Introduction
Foreign direct investment (FDI) regulation has become an increasingly critical piece of the regulatory jigsaw in recent years. FDI flows have started to surge back to above pre-pandemic levels,[2] but we are also seeing a continuing trend towards greater protectionism and stricter enforcement, initially resulting from the unprecedented economic fallout of the covid-19 pandemic, followed swiftly by heightened geopolitical tensions. This means it is more important than ever before to consider the potential application of FDI rules to cross-border M&A from the outset. Many existing FDI screening regimes have been expanded in recent years and – particularly in the EU – a significant number of new regimes have been adopted.[3] It is critical that deal parties and their advisers identify as early as possible in the transaction planning process what investment screening issues may arise, how these might be addressed, and whether they may ultimately threaten the viability of the transaction.
The shift towards stricter scrutiny, both in terms of policy frameworks for screening inward foreign investment and the way in which they are applied, is well illustrated by a number of recent high-profile deals that have been blocked or unwound by FDI regulators (or abandoned following indications that clearance would not be obtained), including Kunlun/Grindr (US, 2019), Teledyne/Photonis (France, 2020), Mengniu Dairy/Lion Dairy and Drinks (Australia, 2020), China State Construction Engineering Corporation/Probuild (Australia, 2021) and Super Orange HK Holding Limited/Pulsic (UK, 2022). Even where FDI clearance is ultimately obtained, extensive commitments may be required to address national security concerns, and dealmakers should not underestimate the potential impact of the review and approval process.
Understanding the global trends at play, as well as staying on top of frequent and fast-moving changes in the FDI rules applicable in individual jurisdictions, is critical to navigating this increasingly fluid and uncertain environment for foreign investment. In this introductory chapter, we set out an overview of the key global trends, which are then explored in more detail in subsequent chapters of this guide. We highlight some notable examples of these trends in action in particular jurisdictions and offer practical guidance for investors seeking to minimise deal risk. In doing so, we emphasise the importance of recognising that the overall picture is one of significant structural change: although some amendments to individual FDI regimes directly related to the covid-19 pandemic or specific geopolitical tensions may ultimately prove to be temporary, the majority of recent amendments are permanent, and enhanced FDI scrutiny of transactions seems likely to continue longer term.
The evolving concept of ‘national security’
‘National security’ is well established as the pre-eminent public interest justification for state intervention in foreign investment. However, as explored further below and in more detail in Chapter 1, the scope of sectors and technologies considered by policymakers to fall within this concept in the context of FDI regulation has evolved in recent years to become much broader than simply military and defence interests. In many jurisdictions, FDI regulations now apply to transactions relating to critical infrastructure (including energy networks and ports), communications assets and advanced technology and data. A number of regimes potentially extend still further to acquisitions in other sectors that are considered key to critical supply chains or to keeping public life running smoothly, from airports to hospitals to food safety. Against the backdrop of the covid-19 pandemic, there has also been a particular focus recently on foreign investment in the healthcare sector, with increased scrutiny of transactions involving businesses deemed critical to the national public health response. This means that transactions in a very wide range of sectors may potentially be at risk of review, including those that perhaps at first sight do not immediately appear likely to give rise to concerns. Indeed, under the Japanese FDI regime, even ‘leatherworking’ has been identified as a ‘strategic sector’ for the purposes of FDI regulation.
This trend can be seen in practice in a number of recent government interventions under FDI rules. For example, the Committee on Foreign Investment in the United States (CFIUS) has intervened in transactions involving digital maps for the automotive industry (Navinfo/HERE Technologies (2017)) and digital apps (Beijing Kunlun Tech Co Ltd/Grindr LLC (2019)) and Beijing ByteDance Tech Co Ltd/Tik Tok (2020)), in light of concerns about foreign access to and storage of personal information. New powers to intervene in transactions on national security grounds in Australia were used in January 2021 to effectively prohibit a takeover of building contractor Probuild, in light of concerns that the proposed acquisition by state-owned China State Construction Engineering Company could give Chinese intelligence services access to information about Australian critical infrastructure.[4] In France, government ministers made it clear at a very early stage that they opposed the proposed acquisition of the French supermarket chain Carrefour by the Canadian company Couche-Tard on the ground of ‘food security’ and the deal was abandoned.
The broadening of the concept of ‘national security’ can make it increasingly difficult for investors to assess confidently the risk of intervention under FDI rules, especially given that – unsurprisingly – governments and FDI regulators tend not to clearly delineate or expressly define the concept in legislation or written guidance (beyond identifying a non-exhaustive list of potentially sensitive sectors where national security concerns may arise). However, it is notable in this regard that US President Biden issued an Executive Order on 15 September 2022 that provides formal direction – for the first time since CFIUS was established in 1975 – on priority national security factors to be considered when evaluating a transaction. The factors specified in the Executive Order are: (1) the effect of the transaction on the resilience of critical US supply chains that may have national security implications, including those outside of the defence industrial base; (2) the effect of the transaction on US technological leadership in areas affecting national security, specifying an extensive (and non-exhaustive) list including microelectronics, AI, biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies and elements of the agricultural industrial base that have implications for food security; (3) industry investment trends that may impact national security, such as multiple acquisitions in the same sector; (4) cybersecurity risks that threaten to impair national security; and (5) risks to US persons’ sensitive data, noting that data is an increasingly powerful tool for the surveillance, tracing, tracking and targeting of individuals or groups of individuals. It is generally understood that these factors were already being taken into account by CFIUS, but the issue of a formal order provides a helpful framework for investors to apply when assessing the likelihood that a transaction will attract particular scrutiny – both specifically under CFIUS regulations and also more generally in other major jurisdictions where FDI regulators are likely to take a similar approach.
In practice, it is arguable that the concept of ‘national security’ as the basis for intervention pursuant to FDI regulation is becoming more akin to a broader notion of ‘national interest’. However, only a handful of developed countries – most notably Australia, France and Canada – have formally opted for a wider ‘public interest’ test for government intervention in foreign investment; in the majority of jurisdictions the focus remains on ‘national security’, albeit broadly interpreted and not usually clearly delineated or expressly defined in legislation. Indeed, significant reforms that took effect in Australia from 1 January 2021 have resulted in an express renewed focus on sensitive ‘national security-related’ businesses under the Australian FDI regime. Similarly, in the context of the passage of the UK National Security and Investment Act 2021 through the parliamentary approval process, the UK government expressly rejected calls for the new regime (which came into force on 4 January 2022) to be used to justify intervention in transactions on broader ‘national interest’ grounds concerning industrial policy or protection of jobs in the United Kingdom.
A further related trend is an increased political focus on the impact of consolidation of international value chains where this is perceived to work against the interests of countries that have nurtured the targeted industries (in particular in advanced manufacturing, research-intensive and technology sectors). However, the real concern here is often not the implications for ‘national security’ (even broadly defined), but rather the intentions of acquirers with rationalisation and relocation of value-adding activities in mind. In such cases, it may be possible to put forward remedies to address these concerns outside the formal FDI (or public interest merger control) regime. This may take the form of voluntary undertakings or non-binding pledges on issues such as maintaining domestic investment or employment (as illustrated by Canyon Bridge/Imagination (2017, UK)),[5] or careful structuring of the transaction in a way that alleviates concerns combined with proactive engagement with the objective of securing political support (as illustrated by Piraeus Port/Cosco (2016, Greece)[6] and Fincantieri/STX (2017, Italy)).[7] Where more formal commitments are required, but no real national security concerns arise, it may still be possible to agree these without a formal FDI or public interest intervention, as illustrated by the approach taken to the acquisition of UK mobile technology company Arm by Japanese firm Softbank in 2018, in which the UK government sought and received formal post-offer undertakings to keep Arm’s headquarters in the UK and to double the UK workforce. However, acquirers should be careful that, in agreeing these types of remedies, they believe that they will be able to comply with them in practice, potentially over a significant time frame: in January 2021, Volkswagen was formally warned by the French Minister of the Economy (referencing both potential civil and criminal liability) to respect its existing commitments with regard to its French subsidiary, MAN Energy Solutions (a strategic supplier to the French Navy specialising in emergency engines for submarines) in light of the fact that Volkswagen was considering significant redundancies at MAN following unsuccessful sale attempts.
A widening focus beyond China
Historically, there has been a particular focus in decisions from a number of jurisdictions on the perceived risks of Chinese investment (or investment viewed as influenced by China) to national security. For example:
- In the United States, all four deals blocked by CFIUS under the Trump administration in the US involved Chinese acquirers or concerns relating to China: the acquisition of money transfer company Moneygram by Ant Financial Services Group (part of Chinese conglomerate Alibaba) (January 2018); the acquisition of Qualcomm by Broadcom (March 2018);[8] the acquisition of dating app Grindr by Chinese conglomerate Beijing Kunlun Tech Co. (May 2019); and the acquisition of the Musical.ly video app (later merged into TikTok) by Beijing ByteDance Tech Co (August 2020).[9] Chinese investment in US businesses appears to remain a key concern for the Biden administration: the Executive Order issued by President Biden on 15 September 2022, discussed in the previous section of this chapter, is not targeted towards any particular country, but explicitly recognises that ‘some countries use foreign investment to obtain access to sensitive data and technologies for purposes that are detrimental to US national security.’
- In Germany, both deals blocked to date have involved Chinese investors: the acquisition of Leifeld Metal Spinning AG by Yantai Taihai Corporation in August 2018 (ultimately abandoned prior to a formal prohibition decision), and the acquisition of IMST (a specialist in mobile communications, radar and satellite technology) by a subsidiary of the Chinese company Casic in December 2020. Prior to these prohibition decisions, the German authorities had also withdrawn their initial approval of the acquisition of Aixtron by the Fujian Grand Chip Investment Fund in late 2016, at US urging (although it was the US authorities that ultimately blocked the deal, a second review by the German authorities may have led to the same conclusion). In August 2018, political influence was also used to prevent State Grid Corporation of China from acquiring a 20 per cent minority stake in 50Hertz, one of Germany’s four providers of high-voltage transmission systems.
- In the United Kingdom, the government has intervened in a number of transactions involving Chinese investors in recent years, both under the public interest merger control regime used to intervene in mergers on national security grounds prior to 4 January 2022, and more recently under the new investment screening regime set out in the National Security and Investment Act 2021. For example, in 2019 the government intervened in the proposed acquisition of Impcross Limited (a UK manufacturer of parts for military aircraft) by Gardner Aerospace Holdings Limited (ultimately controlled by a Chinese-listed entity) and the proposed acquisition of Mettis Aerospace by Aerostar (a fund based in China). Both these transactions were ultimately abandoned. The same fate befell the acquisition of Perpetuus Group (a UK advanced materials specialist) by Taurus International Ltd and Dr Zhongfu Zhou (a Chinese academic) in May 2022. Since the entry into force of the National Security and Investment Act 2021 on 4 January 2022, transactions that have been called in for review on national security grounds have included the acquisition of Pulsic (a UK electronic design company) by Hong Kong company Super Orange HK (ultimately blocked in August 2022) and the acquisition of Newport Wafer Fab (a UK micro-chip factory) by Chinese-owned Nexperia NV (decision pending at the time of writing (September 2022)).
- In Australia, much of the recent focus has been on acquisitions by both Chinese and Hong-Kong based companies, due in large part to concerns about China’s influence over Hong Kong. Recent examples include the proposed takeover of APA Group by Cheung Kong Infrastructure (blocked in November 2018), and the proposed acquisition of building contractor Probuild by the state-owned China State Construction Engineering Corporation (withdrawn in January 2021 after indications that the Australian authorities would not approve the transaction).
However, it is clear that the focus of government intervention in relation to foreign investment is now increasingly also widening beyond China: over 85 per cent of acquisitions reviewed by CFIUS in both 2020 and 2021 involved non-Chinese purchasers,[10] as did the first publicly announced refusal of FDI authorisation in France, the proposed acquisition of the French company Photonis (which develops applications with military uses) by the US group Teledyne in 2020.[11] Similarly, a majority of the interventions on national security grounds in the United Kingdom in 2019–2021 under the public interest merger control regime involved non-Chinese acquirers. These included proposed acquisitions involving investors from Canada (Connect BidCo/Inmarsat (2019)) and the United States (Advent International/Cobham (2019), Parker Hannifin Corporation/Meggit plc (2022), Cobham Ultra Acquisitions Limited/ Ultra Electronics Holdings Plc (2022) and NVIDIA/Arm (2022). Based on the limited publicly available information regarding the transactions that have been called in for review by the UK government under the new National Security and Investment Act 2021, this trend is continuing under the new stand-alone screening regime in force since 4 January 2022: transactions under review have involved investors from France (Altice/BT), the United Arab Emirates (Tawazun/Reaction Engines) and even the United Kingdom (Epiris/Sepura).
Intra-EU investments are also attracting additional scrutiny under FDI rules. However, it is notable that the European Commission recently made clear that it will assert its exclusive jurisdiction to review transactions that fall within the scope of the EU Merger Regulation, and challenge the use by EU Member States of national FDI regimes to block any such transaction, if it does not consider that the prohibition is genuinely aimed at protecting a legitimate interest of the relevant EU Member State.[12] In the context of the acquisition of Dutch insurer Aegon’s Hungarian subsidiaries by Austrian insurer VIG, the Hungarian government initially blocked the transaction under FDI rules, but was forced by the European Commission to withdraw the veto decision in February 2022. In this particular case the European Commission considered that it was unclear how VIG’s acquisition of Aegon’s Hungarian assets posed a ‘fundamental threat to society’, given that the two companies were both established European insurance companies with an existing presence in Hungary.
In the majority of these examples of government intervention in transactions involving non-Chinese investors, it has ultimately proved possible to deal with the concerns by agreeing undertakings relating to matters such as the maintenance of strategic capabilities and the protection of sensitive information. However, this will not always be the case – as illustrated by Teledyne/Photonis (France, abandoned in December 2020) and NVIDIA/Arm (UK, abandoned in February 2022) – and dealmakers should not underestimate the potential impact of the review and approval process.
Increase in global protectionism accelerated by the covid-19 pandemic and geopolitical tensions
The trend towards increased global protectionism has undoubtedly been accelerated by the unprecedented economic fallout of the covid-19 pandemic, which resulted in many governments seeking to protect companies – particularly those critical to the domestic response – from opportunistic acquisitions by foreign buyers. EU-level guidelines on FDI screening published by the European Commission on 25 March 2020[13] specifically identified healthcare – including production of medical or protective equipment and medical research – as a sector considered to be particularly vulnerable to increased exposure to FDI (and deserving of protection) in light of the pandemic. As explored further below, this was reflected in specific amendments made to the FDI regimes of a number of EU countries during the early stages of the pandemic, including Spain,[14] Italy[15] and Germany.[16] Increased scrutiny of foreign investment in response to the pandemic also emerged outside Europe, as illustrated by changes to the regimes in Japan, Australia, Canada and – in a marked contrast to its previous direction of travel towards relaxation of FDI rules – India, also discussed further below.
Heightened geopolitical tensions have also been an important contributory factor. In addition to the ongoing tensions surrounding China and foreign investment connected to the Chinese government already explored above, the recent Russian military aggression against Ukraine has resulted in increased scrutiny of investment with a direct or indirect connection to Russia or Belarus (as an active supporter of Russia). The European Commission has been notably proactive in this regard, issuing guidance[17] to Member States on 6 April 2022 expressly calling for increased vigilance against Russian and Belarusian FDI into the EU, in light of concerns that the Russian and Belarusian governments may have strong incentives to interfere with investments related to critical activities in the EU and pose an increased threat to security and public order. The guidance encourages Member States to systematically check such FDI and scrutinise it carefully, and to ensure close cooperation between national authorities responsible for sanctions enforcement and national authorities responsible for screening of FDI. Foreign investment into Russia has similarly been subject to greater scrutiny since the launch of the Russian attack in Ukraine: on 7 March 2022 the Russian government published a lengthy list of foreign states and territories that are deemed to have committed ‘unfriendly’ actions against Russia, which includes the United States, Canada, the United Kingdom, all EU Member States and Australia, among others. Any acquisitions of Russian companies involving acquirers from these ‘unfriendly’ countries must now be approved by the Russian Commission for Control over Foreign Investments.
Impact on FDI regulation: overview
The global trends explored above have cumulatively resulted in significantly enhanced scrutiny of FDI in many jurisdictions in recent years. This has manifested itself in a number of different ways: the overview set out below highlights some recent examples, with further detail set out in subsequent chapters.
Expansion of the sectors in which FDI regulation applies
As discussed above, the scope of many FDI regimes now extends well beyond military and defence matters and also encompasses transactions relating to critical infrastructure, communications assets and advanced technology and data, among other sectors. Although the expansion to acquisitions in the healthcare sector in a number of jurisdictions was largely a response to the covid-19 pandemic, much of the recent expansion of the sectors to which FDI regulation applies has been implemented on a permanent basis, independent of considerations relating to the pandemic response. For example: