Global FDI Review Landscape Continues to Evolve
January 11, 2022
In 2022, boards of directors will continue to face a complex and expanding global foreign direct investment (FDI) landscape that increasingly requires transactions to undergo intensive multijurisdictional FDI reviews and filing and approval processes, alongside merger control reviews and clearances. This includes longstanding FDI review regimes with which boards of directors may be familiar, such as the Committee on Foreign Investment in the United States (CFIUS), as well as new and recently modified and expanded regimes, particularly in Europe. Governments appear increasingly willing to scrutinize, and in some cases ultimately prevent, transactions they deem objectionable – in late 2020, the French government blocked the acquisition of a French photo-sensor imaging technologies company by a U.S. company, and in April 2021, the Italian government blocked a Chinese takeover of a semiconductor company.
Most of these FDI review regimes focus on national security- or national interest-related concerns, such as (1) access to defense-related or otherwise sensitive export controlled or other information (e.g., personal data) and (2) potential disruption to essential public services, supply chains or critical or sensitive infrastructure. However, the jurisdictional thresholds, review timelines and substantive tests vary by country, sometimes significantly. Moreover, FDI review analyses are often subjective and driven by factors of interest to each particular country, including factors that may not be known to the transacting parties. To further complicate matters, FDI review authorities have broad discretion to assert jurisdiction over transactions and to determine what does or does not qualify as a relevant concern. All of these factors combine to provide unique challenges to management teams and boards alike as they grapple with the lack of certainty associated with any FDI review.
Certain recent FDI-related developments, such as Italy temporarily expanding aspects of its regime to reach non-European investors, India requiring government approval for investments from China and other neighboring countries and an increased general focus on investments in the healthcare sector and essential supply chains, can be attributed to the COVID-19 pandemic. Other developments, particularly the recent developments in the United Kingdom and Europe, occurred independent of the pandemic and are better explained by a desire to increase scrutiny over transactions that raise potential national security or national interest concerns.
We highlight below the FDI review regimes in major jurisdictions that we expect will be particularly active in 2022:
- United States. CFIUS has jurisdiction over any transaction that could result in a foreign person acquiring “control” (which is defined broadly in the CFIUS regulations to be more akin to substantial influence) of a U.S. business. In the case of businesses involved with critical technologies, critical infrastructure or sensitive personal data (so-called “TID U.S. Businesses”), CFIUS also has jurisdiction over investments that result in a foreign person acquiring certain non-controlling rights. Transactions involving TID U.S. Businesses can also trigger a mandatory CFIUS notification requirement. Publicly available information regarding recent high-profile CFIUS reviews demonstrates that CFIUS will aggressively assert jurisdiction over transactions that it believes raise national security concerns. For example, CFIUS recently asserted jurisdiction over a transaction involving a joint venture in China that involved a U.S. company even though the joint venture only had operations outside the United States and not a single tangible asset within the United States was transferred as a result of the transaction. Similarly, CFIUS asserted jurisdiction over a transaction involving a non-U.S. semiconductor company that CFIUS determined qualified as a “U.S. business” despite its very limited nexus to the United States. Both of those transactions ultimately fell apart due to CFIUS concerns. In addition, CFIUS released an annual report in July 2021 providing information about transactions that closed without being notified to CFIUS. According to the report, CFIUS identified 117 non-notified transactions in 2020 and requested a filing in connection with 17 of these transactions. We expect CFIUS to remain aggressive in its review of notified transactions and in identifying and “calling in” non-notified transactions.
- United Kingdom. The National Security and Investment Act 2021, the United Kingdom’s new CFIUS-like FDI regime, came into force on January 4, 2022. Acquisitions that provide an investor (foreign or UK-based) with “control” over an entity with UK customers or activities, even if the entity itself is not organized under UK law, must be notified to the newly-created Investment Security Unit (ISU) if the target entity operates in one of 17 broadly defined sectors. The relevant sectors include defense, critical suppliers to the government, artificial intelligence, cryptography, synthetic biology, energy, transport and data infrastructure. If a foreign investor would acquire the ability to pass or block board resolutions, that is considered to be “control” and the investment must be notified. Similarly, an investor must notify ISU of any acquisition that would increase its ownership percentage beyond the 25%, 50% and 75% thresholds for share ownership or voting rights. Finally, regardless of the investment sector, the Secretary of State retains the authority to “call in” transactions that fall outside the mandatory notification regime if the ISU suspects a risk to national security and the deal closed on or after November 12, 2020. Transactions can be called in below the thresholds identified above if there is an acquisition of “material influence.” Only acquisitions of control over entities must be notified, but asset transactions can fall within this construct as well and could be called in.
- Europe. The European Union’s FDI regulation went into effect on October 11, 2020. The regulation does not provide the European Commission with the power to veto investments, but instead lays out a common framework for FDI reviews by individual EU member states and increases cooperation among member states. Perhaps most importantly, the regulation calls on each EU member state to notify every other member state and the European Commission of any FDI review it conducts. This so-called “consultation” process allows the consulted member states and the European Commission to voice any concerns they may have to the reviewing FDI authority. The EU consultation process also increases the probability of additional FDI reviews, because a consulted member state could determine that it has independent jurisdiction to review the investment and reach out to the transacting parties. Ultimately, the EU consultation process appears to be leading to more intense FDI monitoring across Europe and greater consistency among EU member states. Moreover, in May 2021, the European Union proposed a new EU regulation that would empower the EU to substantively review certain investments made by non-EU investors funded by non-EU governments. The proposal is under review by the European Council and Parliament.
- France. French law requires mandatory pre-closing FDI reviews by the Ministry for Economy and Finance for certain foreign investments in French companies that operate in certain “strategic” sectors, including defense, IT security, treatment or hosting of certain sensitive data, critical infrastructure, healthcare, press, food security and key technologies. Notification is mandatory for investments in these sectors if (1) non-French investors acquire a controlling interest in the relevant French company or acquire all or part of a relevant French business line or (2) investors from outside the European Economic Area (EEA) acquire at least 25% (10% if the company is listed) of the voting rights in a French company.
- Germany. Germany’s Federal Ministry for Economic Affairs (BMWi) operates a mandatory pre-closing FDI regime with a review timeline of 2-10 months. Non-German investors must notify BMWi before acquiring at least 10% of a German entity that is active in the defense or cryptography sectors. Additionally, investors from outside the European Union and the European Free Trade Association (EFTA) must notify BMWi before acquiring at least 10% or 20% (depending on the relevant business sector) of a German entity that is active in certain additional sensitive sectors, including critical infrastructure, certain IT services and IT security products, healthcare and key technologies such as semiconductors, additive manufacturing and autonomous driving.
- Italy. The Italian government operates a pre-closing FDI review regime in which the parties’ filing obligations depend on the sector of the relevant investment. Investors must notify the government of any transaction in the defense and national security sector, regardless of the nationality of the investor and the size of the stake (provided it is at least equal to 3%). For investments in certain additional sensitive sectors (a list that was materially expanded effective as of January 2021), non-EEA investors must notify the government of acquisitions of control. However, due to temporary powers granted as a result of the COVID-19 pandemic, investors must notify the Italian government of additional investments in these non-defense sectors, including certain acquisitions of control by EEA investors and acquisitions of non-controlling stakes by non-EEA investors.
- Netherlands. The Netherlands’ current FDI framework is limited to sector-specific regimes in the gas, electricity and telecom sectors. The government is considering an expanded general FDI framework that would require pre-closing review by the Ministry of Economic Affairs of investments in companies active in the Netherlands providing certain “vital services” and/or “sensitive technology.” Notification will be mandatory for both foreign and domestic investments, leading to (1) a change of control or (2) an acquisition or increase of significant influence in companies providing sensitive technology. The new regime is expected to enter into force as early as the first quarter of 2022 and grant the Dutch government retroactive authority to review transactions completed since September 8, 2020, if there are significant concerns to national security.
- Spain. Spain operates a mandatory pre-closing FDI regime for non-EU/EFTA investments that involve the acquisition of at least 10% of the share capital or control of Spanish companies operating in certain sensitive sectors, including defense, critical infrastructure, critical technologies, the media, the supply of key supply chain inputs and sectors with access to sensitive information. Additionally, any investors that are owned or controlled by foreign governments generally must notify the Spanish government of their investments regardless of the relevant business sector, as must any investor having already made an FDI filing in another EU member state in the past. If the value of an investment in Spain is below €1 million, the transaction is exempt from filing. Until December 2022, EU/EFTA investors are exempt from filing when they invest in Spanish listed companies or in unlisted companies if the value of their investment exceeds €500 million.
- Australia. Australia requires pre-closing FDI reviews by the Foreign Investment Review Board (FIRB) for certain acquisitions by foreign persons when certain monetary thresholds are met. The thresholds are complex and vary depending on the nationality of the foreign investor and the sector of the relevant target business. That said, any investment in a “national security business” must be notified to FIRB if the investor is acquiring at least 10% of the business or would otherwise be in a position to influence or control the business, such as by nominating a director. National security businesses include those that have access to classified information, supply critical products or services to defense agencies and/or operate critical infrastructure assets.
- China. In December 2020, China reformed its FDI-related national security review regime. As written, the new regime may capture investments in non-Chinese companies that have Chinese subsidiaries. Review is now mandatory for foreign acquisitions of control over companies that operate in certain national security-related sectors. The Chinese government also publishes “Negative Lists” that identify sectors in which foreign investment is prohibited or restricted across China and in the free-trade zones. For example, outside the Hainan free-trade zone, the mining of certain rare earth minerals is prohibited, and foreign ownership is capped at 50% in the fossil-fueled passenger car industry.
- India. The Indian government operates a complex FDI regime that bans foreign investments in certain “prohibited” sectors and applies sector-specific rules for several “regulated” sectors. For each delineated “regulated” sector, the Indian regime sets out a maximum foreign ownership percentage that can be acquired with and without government approval, as applicable. In the insurance sector, for example, foreign investments of up to 49% ownership are permitted through the “automatic” route, meaning no FDI reviews are required but foreign ownership beyond 49% is prohibited altogether. In the satellite industry, on the other hand, investments of up to 100% ownership are permitted through the “government” route, meaning FDI filings are always mandatory but there is no foreign ownership cap. In a recent development, India’s FDI review regime also subjects FDI from India’s neighboring countries (which is understood to target China) to a specific mandatory government approval requirement.
The global FDI review landscape will likely be active and continue to evolve during 2022. To avoid delays and disruptions to contemplated transactions, boards of directors should ensure that transactions are undergoing multijurisdictional FDI review due diligence and analysis well before closing, particularly if a transaction involves multiple jurisdictions and countries with active FDI review regimes and sensitive industries or sectors.