In a regime undergoing rapid change, investment screening is currently "light," with red tape increasing for European inbound investment
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While there is still no standalone foreign direct investment (FDI) screening at the EU level, the EU continues to push for a coordinated approach toward foreign direct investments into the EU. The key instrument is the EU Screening Regulation, which has entered into force on October 11, 2020. Other legislative ideas have already been floated, including the introduction of new tools to control the acquisitions and activities of foreign-subsidized companies in the EU.
In addition, the EU has stepped up to ensure a coordinated approach towards investments into health-critical EU assets during the COVID-19 pandemic.
PART 1: EU DEVELOPMENTS
EU SCREENING REGULATION
The EU Screening Regulation (refer to the EU chapter in Foreign Direct Investment Reviews 2019 for details) falls short of delegating any veto or enforcement rights to the EU, which means that Member States remain in the driver's seat for FDI controls. While the EU Screening Regulation also does not oblige EU Member States to introduce a national FDI review process, we expect additional Member States to do so, such as the Netherlands, Sweden, Denmark and Ireland, which currently contemplate the adoption of FDI regimes.
Certain countries have also recently adopted FDI regimes, such as Hungary and Norway. However, the EU Screening Regulation is primarily a means of harmonizing and coordinating the widely differing review mechanisms in place at the Member State level throughout the EU.
In particular, the Regulation introduces a coordinating mechanism whereby the European Commission (EC) may issue non-binding opinions on FDI reviews performed in Member States. "Non-reviewing" Member States may provide comments to the "reviewing" Member States. Member States and the EC may also provide comments on a transaction that is not being reviewed because it takes place in a Member State with no FDI regime, in a Member State in which the transaction does not meet the criteria for an FDI review by the government, or the reviewing Member State decided to waive screening of a particular investment. In the latter case, the Member State concerned by the FDI must provide a minimum level of information without undue delay to the other relevant Member States and/or the EC on a confidential basis.
The cooperation mechanism may also apply to a completed investment that is subject to scrutiny under a Member State ex post regime (most Member States, however, have adopted ex ante FDI regimes), or an investment that has not been scrutinized within 15 months after the investment has been completed. The practical impact of the cooperation mechanism, therefore, will be largely procedural.
The final say in relation to any FDI undergoing screening or any related measure remains the sole responsibility of the Member States conducting reviews pursuant to their national FDI screening procedures. However, it cannot be excluded that (in particular) smaller EU Member States may find themselves under considerable pressure to conform to opinions or comments issued by the EC or other Member States.
In the same vein, despite the fact that the status quo of Member States being responsible for any enforcement actions post-FDI screening still stands, the implementation of the EU Screening Regulation will likely create an impetus for Member States to align themselves better with the EU Screening Regulation. This alignment may prompt Member States to consider establishing a new national security review regime (where one does not already exist), or amend their current regimes to comply with the Regulation. In particular, the EU Screening Regulation sets out the following cornerstones that an FDI regime should reflect:
- Investment reviews should revolve only around the baseline substantive criteria of "security and public order"
- Investments in the following (non-exhaustive) sector-specific assets and technologies may be problematic: critical infrastructure (whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, as well as sensitive facilities and investments in land and real estate, crucial for the use of such infrastructure); critical technologies and dual-use items (as defined in the EU Dual Use Regulation, including artificial intelligence, robotics, semiconductors, cybersecurity, quantum technology, aerospace, defense, energy storage, nuclear technologies, nanotechnologies and biotechnologies); supply of critical inputs, including energy or raw materials, as well as food security; access to sensitive information, including personal data, or the ability to control such information; and media activities as far as freedom and pluralism are concerned
- Investments may be particularly problematic where a foreign government (including state bodies or armed forces) directly or indirectly—e.g., through ownership structures or "significant funding"—controls the acquirer
The most immediate effects of the EU Screening Regulation, however, will be largely procedural. In particular, the new role of the EC and the other Member States will add an additional layer of complexity to the investment screening review process. In any event, the involvement of more players is expected to result in more "red tape" and inevitably longer review processes.
While the EU Screening Regulation is by and large an instrument of "soft law," it does add substantial complexity and uncertainty to security reviews performed at the Member State level. It will also put additional pressure on Member States to consider a broader range of security interests, which is likely to facilitate lobbying efforts from other stakeholders taking interest in a transaction. From a practical point of view, the new EU Regulation establishes an automatic information exchange system between all Member States on notified transactions. So far, Member States are taking diverse approaches, with, for example, Germany only notifying transactions which will face an in-depth review, while other Member States are informing the network of all notiﬁed deals. Investors should make sure that a comprehensive multijurisdictional FDI assessment is carried out in transactions involving potentially strategic sectors and a variety of jurisdictions where the target business operates.
Note that now, after Brexit, the UK is a third country, so UK investments into the EU are no longer "intra-EU investments" and may not become subject to screening of foreign investments or any assessment under the EU cooperation mechanism.
WHITE PAPER ON FOREIGN-SUBSIDIZED COMPANIES
While the EU Screening Regulation has just entered into force, the EU is already floating ideas on the introduction of new tools to control the acquisitions and activities of foreign-subsidized companies in the EU. In June 2020, the EC released its "White Paper on levelling the playing field as regards foreign subsidiaries."
With its white paper, the EC is seeking views on three tools to control the acquisitions and activities of foreign-subsidized companies in the EU. In particular, the white paper contemplates the following tools:
- A general ex post control mechanism to review distortions of competition through foreign subsidiaries
- A mandatory ex ante notification mechanism that would allow the EC to review foreign- subsidized acquisitions, including certain minority investments
- The possibility to exclude bidders that have received distortive foreign subsidies from public contracts tendered by the EU and Member State authorities
These proposed tools would sit somewhere in between merger control/antitrust, trade law and FDI control. The EC considers the tools to close a perceived enforcement gap in case of foreign subsidies, and to be complementary to the existing instruments.
The second tool—a mandatory ex ante notification mechanism of foreign-subsidized investments at the EU level—could in particular result in procedural overlaps with EU or national merger control and national FDI reviews. Where FDI constitutes an acquisition that is facilitated by a foreign subsidy, while also raising concerns with regard to security and public order, the new tool would result in parallel procedures. Such a foreign-backed acquisition would have to be notified to several relevant public authorities under both the FDI screening mechanisms and the possible new tool, considerably adding to the administrative burden. Foreign investors should anticipate the additional administrative burden of this additional mandatory notification combined with a potential merger control filing at the EU or Member State level.
Overall, the white paper is extremely far-reaching and—if adopted into legislation—would be a significant change for foreign investors into the EU. For the time being, these are just "ideas" on the horizon, and would likely be the subject of significant debate during the legislative process between the European Parliament and the Council. However, the proposal is another manifestation of growing protectionism, whether for national security or wider economic or geo-political reasons, and has received positive initial feedback from the Member States.
EU GUIDANCE ON PROTECTING STRATEGIC INTERESTS
In the meantime, the EC has resorted to "soft law" in an attempt to align investment screening throughout the EU. On March 25, 2020, the EC issued a Guidance Paper focusing on the protection of health-related assets in the face of the COVID-19 pandemic.
In particular, the EC warned the Member States of an "increased risk of attempts to acquire healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance, developing vaccines) via foreign direct investment." The Guidance Paper called on the Member States to make full use of any existing FDI screening mechanism, or to set up a full-fledged regime, capable of addressing risks to critical health infrastructures and supply of critical inputs.
While not binding for the Member States, the EC's guidance has not gone unnoticed. For example, within months of the Guidance Paper, specific activities in the medical sector have been added to the list of critical activities to undergo an FDI screening, notably in Germany, France, Italy, Spain, Austria, Hungary, Poland and Slovenia.
While the COVID-19 pandemic is a very particular situation calling for effective responses, the successful use of the Guidance Paper may serve as a blueprint for future concerted reactions to the investment climate—even without a standalone FDI review at the EU level.
PART 2: FDI AT THE MEMBER STATE LEVEL
Only about half of EU Member States have a screening regime. The regimes differ widely in terms of:
- Whether they provide for mandatory or voluntary filings, or ex officio intervention rights of the government
- Where filing requirements exist, whether there is a threshold related to the percent of voting rights or shares acquired, a turnover-based threshold, or another type of trigger
- Which industries are viewed as "critical" and may hence trigger a filing obligation and/or government intervention
- Whether the government has a right to intervene below the thresholds
- Whether they are suspensory (i.e., provide for a standstill obligation during the review)
- Whether they cover only investments by non-EU/EFTA-based investors or by any non-domestic investor
- The duration and structure of the proceedings, including whether clearance subject to remedies (e.g., compliance or hold separate commitments) is possible
Some regimes are truly hybrid, and the answer to these questions depends on the target's activities and other factors.
OVERVIEW OF REGIMES WITH/WITHOUT STANDSTILL OBLIGATION
There is broad divergence among the regimes regarding whether they provide for mandatory filings, voluntary filings, ex officio investigations or a mixture thereof. The German regime is illustrative—as explained in the chapter "Germany ," it provides for a mandatory filing requirement based on the target's activities, the size of the stake (voting rights) acquired and the "nationality" of the investor.
If these thresholds are not met, the government may still intervene, and investors may make voluntary filings, under certain circumstances. (At a minimum, there needs to be a direct or indirect acquisition of at least 25 percent of the voting rights of a German company by non-EU/EFTA-based investors.) The regime provides effectively for a standstill obligation where filings are mandatory.
COVERAGE OF INVESTMENTS BY NON-EU INVESTORS ONLY?
The various national regimes also differ in terms of whether they only cover investments by non-EU-based investors or any non-domestic acquirer. Some regimes are, again, hybrid: For example, the German regime scrutinizes investments by any non-domestic acquirer in the defense sector (as of a 10 percent stake), while in all other sectors, investments by EU or EFTA-based acquirers are permitted by law (although the government takes a very broad view as to whether an investor is non- EU/EFTA-based).
The French regime captures acquisitions of control by any non-French investors, but minority acquisitions only if the investor is non-EU/EEA-based (as of 25 percent of voting rights for all kinds of entities and, until the end of 2020, as of 10 percent of voting rights with respect to listed companies).
INDUSTRIES SUBJECT TO SCRUTINY
We are seeing an increased convergence in views across the US, Europe and elsewhere that so-called "sensitive" sectors need to be protected in a more or less coherent way from what is being described in the US as "adversarial capital." This trend is displayed through both the lowering of thresholds that trigger FDI reviews and an expansion of what qualifies as a sensitive sector for purposes of FDI reviews, export controls and international trade compliance.
Sensitive sectors are no longer limited to the traditional sectors associated with national security at a macro level (defense, energy or telecom). They are now expanding to biotechnologies, hi-tech, new critical technologies such as artificial intelligence or 3D printings, and data-driven activities.
Moreover, the COVID-19 pandemic brought FDI into sharper focus and accelerated movement on a national level across Europe and elsewhere around the world. Governments were concerned about foreign investors taking opportunistic advantage of European companies being in distress, and of course, the crisis led the governments to add the healthcare sector to the sensitive industries.
Finally, 5G technology has become a source of concern for certain Member States that had issued specific rules to ensure FDI screening in relation to 5G networks/equipment. In Italy, the government's "Golden Power" pre-clearance process is mandatory for contracts or agreements with non-EU persons relating to the supply of 5G technology infrastructure, components and services. France introduced a specific ad hoc authorization process for operating 5G technology in French territory.
In Germany, the Federal Network Agency has published a security catalog for telecoms and data processing, highlighting the critical nature of 5G networks, and the Federal Government is contemplating supplementing the technical security check for 5G networks with a political review process.
Some national FDI regimes determine filing requirements or intervention rights based solely on the size of the stake acquired, and cover share deals and asset deals alike; others rely on different or additional factors, such as the target's revenues or other measures of its significance.
For example, in the healthcare sector, the German regime provides for a filing obligation for an investment of at least 10 percent by a non-EU/EFTA-based acquirer, inter alia, into German:
- Hospitals handling 30,000 or more cases/year
- Production facilities for directly life-saving medical products as of an annual turnover of €9.068 million
- Production facilities and warehouses for other pharmaceuticals as well as pharmacies as of 4.65 million packages put on the market per year
- Diagnostic and therapeutic laboratories as of 1.5 million orders/year
Prior approval is required in Austria only if the target company has an annual revenue of €700,000 or more.
INTERVENTIONS OUTSIDE THE FORMAL SCOPE
Triggered by the COVID-19 pandemic, the German Federal Ministry for Economic Affairs and Energy announced in June 2020 that the state-owned Kreditanstalt für Wiederaufbau (KfW) will acquire a 23 percent interest in CureVac, a biopharmaceutical company whose focus is on developing vaccines for infectious diseases like COVID-19 and drugs to treat cancer and rare diseases, in order to avoid its potential acquisition by any foreign investor.
Similarly, in July 2018, the German Federal Government had decided to prevent the acquisition of a 20 percent stake in the power grid operator 50Hertz by a Chinese investor by arranging for an investment by KfW (because it did not have jurisdiction to block the deal under the then-pertinent FDI regime). The German Federal Government officially confirmed that the acquisition by KfW was aimed at protecting critical infrastructure for energy supply in Germany.
DURATION OF PROCEEDINGS (INCLUDING SCOPE FOR EXTENSIONS)
The duration of proceedings differs widely between jurisdictions. Generally, the process takes several months, and many feature a two-phase process (initial review period followed by in-depth review) and provide for stop-the-clock mechanisms, such as suspension based on information request, or negotiation of mitigation requirements.
POSSIBLE OUTCOMES OF PROCEEDINGS
Blocking decisions on the grounds of national security concerns remains an exception in most Member States. Issuing a formal veto to a potential foreign investor may leave the target business without a new investor as illustrated by the recent Photonis transaction in France. In March 2020, the French Minister of the Economy issued an informal objection to US company Teledyne Technologies Inc.'s contemplated investment in Photonis, a French producer and supplier of light intensifier tubes using digital technology with military applications. Teledyne has finally decided to withdraw its offer.
Clearance with "remedies" (mitigation agreements) is becoming customary in an increasing number of Member States. Remedies generally include maintaining sufficient local resources related to the sensitive activities, restrictions on the use of intellectual property rights or on the governance of the target company, mandatory continuation of sensitive contracts to ensure continued services, appointing an authorized security officer within the target company and reporting obligations, etc. In extreme cases, national authorities may also impose mandatory disposal of sensitive activities to an approved acquirer.
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