Depending on the jurisdiction, a national security review and its outcome can significantly impact a transaction, including changes in the terms of the deal or its outright termination.
As national security reviews of foreign investments grow more prevalent, knowing the rules can help you prepare for any outcome. Governments worldwide are focusing greater scrutiny on foreign direct investments into their countries. In particular, they are subjecting an increasing number of cross-border transactions to national security reviews to ensure that the purchase of a domestic asset by a foreign investor does not jeopardize their national security. Depending on the jurisdiction, a national security review and its outcome can significantly impact a transaction, including changes in the terms of the deal or its outright termination.
Every country that conducts national security reviews assigns that responsibility to a particular government component, such as the Committee on Foreign Investment in the United States (commonly known as CFIUS), the Chinese Ministry of Commerce, or the German Federal Ministry for Economic Affairs and Energy.
The types of transactions subject to review and the scope of review vary widely from country to country. Some countries, for instance, publish a list of industries in which a national security review for a foreign investment transaction is likely to be triggered. China has a list of 57 industries, while Russia lists 45 activities of "strategic importance." Others have more general standards: the United States allows CFIUS to conduct national security reviews of any transaction that could result in control of a US business by a foreign person, without defining "national security"—giving CFIUS substantial leeway to review transactions covering a wide variety of areas. Some countries subject very specific types of transactions to review. Australia, for example, requires approval for any foreign investor's acquisition of residential land, vacant land, or any land for redevelopment.
Most national security reviews generally have three possible outcomes: The transaction may be approved; the transaction may be approved subject to certain conditions designed to mitigate national security concerns; or the transaction may be blocked/unwound. Mitigation conditions can range widely, but they commonly involve segregation or divestiture of sensitive businesses, governance requirements, or assurances of continuation of important activities.
Given the enormous impact a national security review can have on a transaction, it is essential for cross-border investors to know in detail each country's requirements and to structure the transaction so as to address any risk arising from the reviews. This requires careful consideration of national security issues in planning and negotiating transactions, including the allocation of national security review-related risk in the transaction documents.
This report outlines the national security review landscape in six countries—-the United States, China, Russia, Germany, France and Australia. For each country it details who conducts national security reviews, who must file, the types of deals reviewed, the scope of the review, the possible outcomes, trends in the review process, how foreign investors can protect themselves and the review process timeline. It also provides investors with general suggestions on the structuring and documentation of their transactions to reduce national security review-related risks.
Please follow the links below to read articles in our report, or read the full report here.
Reducing M&A risks related to national security reviews
As national security reviews grow in impact, investors need to be mindful of potential adverse consequences resulting from such reviews. To read the article please click here.
Deals are generally approved, but a wide range of mitigation conditions may be imposed that can have a significant impact. To read the article please click here.
China is attempting to implement a more structured and comprehensive system to keep a closer eye on economic deals that might have security implications. To read the article please click here.
Following the Montebourg Decree in 2014, the scope of activities covered by national security reviews has been significantly extended to several key industries. To read the article please click here.
The trend is towards higher scrutiny of inbound transactions by the Federal Ministry for Economic Affairs and Energy. To read the article please click here.
Russia targets 45 "strategic activities" that trigger a national security review. To read the article please click here.
Australia requires a wide variety of transactions involving foreign businesses to be reviewed and approved before completion. To read the article please click here.
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