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Diverse foreign investment landscape presents challenges for dealmakers

New foreign investment (FI) screening regimes continue to appear and existing rules are expanding in scope. While in some jurisdictions intervention rates are high, overall most deals subject to FI review are cleared without remedies. Dealmakers are becoming increasingly attuned to the risks and challenges that FI reviews pose to their deals around the world.

The foreign investment landscape – a mixed picture

Overall, across the globe, more deals are subject to FI review. We have seen upticks in the number of notifications, for example, in the U.S. But elsewhere, such as Australia, filing numbers are down on the previous year.

This likely reflects a more subdued M&A market. It might also indicate that parties are growing more familiar with the scope of FI regimes.

But this does not appear to be the case across the board. In each of France, Italy and Spain, over half of notifications submitted were deemed out of scope. This suggests continued uncertainty about the reach of these regimes. In Spain, however, we are now seeing fewer requests for confirmation of whether the FI rules apply – perhaps a sign that this may be changing.

FI intervention levels also present a diverse picture.

In some jurisdictions, FI concerns result in prohibition or conditions/remedies in a high proportion of deals – 53% in France and 18% in the U.S. In others, FI regulators intervened in no, or very few, transactions. In five of the jurisdictions we analysed (including the UK, Germany, Canada) over 96% of deals notified were cleared without remedies.

In terms of timings, the majority of reviews are completed within three months. However, where deals are complex and raise substantive issues, review periods are likely to be significantly longer. In the UK, for example, an in-depth review resulting in intervention takes on average 146 days.

Chinese investment drew attention from many FI regulators, although investors from the EU, UK and U.S. also raised concerns in some deals. Italy blocked French group Safran’s proposed acquisition of a Collins Aerospace business. Already in 2024 it has imposed conditions on the sale of Telecom Italia’s fixed line network to U.S. PE fund KKR. France prohibited the purchase of nuclear parts businesses by a U.S.-based acquirer and the UK government imposed conditions in deals involving investment by U.S. PE firms. 

There is, however, some convergence in the sectors affected by FI intervention across jurisdictions. They include defence, energy, semiconductors, mining and technology. This will help parties pinpoint where concerns may arise.

All these features contribute to a complex environment for dealmakers. Looking ahead, the current geopolitical climate means that FI reviews will continue to be a significant hurdle in terms of administrative burden and potential execution risk. As we discuss in our article ‘Heightened risk of antitrust and foreign investment intervention met with robust deal provisions’, planning for FI screening and allocating risk appropriately is crucial.

The UK regime is maturing

In FY22/23, the UK intervened in 15 transactions, blocking (or ordering the unwinding of) five, and imposing conditions in ten. This amounted to an intervention rate of only 2%. So far in FY23/24, intervention rates are looking much lower. Only three deals have been subject to conditions (most recently e&’s investment in Vodafone in January 2024) and there have been no prohibitions.

The UK government is consulting on possible reforms to the regime which, if adopted, could reduce the burden on dealmakers.

Notably, the government is seeking feedback on possible exemptions for internal reorganisations and situations involving distressed businesses. It is also looking to update and clarify certain mandatory notification sectors, many of which have been criticised for being overly complex to apply in practice. There is, however, a residual risk that this exercise will result in expanding the scope of the regime into new areas – adding generative AI to the current definition of AI being a prime example.

Proliferation and development of foreign investment regimes continue

The UK is not alone in updating its FI rules. FI regimes continue to be established and amended across the globe.

During 2023 Canada, Japan and Singapore each took steps to broaden the reach of their regimes. U.S. Congress has put forward proposals to expand the jurisdiction of CFIUS. In the EU, Dutch, Belgian and Slovakian FI screening regimes came into force last year and the Spanish rules were clarified. A new Irish FI regime is imminent, and it is likely that the scope of the German regime will be fine-tuned in the course of 2024.

Looking ahead, the European Commission (EC)'s proposed reform of FI screening, published in January 2024, will have significant implications for dealmakers in the EU.

The EC plans to oblige all Member States to introduce a screening regime (currently 22 of 27 have one, up from 18 in 2022) and adhere to set minimum standards. Cooperation and information exchange between Member States will be strengthened. Existing national screening mechanisms will likely need significant amendment to meet these requirements.

While on its face this means additional hurdles for dealmakers, in time, a greater degree of harmonisation of rules and procedures across the EU will be welcome for parties to cross-border deals.

Full harmonisation across the bloc is, however, not yet on the cards. Responsibility for FI review of acquisitions will remain exclusively with the Member States. We are therefore still some distance from a “one-stop shop” system similar to EU merger control.

Outbound investment controls on the horizon

Last year, a number of jurisdictions progressed plans to introduce outbound investment control regimes.

In the summer, the Biden Administration took steps to regulate certain types of U.S. outbound investment in semiconductors and microelectronics, quantum information technologies and AI where the investment might compromise U.S. national security.

The EU followed suit and announced it is considering an outbound investment screening mechanism. Early indications suggest it will focus on advanced semiconductors, AI, quantum technologies and biotechnologies.

The UK, as part of the Atlantic Declaration, has committed to evaluating the best way to address the national security risks associated with outbound investment. We expect further details in the coming months.

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