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
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
Since the adoption of the Golden Power Law, the Italian government has exercised its special powers only in relation to 9 golden power procedures, out of more than 50 known filings.
The Italian government, which is led by the President of the Chamber of Ministries, together with any relevant ministry (such as the Defense Ministry, the Ministry of Transport, the Ministry of Communications, etc.), reviews acquisitions of stakes in Italian companies that (i) carry out "strategic activities" in the defense and national security sector and (ii) hold "assets with strategic relevance" in the energy, transport, communication and high-tech sectors.
Italian law provisions on the so-called "golden power" procedure were adopted in March 2012 and were recently amended by a law decree adopted in October 2017 (the Golden Power Law). The amendment provides for new measures to fill in some gaps identified in the application of the existing legislation, as well as to strengthen the existing law. The rules aim to protect Italian companies' technology and technical, industrial and commercial know-how.
FILING OBLIGATION AND CONSEQUENCES IN THE EVENT OF BREACH
The filing is mandatory and the notification shall be made by the company or by the seller/purchaser, respectively, in relation to (i) any relevant resolutions adopted by the target company, and (ii) any acquisition of interests in a target company by a foreign investor, to the extent that the target company exercises any strategic activity in the defense and national security sector or holds any strategic asset in the energy, transport, communication and high-tech sectors. Moreover, any purchaser of equity interests in a listed target company active in the defense and national security sector must notify the acquisition if it exceeds the threshold of 2, 3, 5, 10, 20 and 25 percent ownership in the share capital of the listed target company.
The breach of the notification obligation can lead the purchaser to be held liable for a general monetary sanction equal to an amount up to twice the value of the transaction and, in any case, not less than one percent of the turnover realized by the companies involved in the transaction.
TYPES OF DEALS REVIEWED
The Italian national rules specify the industries and sectors having a national interest and the need to be protected from predatory acquisitions by foreign investors. In particular, the Italian government has jurisdiction to review any transaction that (i) in the defense and national security sectors, may harm or constitute a material threat to the Italian government's essential interests in the defense and national security of Italy; and (ii) in the energy, transportation, communication and high-tech sectors, may harm or constitute a material threat to the fundamental interests of Italy relating to the security and operation of networks and systems, to the continuity of supplies and to the preservation of high-tech know-how. In this context, the types of transactions that the Italian government can review are various in nature and include deals structured as stock or asset purchases, mergers, joint ventures in which the foreign partner is investing in an Italian business, etc., as well as transactions or corporate actions, which may have the effect of changing the target company's ownership structure or purpose, or winding up the target company's business.
SCOPE OF THE REVIEW
Based on the publicly known golden power reviews completed since the adoption of the Italian Golden Power Law (from 2012 onwards), the Italian government mainly focused its attention on transactions leading to: (i) changes in governance and internal policies that could be capable of harming national interests; (ii) transfer of headquarters outside of the Italian territory and total or partial delocalization of the manufacturing activities; and (iii) transfer of know-how outside of Italy and for the benefit of foreign investors, mainly in relation to companies operating in the infrastructure (energy, transportation and TLCs) and high-tech sectors.
The Italian government enjoys broad power to impose restrictions (i.e., the power to veto the resolutions or impose special conditions); however, it appears that the main measures and special conditions that have so far been imposed by the Italian government have included: (i) control measures, in particular with reference to corporate governance and composition of the management bodies of the target companies; (ii) safety measures, such as the approval of safety contingency plans to monitor strategic assets and operations as well as the appointment of a chief safety officer approved by the Italian government; (iii) monitoring measures, such as the establishment of independent committees tasked with the duty to monitor the target's compliance with the above measures imposed by the Italian government; and (iv) other management, organizational and technical measures aimed at preserving the confidentiality of information and the technological know-how of the target.
TRENDS IN THE REVIEW PROCESS
On the basis of public documentation made available by the Italian Government, as well as of our direct experience in assisting companies with golden power reviews, since the adoption of the Golden Power Law, a number of golden power reviews have been activated and completed before the Italian government. Among these, it appears that the Italian government exercised its special powers only in relation to 9 golden power procedures, out of approximately 50 known filings, in relation to the sectors of defense and national security, transport and communications.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
Foreign investors willing to enter into a transaction in relation to any Italian company operating in the defense or national security sector or holding assets in the energy, transport, communication and high-tech sectors, should evaluate the possibility that a golden power filing is required and should carry out the relevant analysis before entering into any transaction. Moreover, it is crucial for foreign investors to understand and consider the risk that, in the event that a transaction falls within the scope of the Golden Power Law, it may be possible that the Italian government will veto or impose certain measures or conditions to the completion of the transaction.
REVIEW PROCESS TIMELINE
The filing shall occur within 10 days after the acquisition (typically after signing) or adoption of the relevant resolution, as applicable. Upon receipt of the filing, a standstill period of 15 days begins during which the Italian government carries out the review of the envisaged investment or resolution, and any voting right attached to the acquired interests, are frozen until the date on which the Italian government decides whether to exercise its powers.
In the event that the Italian government requests additional information, the 15-day term may be extended by the Italian government only once and for a maximum period of 10 additional days.
If the Italian government does not exercise its powers before the end of the standstill period (as possibly extended), the transaction or the resolution may be legitimately implemented, as the procedure can be considered completed through a no objection (silenzio assenso) of the Italian government after the relevant term has lapsed.
OUTCOMES
- The majority of publicly known notified deals have been approved (i.e., no objection)
- Since the adoption of the Golden Power Law (2012), to date the Italian Government has exercised its powers only to apply specific measures or conditions to the transactions, and to our knowledge, no transaction has been vetoed
- The review process by the Italian Government can last up to a maximum of 25 business days from the filing
- The notification obligation applies only to acquisitions of stakes in Italian companies carrying out "strategic activities" in the defense and national security sector and that hold "assets with strategic relevance" in the energy, transport, communication and high-tech sectors
