Planning is Everything when it comes to Foreign Investment Control

“Technology and its implications for national security have risen to the top of many countries’ anxieties when it comes to their willingness to allow inward investments. Some, such as the U.S., are more concerned than others, and whilst it is not possible to summarise a consistent attitude across countries, concerns mostly relate to investments by Chinese buyers including state-owned players.

What is clear is that companies taking over any target with a hi-tech dimension can expect their investments to be closely scrutinised. Ultimately, investors will have to consider the implications of new and strengthened regimes at the planning stage and assess how best to manage timing and other implications as a result of increased uncertainty and complexity.”

- Christian Ahlborn
Rather than getting caught up in the hype – and there is a lot of it out there – let’s talk about what Foreign Investment Control means. National security and public interest tests and screens are nothing new and have existed in most countries’ legislation for decades. What has therefore changed to explain the seeming explosion of transactions over the past five years being subjected to such scrutiny?

First, concern has increased – and so has government involvement and control – as a result of large foreign investment streams coming into Western countries from outside (mostly China), driven less by commercial rationale and more by national strategy.

Secondly, there is now a stronger focus on national self-interest and greater scepticism about the benefits of globalisation, fostering the return of the “national champion”.

These concerns have increasingly led governments to use their powers – originally granted as a tool to restrict foreign investment only where key areas of national security and public safety were concerned – in relation to a whole host of other areas such as the semi-conductor, IT and IP, AI, robotics and other new technologies as well as transport and communication technology sectors.

Governments are responding to perceived threats to national security through more rigorous enforcement of existing rules, introducing new restrictions and imposing more onerous conditions before allowing investments to proceed.

A recent example is provided by the latest legislative development at the European Union (EU) level. On 20 November 2018, representatives of EU governments and the European Parliament agreed on draft legislation to screen foreign direct investments (FDI). This new trend in FDI is well-depicted by the Austrian Economy Minister’s words: “we are determined to keep our technology sectors and key infrastructure safe”. This new EU Regulation, likely to be adopted in the first quarter of 2019, gives greater scope to vet foreign investments into the EU for reasons of security, public order and threats to European technological advantages in key sectors. Member states and the European Commission (EC) are able to consider the potential effects on, among other concerns, critical technologies, including AI, robotics, semiconductors, and cyber security, when deciding whether foreign investments can go ahead.

In the U.S., the Committee on Foreign Investment (CFIUS) is widening the range of sectors in which it is taking an interest. The Foreign Investment Risk Review Modernization Act, passed in August 2018, significantly expanded CFIUS’s authority in multiple ways, with increased scrutiny of transactions involving companies in critical infrastructure or critical technologies, non-controlling investments, and certain real estate transactions. The criminal indictments brought in January 2019 against the Chinese telecoms company, Huawei, by two separate grand juries in the U.S. – for the theft of confidential information from competitors and the evasion of international sanctions against Iran – will no doubt only heighten the tensions and uncertainty in this area.

Germany has strengthened existing rules and introduced notification obligations for acquisitions in specified industry sectors related to public security, such as IT, telecoms and critical infrastructure, and it has announced a further reduction in the threshold for reviewing transactions, from 25% of voting rights to 10% for German target entities active in the operation of certain critical infrastructures and defence-related investigations. France has also progressively tightened its regime over the past few years, and the most recent reforms came into force on 1 January, extending the list of sectors covered to new strategic sectors including in relation to aero-spatial activities, information system security, cyber security, AI, robotics and activities relating to the storage of data whose disclosure is likely to harm strategic interests.

Meanwhile, the UK is considering very wide-ranging reforms, which would enable the government to review all types of investments, in virtually any sector. With the increased scrutiny of foreign investments and uncertainty over deal completion that such proposals bring, there is concern that investors may be deterred in the future from investing in the UK at all. In response to this, the government is currently considering how to give guidance to investors to avoid a “chilling effect” on investment.