The regulation of foreign direct investment, or FDI, has been in the spotlight for most of 2022 and will likely remain a key issue for dealmakers and cross-border M&A in 2023.
Globally, we continue to see a trend towards greater FDI restrictions. The degree of regulation, however, varies significantly across different jurisdictions.
Navigating the rapidly developing legal and regulatory FDI landscape will remain a challenge for both sellers and buyers. In addition to FDI regimes, dealmakers will have to take into account other customary investment barriers, including merger control and regulated sectors for which specific licenses may be required e.g., defence, insurance, infrastructure, and energy.
It is crucial, at the time of planning a new transaction, to consider the application of any such investment restrictions. Dealmakers and investors will need to focus on early due diligence, careful transaction structuring and pre-emptive engagement with advisers and the government.
With careful transaction management and deal structuring, we believe investors can successfully navigate many of these regulatory and legal challenges. The alternative is the very real risk of having a transaction blocked from closing or, worse, unwound after closing.
Global overview
The global trend towards greater FDI regulation shows no sign of slowing down, as governments continue to balance the contrasting demands of an open, welcoming economy with protectionist policies around public security and national defence interests.
United States – The Committee on Foreign Investment in the United States, or CFIUS, continues to see its jurisdiction expand and its funding increase. The CFIUS 2021 annual report reflected a nearly 40% increase in declaration and notice filings in 2021 from 2020.
Europe – An FDI screening mechanism was adopted in the European Union to ensure cooperation and exchange of information across member states, with 18 jurisdictions now fully operational. However, FDI regulations remain largely a national matter and so requires a country-by-country analysis. The United Kingdom, which is no longer part of the European Union after Brexit, recently implemented a comprehensive set of FDI laws for the UK government to review and intervene in M&A transactions where they raise national security concerns.
Asia – China continues to develop its FDI regime under the PRC Foreign Investment Law, which came into effect on 1 January 2020. Hong Kong remains a popular investment hub and, while the adoption of the Hong Kong National Security Law has raised concerns, its impact at this stage remains political rather than economic. Other jurisdictions in Asia have introduced new licencing regimes and regulatory restrictions in certain sectors. However, certain governments, particularly in Southeast Asia, appear to be prioritising foreign investment and economic growth.
United Arab Emirates – The UAE federal government and the governments of the seven separate Emirates that comprise the UAE (being Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain) have, in recent years, introduced various measures to liberalise their FDI regimes. The current position is that non-UAE nationals may own 100% of a UAE limited liability ‘onshore’ company, but sector-specific FDI restrictions remain in place.
United States
The US remains one of the top recipients of FDI inflows worldwide. The US Bureau of Economic Analysis reports that, from 2020 to 2021, FDI in the US increased by more than $500 billion to approximately $5 trillion. This was primarily driven by foreign investment from Europe. The corollary was that CFIUS, an interagency review committee for foreign investment transaction, saw a nearly 40% increase in declaration and notice filings in 2021.
Some transactions require mandatory filings with CFIUS but, even if no mandatory filing requirement applies, a voluntary notification may be advisable. CFIUS regulations permit parties to file a short-form “declaration” as an alternative to the traditional voluntary notice, which is typically reviewed within 30 days. If CFIUS identifies national security concerns, it will follow with a 45-day investigation and may impose certain mitigation measures. These measures include guidelines for the transfer or sharing of sensitive information, ensuring that certain operations are located only in the US, and divesting all or part of the US business. Failure to comply with CFIUS can result in civil penalties up to the value of the transaction, and, in certain circumstances, a block on pending transactions or unwinding of completed transactions.
In response to evolving US national security risks, CFIUS authority and involvement in reviewing foreign investment in the United States has expanded over the past several years. The Foreign Investment Risk Review Modernization Act of 2018 and regulations passed by the US Department of Treasury in 2020 modernized and broadened the authority of CFIUS over certain foreign investments in “TID US businesses”. These are businesses involved in critical technologies, critical infrastructure and sensitive personal data of US citizens, as well as certain real estate transactions.
Most recently, on September 15, 2022, US President Joe Biden signed an executive order intended to provide guidance for CFIUS in conducting national security reviews. While the executive order does not expand or change the regulatory requirements under CFIUS, it does provide additional guidance on whether to make a voluntary filing, including more context as to whether a transaction may be subject to post-closing review. Given the continued broadening of CFIUS involvement, we anticipate 2023 will see an increase in the volume of voluntary CFIUS filings, as well as post-closing inquiries.
France
Since its introduction in 2005, the FDI regime in France has expanded and developed apace. The French FDI regime was fully reformed in 2019, consolidating amendments made since 2005, as well as additional modifications recently introduced in response to the Covid-19 pandemic and the EU screening mechanism. Notwithstanding these developments, France remains one of the most active European countries for FDI. In 2021, it attracted a total of 1,600 FDI transactions (18% from Germany, 15% from the US, and 9% from the UK) and 328 FDI applications for approval, an increase of 31% from 2020.
The reform in 2019 largely abolished the former distinction between EU and non-EU foreign investors and required investors to disclose any interest held by or financial support received from a state outside of the EU. The reform also harmonised the list of qualifying transactions, being the acquisition of control of a French entity, the acquisition of a business unit of a French entity or, except for EU investors, the acquisition of 25% of the voting rights of a French entity. During the pandemic, the threshold was temporarily lowered to 10% for listed companies, extended until the end of 2022, thereby mirroring the applicable rules in Germany and Spain. Approval timelines have been clarified and the government recently issued some guidance to frequently asked questions. Unlike the rules for merger control filings and similarly to the rules in the UK, the FDI regulation in France does not set any economic or financial conditions for its application. The size of the target will, however, be taken into consideration when a filing is reviewed.