The COVID-19 pandemic is accelerating the trend towards stricter control and screening of foreign investments as many States have recently announced amendments to their foreign direct investment (“FDI”) rules to protect strategic domestic industries. Foreign investors should, in the early planning stages of their investments, carefully assess risks resulting from these regulations.
Increased FDI controls before COVID-19
In recent years, many States had already introduced or reinforced mechanisms to screen the admission and establishment of FDI on their territory on national security or other public interest grounds. While the specific screening regimes and applicable thresholds can vary significantly from State to State, transactions involving foreign investments meeting the screening criteria will typically be subject to prior approval and increased reviews and disclosure obligations. Other measures include restrictions on participation in domestic firms by foreign State-owned companies.
These screening measures have originally targeted investments in the military and defence sectors, but have evolved over the years to include other domestic strategic industries such as energy, transport, telecommunication and increasingly protect domestic technology and knowhow or sensitive data of citizens.
Calls for stricter FDI controls in the EU in the wake of COVID-19
In response to the COVID-19 pandemic, FDI controls are rapidly intensifying around the world. On 25 March 2020, the European Commission (“EC”) issued guidelines noting an “increased risk of attempts to acquire healthcare capacities . . . or related industries such as research establishments” and calling upon EU Member States that already have an FDI screening mechanism in place to make full use of the tools available. The EC also called on those EU Member States that do not have an FDI screening mechanism in place to adopt similar procedures. Based on similar concerns about certain foreign trade practices, the EC also published a White Paper on 17 June 2020, launching a consultation on how to deal with the “distortive effects caused by foreign subsidies”. One of the proposed regulatory instruments is a compulsory notification mechanism that would allow for an ex ante review of planned acquisitions involving foreign subsidies.
Already before the pandemic, the EU had adopted Regulation 2019/452 which creates an EU-level mechanism for coordinated screening of FDIs through information exchange and gives the EC the possibility to issue non-binding opinions on specific transactions. This regulation will apply from 11 October 2020.
A number of EU Member States have also announced stricter FDI control rules since the COVID-19 outbreak. France has lowered the approval threshold for acquisition by foreign investors from 25 percent to 10 percent, for listed “sensitive” companies until the end of 2020 (applicable only to investors outside the EU and the EEA) and has extended the scope of its FDI screening to cover biotechnologies. In the same vein, Italy has expanded the notification duty for FDIs to new strategic sectors and temporarily applies notification requirements also to foreign buyers from within the EU. Similar measures have been adopted by other EU Member States, including Spain and Germany.
Other States are also moving to intensify FDI controls
Such measures are not limited to the EU and its Member States. Other States have also taken significant steps to protect their domestic companies from foreign takeover.
For instance, on 5 June 2020, Australia announced what it describes as the “most significant reforms to the Foreign Acquisitions and Takeovers Act 1975 since its introduction”. Among other things, the proposed reforms enable the Treasurer to impose conditions or block any foreign investment on national security grounds, regardless of the value of the investment. On the same grounds, the Treasurer is given the power to impose or vary existing conditions for foreign investments, or, as a last resort, require the divestment of any realised investment, even if that investment was previously approved.
On 21 June 2020, the UK government also announced changes to the Enterprise Act 2002, which will allow the government to intervene in mergers and takeovers on public health grounds. Although these changes will apply to both foreign and domestic takeovers, the UK government emphasised that they are aimed at allowing it to “scrutinise certain foreign takeovers to ensure they do not threaten the UK’s ability to combat a public health emergency”. These changes, which also extend the UK government’s existing powers to intervene in mergers on national security grounds, are intended to mitigate risks in the short term ahead of a planned new National Security and Investment Bill.
Other States, such as Japan, Canada or India, have also announced enhanced FDI controls.
COVID-19 is significantly speeding up the global trend towards tightening FDI controls and subjecting a wider range of industry sectors to regulatory review procedures. Parties to foreign investment transactions should assess early the risks associated with potential new FDI rules and will have to expect higher administrative burdens and longer review periods when planning investments in sectors designated as sensitive by the host State.
Further changes in States’ FDI framework can be expected as the pandemic continues to evolve.