The rapidly changing regulatory environment creates risks and uncertainty for investors considering cross-border investments.

Going forward, we expect investments in the technology space to be subject to close scrutiny.

A paradigm shift

There has been a paradigm shift in the scope and intensity of regulatory scrutiny of transactions involving FDI in recent years. This global trend has accelerated due to the impact of Covid-19, which has heightened concerns over opportunistic acquisitions of strategic assets and "home grown" local champions.

The impact of expanding foreign investment scrutiny has been particularly pronounced in the tech sector. Technology, data, and communication infrastructure are all increasingly now perceived as central to the national interest and industrial policy, against the backdrop of a new global "technology race".

Read more on Foreign Investment Control at Linklaters and access our Thresholds for Key Jurisdictions guide (May 2020)

Expansion of screening regimes to include new tech sectors

The scrutiny of FDI in the tech sector arises in the context of a global expansion of foreign investment controls, with the introduction of new regimes and extension of existing ones:

United States: The Foreign Investment Risk Review Modernization Act (FIRRMA) recently introduced a mandatory pre-closing notification requirement with the Committee on Foreign Investment in the U.S. (CFIUS) for certain investments in companies involved with critical technology, critical infrastructure or sensitive personal data.

European Union: The EU will introduce a screening framework from October 2020 which targets inter alia critical and strategic technologies, data and access to sensitive information. This was bolstered by guidelines issued in March 2020, which urged greater vigilance in light of Covid-19.

Individual EU Member States: the UK, France, Germany, Spain and Italy have strengthened their rules as a result of their new screening regulations and/or Covid-19 to include additional technology sectors.

Read more on the UK reforms: Open for investment but not exploitation: UK foreign investment gets a v2.0 upgrade (June 2020)

Lowering of procedural thresholds of screening regimes

Procedural thresholds have been lowered to capture a wider range of investments, exemplified by recent reforms in France, Germany, Italy and the UK in Europe. For example, in Germany a new lower FDI screening threshold for transactions involving 'critical infrastructure', came into effect in June (10% of a company's voting rights as opposed to the general 25% threshold); while in the UK the Government is intending to lower the jurisdictional thresholds for public interest interventions for three additional tech sectors (AI, cryptographic authentication and advanced material sectors). Similarly, Australia and New Zealand have suspended asset value thresholds during the pandemic to capture all covered transactions regardless of dollar value. These reforms may have a disproportionate impact on the tech sector by capturing investments in smaller start-ups.

Increasing intervention levels under screening regimes

Regulatory authorities have also taken an increasingly interventionist approach to transactions involving tech platforms, which has the potential to impact on a broad range of tech companies. In addition to traditionally sensitive technologies such as semiconductors, concerns increasingly arise in consumer technology areas where the national security nexus is less obvious. For instance, concerns relating to the use of customer data are an increasing focus in both the EU and U.S. (as evidenced by recent CFIUS cases involving platforms such as PatientsLikeMe, Grindr and StayNTouch).

Use of more overt political measures to scrutinise FDI

Several governments have also adopted measures outside of formal legal frameworks governments to scrutinise FDI.

EU Commissioner Margrethe Vestager, responsible for competition and the digital sector, recently urged EU Member States to acquire stakes in European companies to prevent foreign takeovers if necessary. This approach has already been adopted in Germany, with the German Government investing in a strategic stake in 50Hertz (the German high-voltage energy network) to fend off investment from China's State Grid in 2019.

Similarly, the UK Government has previously sought to obtain commitments from overseas acquirers of sensitive UK companies under the Takeover Code rules, to mitigate public interest and/or political concerns where a transaction does not qualify for formal review under the UK's public interest regime (see, for example, SoftBank / ARM).

Response to Covid-19

Finally, we have seen far-reaching proposals to limit FDI in the light of Covid-19. In the U.S., the chair of the House Judiciary's antitrust subcommittee recently proposed a temporary merger ban, while senior European politicians have mooted a similar ban on acquisitions of European firms by Chinese investors. Indeed, the European Commission has just published a White Paper proposing a new bloc-level review of acquisitions of EU companies by foreign acquirers backed by subsidies; a move widely perceived as a response to concerns that Chinese and other foreign investors are acquiring European champions with cutting edge technologies.

Read more: The European Commission canvasses new broad powers to neutralise market distortions from foreign subsidies (June 2020)

Global tensions and Covid-19 have proven to be a powerful catalyst for ever stronger foreign investment control in the tech sector. - Christian Ahlborn Tech Sector Leader, Competition Partner, London

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