Foreign investment screening landscape grows more complex
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That foreign investment screening adds a layer of complexity to M&A processes is nothing new. But exactly how complex has it become as the number of regimes grows, the rules evolve – and enforcement levels rise?
1. FDI regimes proliferate in Europe
The European Commission (EC) continues to encourage member states to adopt FDI screening regimes to protect the “collective security” of the EU.
In response, 21 of the 27 member states now have FDI frameworks in place, while several others are in the process of revising their rules. Luxembourg and Estonia have become the latest EU countries to implement new rules, with others including Sweden and Ireland set to follow.
With the EU’s FDI Regulation ensuring the EC and member states are informed of all FDI notifications made within the bloc, we are seeing merging parties continue to submit precautionary filings even where their deals on the surface do not require it. Given that authorities across the EU share information, a consistent approach to filing is critical. We are seeing increased coordination between authorities, who are questioning why certain deals have been notified in other member states but not to them. A consistent regulatory filing strategy is therefore more important now than ever.
FDI regimes across Europe and beyond are increasingly focusing on source of funds, and investigating limited partner rights to obtain information and manage underlying investments. With this focus on structures and governance increasing, we see an inevitable trend towards longer and more complex reviews where sensitive assets are involved. Authorities in the UK and U.S. are also flexing their muscles.
2. Energy assets in focus for CFIUS
In the U.S., the Committee on Foreign Investment in the United States (CFIUS) forced a tech company with an R&D facility in China to divest its majority stake in a Hawaiian solar storage business.
CFIUS last year published its first enforcement and penalty guidelines (previously the committee was considered a “black box”), which revealed that failing to file a mandatory notification, or submitting incorrect information, can result in fines of USD250,000 or equivalent to the value of the deal, whichever is greater.
In September, Assistant Secretary to the Treasury for Investment Security Paul Rosen underlined CFIUS’s authority to take enforcement actions and issue penalties to address cases of non-compliance, including failure to comply with mitigation agreements.
CFIUS reviewed a record 440 notices and declarations in 2022, despite a significant decrease in new foreign direct investment in the U.S.
CFIUS is increasingly monitoring non-notifiable deals and proactively contacting parties, while the Biden administration has also expanded the range of national security considerations CFIUS must consider when evaluating inbound investments. These include the impact of the deal on the resilience of critical U.S. supply chains, U.S. technological leadership, industry investment trends, cyber risks and threats to U.S. persons’ sensitive data.
3. UK NSIA takes shape
With the UK National Security and Investment Act (NSIA) now having been in force for some time, it is possible to draw conclusions about its application.
a. We are continuing to see parties challenged by a lack of clarity over exactly which of the 17 “sensitive” sectors trigger a mandatory notification.
b. Minority rights require careful assessment. A mandatory filing may not be necessary where the investor acquires shareholder or voting rights of 25% or less, or where those rights are contractual (e.g. veto rights in a shareholders’ agreement). However, where minority rights confer “material influence” over the target, the government’s Investment Security Unit (ISU) may call the deal in.
c. Internal reorganisations and continuation funds/fund-to-fund deals may be subject to a suspensory mandatory notification, even where the ultimate beneficial owner doesn’t change.
d. The government is not required to share with the parties details of exactly where its national security concerns lie, and although summaries of final orders on called-in deals are made public, information on remedies is limited, making risk assessment based on precedent uncertain.
e. The ISU can call in acquisitions of energy infrastructure even where the asset itself does not exist (i.e. based on deals involving development rights or the award of licences).
While overall there are fewer notifications under the NSIA than expected, the number of deals subject to conditions has been sizeable (more than 17 so far). Private equity buyers are not escaping scrutiny, and in fact there are examples of even UK private equity investors having their deals subjected to in-depth reviews and conditions being imposed.
As authorities increasingly seek to establish the identity of funds’ limited partners – and even scrutinise passive investments involving LPs from countries of concern – sponsors must factor foreign investment risk analysis into their deal processes.
Several countries have imposed conditions on even “friendly country” investors where critical infrastructure or sensitive assets are involved, requiring information barriers to be put in place, assets to be kept in-country and R&D to be maintained.
To ensure a smooth deal process FDI filing requirements and conditionality should be considered on all deals, with the potential for conditions being imposed where there are sensitive activities factored into the deal analysis.