Over the past couple of years, governments across the globe have introduced, enhanced or sought greater enforcement of their regimes for the screening of foreign direct investment (FDI) on the grounds of national security and public order concerns.
The review of inbound investment from China often has been cited as an important factor to establish why an FDI regime should be introduced or broadened in a particular jurisdiction. Chinese investment remains a frequent point of interest on both sides of the Atlantic and has given rise to a number of notable enforcement decisions. However, the continuous development and expansion of FDI regimes reflects an increased sensitivity around foreign investments as a whole and their impact on the security of domestic industry, technology, data, resources and wealth, well beyond a ‘China focus’. Today, FDI regulation seeks to pursue much broader objectives, accounting for the core contribution of FDI to economic growth and prosperity as well as the desire of governments to understand better ‘who invests and for what purpose’. Since publication of the first edition of this book, FDI scrutiny has been further enhanced as a result of Russia’s invasion of Ukraine.
Our updated chapter examines the ongoing evolution and current scope of FDI regimes on both sides of the Atlantic and considers recent FDI enforcement activity. What we observe, and suggest, as a general trend is that across Europe and in the United States, FDI enforcement continues to widen its focus and subject a greater number of transactions to increased scrutiny. While concerns often still centre around investors from certain jurisdictions, FDI regulators conduct their substantive assessment on a case-by-case basis and take into account a broad set of considerations. FDI screening also remains a tool that is subject to political influence and strongly driven by geopolitical developments. As we will discuss, while the number of prohibitions remains fairly low, the real impact of the mounting FDI laws on investors lies in navigating the exponential growth and diversity of filing requirements, the additional time and for some investors, implementing the conditions imposed in connection with FDI approvals, or even deciding to modify or abandon certain investments.
We expect these trends to continue and expand – although FDI regulators appear cognisant of offering some greater procedural efficacy where possible. Looking forward, by the next edition of this book we expect to witness greater opportunity arising for EU influence and competence in FDI decision-making. The comparatively limited role of the European Commission under the EU FDI Regulation stands to be bolstered by additional powers to be granted to the Commission to scrutinise certain inbound investment through the Foreign Subsidies Regulation, which will by then have entered into force.
FDI enforcement focused on Chinese investments
The evolution of FDI enforcement and legislative activity in recent years has focused on, and tended to be motivated by, concerns around Chinese investment. This holds true for both sides of the Atlantic. For instance, most presidential orders to block or unwind transactions following review by the Committee on Foreign Investment in the United States (CFIUS) have concerned Chinese investors or investors with significant ties to China. In Germany, public debate erupted over the acquisition of industrial robot developer and manufacturer Kuka by the Chinese Midea Group in 2016, to which the BMWi issued a certificate of non-objection. This case formed a turning point in Germany, serving as a precedent in public debate of why powers available to scrutinise and control FDI review should be increased. The German FDI regime was tightened in the following years and, around this period, interventions by the German regulator predominantly concerned Chinese investors.
To a degree, a similar trend was emerging in the UK. Aside from a number of high-profile enforcement decisions involving UK defence assets and relating to US investors (mentioned below), a number of decisions under the ‘public interest intervention’ regime in the period from 2017–2020 concerned Chinese investors. For example, the UK government intervened in the acquisition by China’s Hytera Communications of Sepura, a provider of communications network services to the UK emergency services. The transaction was ultimately cleared, subject to undertakings to ensure that sensitive information and technology would be protected and that there would be continuity of supply and maintenance of services. Hytera and Sepura also agreed to have at least one UK national as a board member. At least two other Chinese investments in the space and technology sector were abandoned following public interest interventions in the UK. In the transition to the National Security and Investment Act (NSIA), Chinese investment has remained high on the agenda: bringing significant political attention to Chinese investment in the UK semiconductor industry, and the first two blocking decisions under NSIA have involved Chinese investors.
For Chinese investors as a group, even now (and taking into account other known FDI case examples in Germany, Italy and elsewhere), it would be difficult not to argue that Chinese investors are still more likely to be subject to prohibition than other investors. Those other investors, however, must accept scrutiny, the time-cost of review and, in a growing number of cases, the prospect of mitigation.
Regulatory FDI amendments broadened the scope for FDI screening
Indeed, although FDI regimes have traditionally focused on the most sensitive sectors, such as defence and critical infrastructure, CFIUS and, in its footsteps, the European regimes have obliged investors to notify their transactions (backed by strong penalties) and submit to a degree of transparency about their investment plans. The areas of sensitivity and greatest interest, while carrying national differences, now clearly go beyond defence and critical infrastructure to encompass critical technology, essential inputs and supplies or data related businesses. Driven by consultations with CFIUS, during 2017, Germany, France and Italy campaigned for such changes at the European level and for an EU legal framework to provide for the screening of FDI by non-EU countries. The UK began to address similar considerations in the same period with a ‘White Paper’ proposal for greater investment screening powers and, in the meantime, in 2018, making legislative amendments to lower the barriers to FDI intervention for acquisitions relating to critical technologies. Gathering evidence in a 2019 study, the European Commission found that foreign ownership was remarkably high in sectors that the Commission considers at the heart of the economy. The Commission noted that the rate of acquisitions involving state-owned investors from Russia, China and the United Arab Emirates appeared to be increasing rapidly. The Commission emphasised its concerns that state influence may result in the acquisition of EU companies for strategic rather than purely commercial reasons, and that foreign investors may benefit from state support.
In 2018, the United States Congress adopted the Foreign Investment Risk Review Modernization Act (FIRRMA), significantly expanding the jurisdiction of CFIUS to review a wider range of transactions. FIRRMA reflected broadened notions of national security and geopolitical risks, to include newly defined categories of critical technologies, critical infrastructure and sensitive personal data (‘TID US businesses’) and expanded CFIUS’s authority beyond its traditional jurisdictional purview of ‘controlling’ investments to non-controlling but non-passive investments in those businesses. FIRRMA also required, for the first time, that investments involving critical technologies be subject to mandatory filing requirements, in contrast to CFIUS’s traditional voluntary review framework. Further, FIRRMA newly established CFIUS’s authority to review certain greenfield investments in real estate. Under FIRRMA, CFIUS and its member agencies were granted additional resources, which have been used, in part, to identify and review completed transactions that previously were not notified to CFIUS. While FIRRMA did not specifically identify China or any other country, the underlying policy debate over the development of FIRRMA signalled that China was a principal focus of concern.
In 2019, the European Union adopted its EU FDI Regulation, which entered into full effect on 11 October 2020. The Regulation provides for procedural standards for FDI screening in the EU Member States, contains a non-exhaustive list of factors that may be taken into account for the review of FDI and establishes a cooperation mechanism between the Commission and the Member States. As a result of the covid-19 crisis, the attention given to FDI screening accelerated markedly. In Europe, the Commission published guidance for Member States on how to use FDI screening in times of public health crisis and economic vulnerability in March 2020. The Commission called on Member States to make full use of existing FDI regimes, or to introduce new regimes where none was yet in place. Globally, a number of countries – from Australia and New Zealand to China and India – all expanded their powers to scrutinise investment and act, where necessary, to protect assets that could become vulnerable during the pandemic. Some measures were temporary and others have remained.
Following Russia’s invasion of Ukraine in February 2022, the Commission has also reiterated its call on Member States to use FDI powers in relation to potential threat actors and provided guidance on the circumstances under which Member States may be permitted to derogate, for FDI screening and enforcement purposes, from principles of free movement of capital and freedom of establishment that are central to the EU Treaty.
Around a similar time, the German FDI regulator used, for the first time, its powers to appoint a fiduciary – and did so in relation to the Russian gas infrastructure provider Gazprom Germania, after it learned about an unnotified change in ownership in the company. According to Federal Minister Robert Habeck, the order of fiduciary management served to protect public security and order and to maintain the security of supply. In due course, the company was put under long-term administration and received a loan of around €10 billion to support its operations.
In a similar vein, the Canadian Minister of Innovation released a Policy Statement regarding Russian investment under the Investment Canada Act. According to the statement, the Canadian authorities will apply close scrutiny to Russian investments into Canada. Investors that are found to be controlled or subject to influence by the Russian state are considered likely to present security concerns and may therefore be subject to prolonged review periods. For the planning of investment filings, all non-Canadian investors are asked to proactively identify any potential connections to Russian investors and entities.
Other undercurrents to FDI policy have nonetheless endured and also shifted in recent years, recalling that Member State rhetoric envelops broader objectives for FDI screening. For instance, prominent calls from Germany and France have concerned fostering industrial capability within Europe, potentially even to the exclusion of allied investors. In June 2020, speaking at a joint French-German conference, Bruno Le Maire, the French Minister for the Economy, expressed support for stronger government engagement to develop European industrial champions for the protection of European economic interests against all other parts of the world (including the United States and China). The (then) German Minister for the Economy, Peter Altmaier, noted this policy was long-standing and encompassed a range of sectors but particularly technology and biotech industries.
Stricter FDI scrutiny for all foreign investors – regardless of their origin
Despite all such heightened interest in investments from certain countries, most of today’s FDI regimes focus in the first instance and in formal terms on the protection of technologies and other national capabilities and not on particular investors. As such, FDI filing requirements are considered to be ‘investor-blind’ in that they commonly apply to all ‘foreign’ investors alike. In some regimes, nuances can arise and, for example, the determination of whether an investor is considered foreign may depend on the sector affected by the investment. Investments in particularly sensitive sectors, such as defence, often trigger a screening for all non-national investors. The EU FDI Regulation refers to ‘third countries’ and applies to investors from non-Member States of the European Union (EU) and European Economic Area (EEA) for investments in critical infrastructures, critical technologies and other sectors and technologies listed in Article 4(1). The same approach is taken by many FDI regimes within the EU that consider investors from countries that are not Member States of the EU, EEA or the European Free Trade Association as foreign for sectors outside defence and other particularly sensitive activities.
Some countries have elected to screen investments from state-owned or state-controlled entities at lower thresholds. In Spain, for example, FDI made by a company that is considered to be controlled by a government, whether directly or indirectly, is always subject to a mandatory screening procedure. Australia applies specific screening thresholds (often AUS$0) to ‘foreign government investors’. Taking another tack, the UK requires all investors (including those from the UK) in 17 core sectors to submit to screening upon acquiring more than a 25 per cent interest. A general FDI regime currently in the final stages of the legislative process in the Netherlands is expected to encompass a similar approach and include Dutch investors within mandatory filing requirements. Nevertheless, beyond the question of whether an investment requires mandatory filing, and in all FDI regimes, an investor’s nationality and the fact of whether an investor is considered state-owned, state-backed or state-controlled is an important factor for the substantive assessment of likely effects on national security.
The broad applicability of FDI regimes is reflected in the most recently published reports on FDI screening. Across Europe and within the United States the number of transactions falling within the scope of FDI review has significantly increased during the past few years. The European Commission’s first report on FDI screening notes that in the 18-month period between 11 October 2020 and 30 June 2021, around 1,800 FDI filings were submitted to FDI authorities in seven reporting Member States. In the calendar year 2021, almost the same number of transactions (1,600) involved an FDI filing and the proportion of cases that were formally screened increased. Individual Member States similarly (and logically) report on steep increases in the number of FDI proceedings. For example, in Germany the number of FDI reviews increased by more than four times within five years, from 66 cases in 2017 to 306 cases in 2021. In the United States, the latest annual report published by CFIUS points to a similar direction. CFIUS reviewed a record number of transactions in 2021, including 164 declarations (up from 126 in 2020) and 272 notices (up from 187 notices in 2020).
The widened scope of FDI filing requirements has an impact on all investors regardless of their origin. Accordingly, on both sides of the Atlantic, closely allied countries were among the main countries of investor origin. In the latest European Commission report for the year 2021, most of its screening procedures included US investors (40 per cent), followed by investors from the UK (10 per cent), China (7 per cent), the Cayman Islands (5 per cent) and Canada (4 per cent). Russia accounted for less than 1.5 per cent of the cases and Belarus for 0.2 per cent (for which the instances of compliance or deterrence might also be points of interest). In Germany, US investors (approximately 45 per cent) topped the list, followed by investors from the UK (approximately 15 per cent), China (approximately 12 per cent), Canada (approximately 4 per cent), Japan (approximately 3 per cent) and Bermuda or the Cayman Islands (approximately 3 per cent). In the United States, the ranking depends on the type of filing. Investors may elect to file a long-form ‘notice’ or a short-form ‘declaration’. The latest CFIUS annual report shows that investors from allied countries relied most often on the simplified requirements of a declaration, with investors from Canada on top, followed by Germany, Japan, Singapore and South Korea. Most long-form notices were filed by Chinese investors, followed by Canada and Japan.
Despite the widened scope of FDI review, the vast majority of transactions still receive FDI approval. For example, the latest European Commission report notes that 96 per cent of the cases formally reviewed by the Commission were cleared (approximately 73 per cent unconditionally and approximately 23 per cent with conditions). The number of prohibition decisions remained low and amounted to only around 1 per cent of all screened transactions, while approximately 3 per cent of the transactions were withdrawn by the parties. Importantly, these decisions are made by EU Member States, as the European Commission currently performs a coordinating and influencing role in FDI screening, which involves providing non-binding comments to Member States in respect of FDI that has an EU dimension. What is clear in practice is that, while public debate focuses on investors of potential concern or certain high-profile cases, for most investors compliance with FDI regimes is a matter of timing, diligence and acceptance of transparency towards FDI regulators. Consequently, FDI review has the potential to increase the direct cost involved in deal-making, but for most parties it does not ultimately hinder their transaction plans.
Substantive assessment requires a case-by-case analysis
Recent enforcement practice indicates that FDI screening serves broader objectives than the screening of investments only from certain jurisdictions. Moreover, most regimes leave broad discretionary powers to screening authorities, which have some degree of flexibility to reflect trade policy (reciprocity) and other political considerations. In a context of growing tensions globally, FDI regulators assess filings on a case-by-case basis. Despite the heightened focus of FDI regimes on Chinese investors, they are by no means the only targets of FDI proceedings. Stricter scrutiny is applied also to investors from other countries depending on sensitivities within the target business and policy imperatives of national governments, as will be illustrated by the following examples.
In the most traditional FDI sector of all, US investors have been active in the United Kingdom and not without encountering FDI scrutiny and requirements to provide FDI commitments. A particular trend is evident, beginning in 2018 when undertakings were volunteered to secure clearance for the acquisition of GKN by Melrose. A continuing series of high-profile transactions demonstrate that foreign investments in the defence sector appear capable of proceeding, provided that parties are prepared to engage with government concerns.
By comparison, France has taken a stricter line on defence sector transactions, with the Minister of Economy exercising a veto in relation to the planned acquisition of Photonis International by US investor Teledyne during 2020. To secure the purchase of Photonis, a company conducting activities in the design of nightvision devices, Teledyne was asked to provide undertakings and offer a minority stake in Photonis to the French sovereign investment fund, but ultimately decided not to pursue the transaction.
For Rolls-Royce, which undertook a series of divestments and restructuring across its group in 2020 to 2021, FDI considerations were raised in relation to the sale of its subsidiary ITP Aero, a Spanish turbine blade manufacturer that provides engines for the Spanish armed forces. The Council of Ministers ultimately authorised Bain Capital’s investment in ITP subject to mitigation negotiated in an agreement. Among other things, Bain offered guarantees of national and European interest programmes with regard to location, maintenance of employment and headquarters, exemption from non-EU export controls, contract compliance and the proper handling of sensitive information. In Norway, Rolls-Royce also faced FDI challenges earlier in 2021 when the disposal of its marine engineering company Bergen Engines to a proposed Russian investor was blocked under Norway’s then new FDI screening rules.
Where critical infrastructure is concerned, an expansive range of activities can become susceptible to FDI review, regardless of an investor’s identity. The Spanish FDI authority, the National Securities Market Commission, approved an acquisition of a 22.7 per cent stake in the company Naturgy Energy Group by Australian Fund IFM, with mitigation. The conditions pursued safeguard planned investments in energy expansion and infrastructure by Naturgy until 2025 and ensure that IFM does not sell assets in excess of levels already approved by the board. It was also agreed that Naturgy will not be delisted and taken into full private ownership for at least three years.
In the UK, the recently established Investment Security Unit (ISU) is reported to be reviewing the proposed acquisition of certain gas transmission assets of National Grid plc that are regarded as a key part of critical energy infrastructure in the UK by a consortium including Macquarie Group (an Australian firm) and British Columbia Investment Management Corporation (a Canadian pension fund). The ISU has shown willingness to assert its interest or exercise its call-in powers in other transactions relating to critical infrastructure, even in cases involving European buyers and where mandatory filing thresholds do not appear to be met, though ultimately it did not take any further action.
In 2019, the UK government reviewed the acquisition of satellite communications provider Inmarsat by the Connect Bidco consortium of private equity investors, which mostly originated from the United States and, shortly afterwards, lowered the applicable jurisdictional thresholds for transactions involving critical technology. The review resulted in a comparatively extensive set of undertakings requiring, among other things, that the acquirers commit to behave as passive financial investors only and that other governance-related restrictions would apply, including having UK nationals appointed to a number of board and other senior positions. Recently, a follow-on sale of Inmarsat to Viasat underwent review under the NSIA and was cleared, subject to Viasat imposing information security controls and maintaining supply of certain ‘strategic capabilities’ to the UK government.
More recently, the UK government began a public interest intervention on national security grounds in relation to the acquisition of the semiconductor company Arm Ltd by the US company Nvidia Corporation. The deal was ultimately abandoned following concerns of several FDI and competition regulators, including the European Commission. Similarly, in the planned acquisition of hyperpure silicon wafer manufacturer Siltronic by Taiwan’s GlobalWafers no FDI clearance could be obtained from the German regulator before expiry of the long-stop date, so the deal ultimately did not proceed. The British government has also come under pressure (including from UK Parliament) to ensure that the merger between Eutelsat S.A. and OneWeb, a British satellite company (of which the government is a shareholder) operating a Low Earth Orbit constellation, is reviewed under the NSIA.
Other essential supplies and access to data
The tensions that arose in regard to global supply chains with essential medical products have also provided noteworthy FDI interventions. In Germany, as a means of maintaining its strategic independence capabilities in healthcare, the federal government acquired a minority stake of 23 per cent in CureVac in 2020 through the German state-owned bank KfW. It did so outside the German FDI regime but with the aim of retaining future covid-19 vaccines for the national healthcare system and to prevent the potential acquisition of CureVac by US investors.
In 2021, France rejected the takeover of the convenience store Carrefour by the Canadian supermarket group Couche-Tard. Even negotiations between the French Minister of Economy, Bruno Le Maire, and Couche-Tard regarding jobs and suppliers could not dispel concerns that the transaction would endanger national food safety. Mr Le Maire said that ‘what’s at stake is the food security of our country . . . food security is strategic for our country so that’s why we don’t sell a big French retailer.’ No formal FDI proceeding was commenced, but the French government commented openly that it would veto the transaction using FDI laws shortly after the proposed transaction was announced.
The Italian government is reported to have halted the move of 530 Bnl employees to the consulting company Accenture under golden power rules. Bnl, formerly state-owned and now part of BNP Paribas, was asked by the Italian government for more details on Accenture. The questions raised by the Italian government were reported to relate to concerns that with the transfer of employees, the French consulting company was responsible for the management of personal data of the bank’s Italian clients. The transfer of employees is understood to have been completed, but it shows the authorities willingness to take a closer look into certain transactions regardless of the investor’s origin.
Governments around the world remain interested in maintaining high levels of foreign investment and keeping their economies as favourable places to do business. Whereas the focus of FDI enforcement has been on defence and critical infrastructure, and the investor’s nationality has appeared to be a significant factor, the scope of FDI enforcement has broadened over a number of years alongside an evolved and wider concept of national security risk. The readiness of many countries to protect their industries, and national manufacturing capabilities for a range of critical technologies and products, appears to be more neutral with respect to investor nationality.
However, all investors face closer FDI scrutiny and must learn to live with increasingly complex FDI proceedings, even if, for most of them, no direct or long-term consequences will flow from a substantive FDI review. For all investors – rather than only those from certain jurisdictions or those that are found to be state-owned, state-controlled or state-backed – the pattern of more significant FDI decisions must be reasonably taken into account and suggests the need for care in planning investment choices, particularly in sectors that concern critical technologies. The risks concerning FDI require appropriate stewarding throughout the transaction process and even beyond the completion of each transaction.
This is only underscored by surrounding developments. In May 2022, the Commission proposed legislation to the European Parliament on foreign subsidies distorting the EU market (the Foreign Subsidies Regulation), which was approved unanimously by the European Council and Parliament with very minor amendments in June 2022. Under the new regulation, the Commission will have the power to investigate and counteract foreign subsidies. In a transaction context, this means that investors in receipt of foreign subsidies will have an additional obligation to obtain clearance from the European Commission upon acquiring certain EU targets. Foreign investors will therefore soon face another clearance procedure (with yet another potentially overlapping, but still slightly different focus), alongside merger control and FDI filings.