Deals are generally approved, but a new law increases the number and types of deals reviewed.
As governments in various countries tighten their grip on national security reviews of foreign direct investment, the need for better assessment and calibration of the associated regulatory risk in cross-border transactions is greater than ever before
Nowhere is this trend more evident than in the United States, with the August passage of the Foreign Investment Risk Review Modernization Act (FIRRMA), which expanded the range of transactions that are subject to review by the Committee on Foreign Investment in the United States (CFIUS), and the more recent release of a pilot program under FIRRMA that instituted mandatory declarations for a broad range of transactions and put in place penalties—up to the full value of the transaction—for failure to comply. With CFIUS set to clamp down still further in coming months, CFIUS compliance is rapidly moving to the very top of the due diligence list for cross-border transactions involving US businesses.
The US is far from alone. As you will read in the pages that follow, the European Union, United Kingdom, Germany, France, China and other nations are also incrementally ratcheting up their reviews. In the UK, for instance, the government is proposing radical new legislation to allow it to intervene in cases that raise potential national security concerns. The UK government itself estimates that, under the new law, approximately 50 cases a year may end up with some form of remedy to address such concerns. In France, the new PACTE law is likely to strengthen the sanctions mechanism, extend the list of sectors subject to review and introduce some transparency into the process through annual reporting on a no-name basis of reviewed cases.
The pages that follow offer a common-sense guide to investing in major jurisdictions, a snapshot of recent regulatory changes in each, and guidance on making sound investment decisions in a time fraught with regulatory uncertainty.
Deals are generally approved, but a new law increases the number and types of deals reviewed.
While few deals are challenged in Canada, national security reviews are becoming more common and complex
Proposed European foreign direct investment regulation— a first step toward harmonized European investment controls
Deals are generally not blocked in Finland.
New legislation has been proposed to expand the scope of French national security reviews, especially in the technology sector, and to strengthen the powers of French authorities to impose sanctions
Federal Ministry for Economic Affairs and Energy is enforcing a stricter regime for foreign direct investment reviews
Deals are generally not blocked by the Italian government. However, in connection with the clearance process, conditions may be imposed that can have a significant impact on the investment
New amendments potentially require foreign investors to disclose information about beneficiaries, beneficial owners and controlling persons as part of pre-clearance
National security interventions have, with one exception, involved defense considerations
Australia requires a wide variety of investments by foreign businesses to be reviewed and approved before completion
China is attempting to implement a more structured and comprehensive system to keep a closer eye on economic deals that might have security implications
Japan’s implementation of the 2017 amendments to FEFTA must be watched closely to see whether Japan will adopt a more aggressive stance
Proposed European foreign direct investment regulation—a first step toward harmonized European investment controls
Due to the significant increase of foreign direct investment (FDI) into European technology assets over the past 24 months, particularly from the People's Republic of China (PRC), there has been an increased call for the EU to take a more active role in scrutinizing investments.
Responding thereto, Jean-Claude Juncker, President of the European Commission, presented a proposal in September 2017 for an EU Regulation establishing a framework for the screening of foreign direct investments into the EU (Proposal or Draft Regulation). This Proposal aims at striking a balance between maintaining the EU's general openness to FDI and ensuring that the EU's essential interests are not undermined by precisely this openness. The Draft Regulation is currently expected to be adopted ahead of the elections of the European Parliament in May 2019.
KEY OBJECTIVES OF THE PROPOSAL
As of today, only 12 out of 28 Member States have national security review mechanisms in place, differing widely in scope and enforcement. This illustrates the lack of harmonization toward national security reviews within the EU and has cast doubts about the effectiveness of the EU's decentralized and fragmented system of monitoring FDI to respond adequately to new challenges in an increasingly protectionist environment.
Today's European mechanisms differ widely in scope (review of intra- or extra-EU FDI, differing screening thresholds, breadth of Proposed European foreign direct investment regulation— a first step toward harmonized European investment controls European Union By Tobias Heinrich, Mark Powell and Orion Berg sector coverage), design (preauthorization vs. ex post screening of FDI) and enforcement. The Draft Regulation falls short of introducing a single EU mechanism but aims to enhance cooperation on FDI screenings between the European Commission and Member States. At the same time, it intends to increase legal certainty and transparency within and among Member States.
PROPOSED SCOPE OF DRAFT REGULATION
The Draft Regulation seeks to establish a general framework for Member States and the European Commission for the review of foreign direct investments into the EU. If Member States decide to opt for legislative investment reviews, those will have to be brought in line with certain minimum standards laid out in the Proposal.
The key entering point to investment reviews will revolve around the criteria of "security and public order." While such terms stem from European law, they are only vaguely defined by the European Court of Justice. The Draft Proposal specifies the criteria by a non-exhaustive list of sector-specific assets and technologies to be taken into account when conducting a review, including inter alia:
The scope of investment reviews laid out in the Draft Regulation reveals conceptual and technical similarities with the latest amendments of the German Foreign Trade and Payments Act (AWV) in 2017 (see chapter on Germany). Additionally, the Proposal takes into account whether the acquirer is "controlled by the government of a third party, including through significant funding." The latter responds to increased volume of investments backed by state-owned enterprises and state-supported funding, in particular from the PRC.
NEW COMPETENCIES FOR THE EUROPEAN COMMISSION
One of the most significant changes to the existing national review mechanisms throughout the EU is the new role of the European Commission as anticipated by the Proposal. The Draft Regulation provides for a cooperation mechanism between the Member States and the Commission by virtue of which the latter shall be authorized to conduct investment reviews in a coordinating and supporting function. Accordingly, Member States will be required to inform the Commission and other Member States of any foreign direct investment undergoing the national review process simultaneously. This raises confidentiality concerns for the parties of a transaction, in particular when considering prefilings, which the Commission is seeking to actively address.
Going forward, the European Commission may review the respective investment in its own right and issue its opinion to the relevant Member State. Other Member States may also deliver comments to the reviewing Member State, though neither the Commission's opinion nor other Member States' comments will be binding, leaving the ultimate decision on the clearance of a transaction to the reviewing Member State.
Furthermore, the Draft Regulation introduces annual reporting obligations on the part of the Member States with respect to national security reviews on the basis of the information made available to them. This is intended to achieve transparency of national review proceedings through the EU, as most Member States do not provide publicly available information on the domestic review processes or the decisions taken by the relevant authorities.
Should the Commission qualify a transaction as likely to affect projects or programs with significant EU funding (e.g., Galileo, Copernicus, trans-European Networks, etc.), the relevant Member State must "take utmost account of the Commission's opinion and provide an explanation to the Commission in case its opinion is not followed." Yet, even in this context, the ultimate decision remains with the respective Member State.
In summary, the European Commission's role in the review process is generally limited to an advisory responsibility, falling short of the competencies of the Committee on Foreign Investment in the United States (CFIUS). This limited role has been addressed in the current legislative process by the European Economic and Social Committee (EESC) which in its report issued in April 2018 called for an extension of the powers of the Commission. In particular, the EESC proposed to expand the Commission's review competencies to such transactions having a crossborder impact on the whole EU or parts of it.
The implications of the Draft Regulation for existing national review mechanisms are expected to be mostly of a procedural nature. Member States retain the ultimate decision-making power and remain free to opt out of investment reviews entirely.
Given that Member States will be obligated to give the Commission's opinion and other Member States' comments due consideration, the time frames for national review procedures are likely to expand further. This is enhanced by the fact that under the Draft EU-Regulation, Member States will have to inform the Commission and other Member States of the transaction undergoing review within five working days following initiation of the review process. Opinions and comments would need to be submitted within another 25 working days. Should the Commission require additional information, it may request such information from the reviewing Member State and the 25-working-day period will start upon receipt of such information. Should another Member State issue comments before the Commission's opinion, it would trigger a restart of the 25-day-review period, which may significantly reduce predictability of transaction timetables.
A first public consultation on the Proposal took place during the European Parliament's International Trade Committee (INTA) meeting on November 22, 2017. After a number of technical briefings, INTA adopted its report on May 28, 2018 and simultaneously agreed to enter into inter-institutional (trilogue) negotiations as representative of the European Parliament. On June 13, 2018, the EU Member States' Permanent Representatives agreed on the Council's position on the proposed regulation and asked the Presidency to start negotiations with Parliament as soon as possible. A first trilogue meeting took place on July 10, 2018.
The European Parliament's response to the Draft Regulation focuses, inter alia, on the introduction of an Investment Screening Coordination Group as a second institutional coordination body.
The Draft Regulation could be adopted as early as spring 2019 (most likely ahead of the election of the European Parliament at the end of May 2019). It remains open whether the new EU framework would be immediately applicable as proposed in the draft EU Regulation or delayed by a transition period of 18 months, as currently suggested by the EU Council.
The new role of the European Commission, possibly an Investment Screening Coordination Group and other Member States, will add another layer of complexity to the review process—a testimony to the increasing significance of security reviews in the field of international M&A. Annual reporting obligations will contribute to reducing the current lack of transparency, and the cooperation mechanism should serve as an important step toward a unified approach throughout the EU. It remains to be seen whether the current proposal is an interim or a more definitive step in the course of harmonizing European investment controls.
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