards. For example, requirements that the acquired entity take certain steps to protect customers’ personal information (in US company Genworth Financial’s acquisition by a Chinese financial holding group) or that certain cyber and physical security requirements be implemented (in a merger between two US semiconductor companies).
Audit requirements
Audit requirements may be imposed alongside other behavioural remedies to ensure the company complies with those conditions. For example, when UK mobile network operator Truphone was acquired by a German investment vehicle, telecoms information security measures were put in place, alongside requirements that the acquirer carry out a security audit by a UK government approved auditor to report on security measures. Similar requirements are also common in other countries - for example, in Germany as regards compliance with IT security standards.
In the US, CFIUS can also impose third-party monitoring, which effectively functions as an ongoing, real-time audit of the company’s operations. This may occur, for example, if CFIUS has concerns about the sharing of sensitive data from a US business to a foreign acquirer. In addition to potential delays in conducting business, third-party monitoring can also be expensive. Costs vary based on the extent of the monitoring and can reach millions of USD per year, potentially affecting the underlying deal rationale.
Structural remedies
Structural remedies also occur, either on their own or in conjunction with behavioural remedies, but these are generally rare and reserved for the few highly sensitive cases. These may take the form of equity restrictions. For example:
- When COSCO, a Chinese company, acquired a share in German container terminals, the German government conditioned the purchase on COSCO capping its share in the Tollerort container terminal at 24.99% (strictly speaking not as a remedy but to avoid the remainder of the transaction being caught be the German regime).
- When Spanish aerospace ITP Aero company was acquired by Bain Capital, a US private equity firm, alongside governance and operational restrictions, the Spanish government required that 27.5% of shares in ITP Aero be reserved for the formation of a consortium of Spanish industrial companies and institutions.
- In the IPO prospectus of Hensoldt, a German defence company, the company outlined key elements of its security arrangements with the Federal Republic of Germany. These arrangements featured a range of commitments, including: the acquisition of a golden share by the Federal Republic of Germany, combined with the right to acquire a strategic interest by increasing its shareholding to up to 25.1%; appointment rights for the supervisory board; as well as information and consultation obligations before transferring 10% or more of the shares to a strategic investor.
Sometimes, however, concerns are more serious and cannot be addressed by behavioural remedies or share limitations. In such cases, a partial or total divestment may be required. For example, as a condition for CFIUS clearing COSCO’s acquisition of Overseas Orient International Limited, the parties had to divest OOIL’s container terminal in Long Beach, California. However, divestiture remedies, which are a standard cure to address concerns in merger control proceedings, are still very rare in the foreign investment control world and uncharted territory in Europe to date.
Prohibitions: When remedies aren’t enough
While rare, there are also instances where conditions aren’t sufficient to remedy the concerns raised with the investment. Similar to cases where conditions are imposed, prohibitions usually occur where there is convergence of two main factors: first, the transaction is in a particularly sensitive sector, and second, there are concerns about the home jurisdiction of the purchaser.
For example, the six known-of prohibitions in Germany since 2018 have involved a proposed acquisition of an entity in a sensitive sector by a Chinese entity (in semiconductors including upstream activities, satellite communications that were key for defence, ventilation machinery (at the height of the COVID pandemic), etc). Similarly, in the UK, four of the five prohibitions since the NSIA came into force have involved proposed acquisitions by a Chinese entity of a UK company involved in semiconductor manufacture or chip design.
The sliding scale of remedies
What this tells us is that foreign investment review is essentially a sliding scale, with transactions in less-problematic sectors by “friendly” purchasers likely to be approved without conditions; those transactions in sensitive sectors involving riskier acquirers likely to be subject to closer scrutiny and – potentially – conditions; and finally, transactions that pose very serious threats to security and public order likely to be blocked. While structural remedies are still rare and to some extent there are typical scenarios where a regulator is likely to have concerns with a deal, we have also observed a good degree of creativity from some foreign investment regulators. For example, travel bans for holders of sensitive technological knowhow when considering potential remedial measures (although that deal was ultimately prohibited).
