National security reviews 2018: A global perspective
What's inside
A guide to navigating the rules for investing in countries that require national security approval
Navigating national security reviews worldwide
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.
United States
Deals are generally approved, but a new law increases the number and types of deals reviewed.
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
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
China is attempting to implement a more structured and comprehensive system to keep a closer eye on economic deals that might have security implications
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
French law does not provide for any materiality threshold— even transactions of modest size can be captured for review.
The Bureau Multicom 2, which is located within the Ministry of Economy's (MoE) Treasury Department, conducts the review. The process generally involves other relevant ministries and administrations depending on the areas at stake. Since January 2016, a commissioner of strategic information and economic security (attached to the MoE) also assists the Treasury when coordinating inter-ministerial consultations.
WHO FILES
The foreign investor files a mandatory request for prior authorization, which must include detailed information on the investor and its shareholders, the target, the pre- and post-closing structures, financial terms of the transaction and the sensitive activities at stake.
TYPES OF DEALS REVIEWED
Transactions reviewed under the French Monetary and Financial Code (MFC) include:
Direct or indirect acquisition by a foreign investor of the control of an undertaking whose registered office is established in France
Acquisition by a foreign investor of all or part of a branch of activity of an undertaking whose registered office is established in France
For non-EU investors only, acquisition of more than 33.33 percent in the capital or voting rights of an undertaking whose registered office is established in France. French law does not provide for any materiality threshold—even transactions of modest size can be captured for review.
The review only applies to foreign investments made in sensitive activities listed in the code. For EU-based investors, these activities include defense- and security-related activities and dual-use technologies. For non-EU investors, additional activities are captured (e.g., gambling).
Since May 2014, the scope of activities concerned by national security reviews has been significantly expanded for all foreign investors (whether EU or non-EU) to protect "activities relating to equipment, products or services, including those relating to safety and the proper functioning of facilities and equipment, essential to guarantee the French national interests in terms of public policy, public security or national defense" in seven new sectors: (1) electricity, gas, oil or other source of energy;
(2) water supply; (3) transportation networks and services; (4) electronic communication networks and services; (5) an installation, facility or structure of vital importance; and (6) protection of the public health.
SCOPE OF THE REVIEW
MoE assesses whether the transaction may jeopardize public order, public safety or national security based on the information the investor provided in its submission. Follow-up Q&A and meetings with MoE and other ministries involved are customary. The seller and the target company may also be requested to cooperate with the review.
TRENDS IN THE REVIEW PROCESS
In 2017, following several crossborder deals involving French flagships acquired by foreign investors, French National Assembly created a Parliamentary Enquiry Committee to investigate decisions made by the French State and how French national security interests are protected on such occasions. This puts an increased pressure on the services conducting and coordinating the review process to ensure that they have completed a thorough review of both the activities at stake and the profile and intentions of the foreign investors. Investors, as well as public opinion, also regularly complain about the lack of general public statistics in relation to the French review process (see below potential changes in relation to the PACTE Law). All relevant administrations are involved in the review process, and the investor and its counsels, as well as the target company, may be convened to meetings and Q&A sessions in relation to the envisaged transactions. Delineating and retaining strategic activities, jobs and resources in France have also become an increasing strategic concern in the review process, as well as in relation to clearance commitments that may be required on a foreign investor.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
It is critical for foreign investors to anticipate foreign investment control issues ahead of planning and negotiating transactions.
The responsibility for filing lies primarily on the buyer and, if the transaction falls under MFC regulation, prior clearance by MoE should be a condition of the deal. The buyer may also seek a ruling from MoE to confirm whether a contemplated transaction falls within the scope of the MFC.
The seller's cooperation in the preparation and review of the filing is important. If the parties expect that conditions or undertakings will be imposed, the buyer should anticipate discussions with MoE and other interested ministries that may impact the timeline for clearance. In addition, the buyer should consider including a break-up fee or opt-out clause in the transaction documentation to protect its interests if the conditions imposed on the transaction are too burdensome. Preliminary informal contacts with French authorities may also be advisable.
REVIEW PROCESS TIMELINE
MoE must make its decision within two months of its receipt of a complete authorization request.
Longer periods (e.g., three or four months) should be anticipated if MoE requests supplemental information and considers imposing conditions to clear the case.
2018 UPDATE HIGHLIGHTS
The French Government is contemplating amending the French legal framework applicable to national security reviews in the context of the so-called draft PACTE Law. The list of sensitive sectors subject to prior authorization is likely to be expanded to new strategic sectors. The PACTE Law will also amend the sanctions mechanism in case of infringement to the prior approval obligations. The proposed reform aims at giving the French Government a larger palette of possible sanctions it can adapt and leverage depending on the specific situations. Notably, if a transaction has been implemented without prior authorization, the Ministry of Economy (MoE) will have the power to order the investor to amend the transaction or to restore the previous pre-transaction situation
at its own expense. The MoE may also suspend the voting rights of the investor or suspend, restrict or prohibit temporarily the free disposal of all or part of the assets related to the sensitive activities at stake. Similar sanctions will be imposed if an investor did not comply with the clearance conditions imposed by the MoE including divestment of all or part of the sensitive activities at stake. Monetary sanctions in case of infringement to Foreign Investments Control obligations will be increased. The Parliament is also likely to be involved in the process through a new committee in charge of economic security. Finally, the PACTE LAW also provides for the MoE to issue yearly public general statistics (on a no-name basis) in relation to French national security reviews.
OUTCOMES
Once the review is completed, the MoE may:
- Authorize the transaction without condition (rather rare)
- Authorize the transaction subject to mitigating conditions/undertakings aimed at ensuring that the transaction will not adversely affect public order, public safety or national security (most of the cases when the MoE decides to review the investment)
- Refuse to authorize the transaction if adverse effects cannot be remedied (very rare)
Mitigating conditions/undertakings may pertain to the investor's preservation of the continuity of the target's activities and the security of its supply of products or services (for example, maintaining existing contracts with public entities, maintaining R&D capabilities and production in France). They may also include corporate requirements such as ensuring that sensitive activities are carried out by a French legal entity, and/or imposing information-access/governance requirements involving French authorities.
MoE review is a mandatory process. Under the current legal framework, if a transaction subject to review is closed without MoE's prior approval, MoE may order the investor(s) not to proceed with the transaction, to amend the terms of the transaction or to unwind the transaction at their own expense (potentially imposing a financial penalty of up to twice the amount of the original investment). Moreover, contractual agreements in breach of the mandatory process are deemed null and void. Violation of foreign investment rules may also give rise to criminal sanctions of up to five years of imprisonment and a fine of up to twice the amount of the investment. This sanctions legal framework is, however, being reviewed by French Parliament and will likely be modified by the upcoming PACTE LAW that is expected to be adopted during the first quarter of 2019.
