In recent years, several European Union (EU) Member States, as well as the EU itself, have reconsidered their approaches to foreign direct investment (FDI). An increasing number of European jurisdictions have introduced rules restricting FDI or have strengthened existing rules.
To date, 14 of the 28 Member States have adopted mechanisms to scrutinize FDI, ranging from screening procedures to partial or total prohibition of FDI in specific sectors. Among these countries are Europe's largest economies Germany, the United Kingdom, and France,1 all of which recently tightened their FDI screening regimes. Even European countries that are traditionally recognized as the most open economies, such as the Netherlands and Switzerland, are in the course of or considering or adopting FDI regulations.2 Furthermore, the EU itself has recently introduced FDI screening regulations for the first time, adopting a "framework for the screening of foreign direct investments into the Union".3
Albeit diverse in their nature and procedures, all of these mechanisms aim to address challenges raised by FDI into sectors deemed sensitive or strategic to national economies or national security. This particularly concerns companies active in the aerospace, defense, and government services (ADG) industry. National governments have traditionally kept a close watch on the ADG industry and the current trend is toward even tighter regulation. In the United Kingdom, for example, new provisions amending the Enterprise Act 2002 expressly expand the regulations to cover smaller businesses active in the military and dual-use sectors, and the advanced technology sector.4 ADG companies should therefore pay close attention to the regulations in force when conducting cross-border transactions and assess their potential impact on the due diligence process and the timing of transactions. As the regulatory frameworks are subject to constant change, it is crucial to stay on top of those developments.
This article aims to provide (1) an introduction to foreign investment control; (2) an overview of the legal framework for FDI screening on EU level; and (3) a summary of recent developments in the area, an outlook on what to expect in the future, and recommendations for the mergers and acquisitions (M&A) process.
1. Background, applicability, and M&A implications of foreign investment control
a) Background and rationale for FDI screenings
The surge in takeovers of EU-based companies manufacturing key technologies and of strategic infrastructure assets by non-EU investors has raised concerns about the potential impact of these transactions on national security or public order. While globalization is leading to an increasing number of cross-border transactions, one of the main factors drawing regulators' attention is the involvement of more and more state-owned funds, enterprises, conglomerates, and private firms with close government links in such transactions.
Two political camps are facing each other in the dispute over the right regulatory response. While the free market-oriented side rejects or seeks to limit scrutinizing mechanisms as protectionist, the more interventionist camp welcomes such regulation. The latter camp is mainly driven by a fear that investments by state-affiliated investors are not market-based, but strategic efforts to facilitate, among other things, "knowhow theft" with the goal of surpassing more advanced economies. The debate has considerably intensified since the beginning of the world economic crisis in 2008. In Western economies such as those in Europe, and even more in the United States, weight is shifting more and more to interventionist trade and market policies.5 In contrast, emerging economies have historically been to a large extent closed to FDI and are now attempting to open their domestic markets to it.6
1 Other Member States with FDI screening mechanisms are Austria, Denmark, Italy, Latvia, Lithuania, Hungary, Poland, Portugal, Romania, Spain, and Finland. The list can be retrieved on the European Commission's website under http://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157946.pdf. Our previous coverage of the list's publication is available under https://www.hoganlovells.com/en/blogs/focus-on-regulation/foreign-investment-control-on-the-rise-new-list-of-eu-member-states-fdi-screening-mechanisms.
2 The Swiss Federal Council has only recently blocked a motion to introduce foreign investment control. Documentation is available on the Federal Council's website under https://www.parlament.ch/de/ratsbetrieb/suche-curia-vista/geschaeft?AffairId=20183021 (only in German, French, and Italian). Meanwhile, the Dutch government is currently preparing certain regulations providing for FDI screenings for national security reasons to be introduced in the future. Assessments are made on a sector by sector basis, while legislation for the telecommunications sector is already underway.
3 See further to this below under (2).
4 New provisions, which came into force on 11 June 2018, introduced lower merger control thresholds for transactions in certain sectors. The target turnover threshold was reduced to as little as £ 1 million from previously £ 70 million). These revised thresholds are designed to provide the UK government with increased scope to scrutinize FDI and transactions that raise national security concerns. For further information, see our previous coverage regarding the topic here: https://www.hoganlovells.com/en/publications/new-uk-foreigninvestment-screening-rules-come-into-force.
5 The recently published "Franco-German Manifesto for a European industrial policy fit for the 21st Century", which followed the Alstom/Siemens prohibition by the European Commission, is a notable example of this. Therein, strong support for the recently adopted European foreign investment screening framework as well as "tough national legislation as France and Germany already have in place" regarding FDI is advocated. The manifesto can be retrieved on the website of the German Federal Ministry for Economic Affairs and Energy under https://www.bmwi.de/Redaktion/DE/Downloads/F/franco-german-manifesto-for-a-european-industrial-policy.pdf?__blob=publicationFile&v=2. Our previous coverage of the matter can be retrieved under https://www.hoganlovells.com/en/blogs/focus-on-regulation/we-are-the-champions-france-and-germany-unite-to-revive-industrial-policy-ateuropean-level.
6 For example, China has recently introduced a new foreign investment law to promote FDI against the backdrop of increasing trade tensions with the United States. See our coverage regarding the matter here: https://www.hoganlovells.com/en/publications/the-foreign-investment-law-a-new-chapter-opens-for-foreign-direct-investment-in-china.
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