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National security clampdown on foreign deals

Countries around the world have been increasingly focusing on national security reviews of foreign direct investments into their markets.

The three countries where national security reviews can potentially have a significant impact on transactions are China, the United States, and France.

Sectors that typically fall within the scope of national security reviews include oil, gas, electricity, water, transportation, electronic communications, and healthcare 


US: CFIUS continues to play a significant role

In the US, national security reviews of foreign direct investment are conducted by the Committee on Foreign Investment in the United States (CFIUS). CFIUS has jurisdiction to review any transaction that could result in control of a US business by a foreign person. Notably, "control" is defined broadly and can include many minority investments. Moreover, the types of transactions that can be reviewed by CFIUS are quite varied, including deals structured as stock or asset purchases, debt-to- equity conversions, foreign-foreign transactions where the target has US assets, private equity investments and joint ventures where the foreign partner is investing in an acquired or contributed US business. Unlike the French and Chinese regimes, the CFIUS statute and regulations do not specify what types of industries or activities are relevant to national security. This has provided CFIUS with substantial leeway to review transactions covering a wide variety of areas, including identity authentication, biometrics, information technology, energy, telecommunications, food safety, cyber security and healthcare, as well as industries with a more direct link to national security such as aerospace and defence. External issues unrelated to the structure of the transaction, such as the US business being located in close proximity to sensitive US government assets, can also pose substantial national security concerns. Accordingly, it is important to consider CFIUS issues in connection with any transaction involving foreign investment (direct or indirect) in a US business with a potential link to US national security. In recent years, there has been a significant broadening of the foreign investor base represented in CFIUS reviews, with greater activity from emerging markets, such as China, Japan, India, and the Middle East, and relatively less participation by more traditional European and Canadian investors. As a result, the risk factors CFIUS considers in its national security analysis have changed to reflect a broader pool of investors. A CFIUS review is ostensibly a voluntary process, but in some cases it is effectively mandatory e.g., acquisitions of cleared defence contractors or assets likely to qualify as critical infrastructure). CFIUS actively looks for transactions of interest that were not notified and will "invite" parties to submit a filing regarding transactions it would like to review. Where CFIUS has national security concerns, it can impose mitigation conditions that can have significant implications on the foreign investor's involvement with the US business or even ultimately lead to the need to divest the asset. Accordingly, it is critical to consider CFIUS issues in planning and negotiating transactions, including with respect to allocation of CFIUS-related risk.

industry sectors in China are likely to trigger national security reviews
Source: Ministry of Commerce, China


China: Full implications of national security review process not yet clear

China is looking to implement a national security review for foreign investors in a new law governing foreign investment. Since 2011, the Chinese Ministry of Commerce has subjected foreigners looking to invest in Chinese industries that could have an impact on national interest to reviews, however, this is based only on anecdotal evidence; nothing has been published. As a result, it remains unclear if the rules have had a material impact on foreign investment into China. This could now become enshrined in law. China has rejected several transactions on national security grounds. As a result, companies looking to invest in China should carefully consider national security review requirements. Under Chinese law, a foreign investment transaction may be subject to national security review following voluntary filings, referrals from other governmental agencies or reports from third parties. The Ministry of Commerce has also published a list of 57 industries in which national security review is likely to be triggered. Where the Chinese government has national security concerns about a transaction subject to review that was not approved, the parties could be subject to sanctions, including a requirement to divest the acquired Chinese assets. As of May 2015, foreign investors targeting assets in free trade zones are subject to more stringent national security reviews than for deals that lie outside them. Greenfield investments and investments into cultural and Internet businesses through offshore and other contractual arrangements are also more susceptible to national security reviews inside of those free trade zones. Due to enforcement uncertainties and the broad scope of captured industries, foreign investors interested in sensitive industries often schedule voluntary meetings with Ministry of Commerce officials to determine the national security review risk regarding a potential transaction before commencing the formal application processes.

acquisition of capital or voting rights by a non-EU investor will be subject to prior authorisation
Source: Ministry of Economy, France


France: Scope of its national security review process expanded

Following the acquisition of French engineering group Alstom by General Electric of the US last year, the French foreign investment regime was modified by the so-called "Montebourg decree" which significantly expanded the scope of industries for which M&A transactions may require authorisation by the French Ministry of the Economy. Among others, sectors that now fall within the scope of control include oil, gas, electricity and other energy production activities; water; transportation networks and services; electronic communication networks and services; and healthcare. The criteria for triggering the French control authority are somewhat subjective. In order to be subject to prior authorisation, the French company's products and services must be "material to secure the interests of France in terms of public order, public security or national defence" French law does not provide for any materiality threshold, however, meaning that even transactions of modest size can be captured. Accordingly, any transaction involving the foreign acquisition of a French business in one of the specified industries should be carefully screened to assess if prior authorisation is required. EU as well as non-EU investors can potentially be caught by the French foreign investment regime. Notably, the acquisition by a non-EU investor of 33.33 percent of the capital or voting rights of a company whose headquarter is located in France is also subject to prior authorisation (however this does not apply to EU investors ). When facing a review, foreign investors should consider how the duration of any review could impact the time frame of the transaction, as well as potential commitments (for example, obligation to maintain capacities and productions on the French territory, supply chain controls, government access requirements, etc...) that could be requested by French authorities as a condition of approving any deal. Foreign investors should anticipate potential discussions with administrative services in charge of public security and national defence. Failure to obtain an approval can have harsh consequences, including pecuniary sanctions of up to twice the value of the investment and the nullity of the transaction.


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