Russia’s assault on Ukraine and heightened tensions with China have energized Western capitals to act, while at the same time prompting greater scrutiny of investments. This is particularly the case with respect to transactions that may implicate national security concerns or the resiliency of supply chains.
We summarize below a number of developments in the US, the UK and key European countries – and outline steps that can increase the chance of approval.
1. The EU cooperation mechanism for FDI screening has been in place since October 2020. In its first year, over 2,000 deals were filed with the EU Commission, and member states have made broad use of the new tool, which allows for better coordination and information exchange.
2. The mechanism is directed at safeguarding what the EU Commission calls the EU’s strategic autonomy. The EU Commission has repeatedly made it clear that while the EU remains open to FDI, this openness is not unconditional, and that it aims to safeguard key economic assets and collective security.
3. The EU will continue to work on its toolbox to pursue this strategic aim, with its foreign subsidy regulation being the last example of efforts to strengthen autonomy and resilience in the face of unfair competition and market interference.
4. The EU cooperation mechanism is especially influential in shaping FDI screening regulation in smaller EU member states. FDI screening remains a national prerogative, however, and large member states that often already had mechanisms in place continue to apply their own approaches to FDI.
1. Germany is carefully examining its dependencies and approach to foreign investment in strategic sectors. There has been a broad interpretation of the terms “national security” and “public order” with special emphasis on sectors like energy, semiconductors, health, technologies and food.
2. The German government is ready to use FDI screening to stop undesired deals – even if only through procedural delays. While formal prohibitions remain a high hurdle, cases like Siltronic/Global Wafers have shown that the government is ready to use screening processes to avoid making politically difficult decisions.
3. The spotlight remains on China – with an even greater scrutiny in Germany: Key ministries in the new German government are held by Green party representatives who have called for a stricter stance. Naturally, investments from Russia and Belarus, even if stemming from entities not affected by sanctions, are now also viewed extremely critically. Even so, investors from allied countries can also be met with increasing scrutiny.
4. In Germany, FDI regulation has proven a useful tool for the government to pursue its interest in energy disputes with Russia: when it became apparent that shareholders of energy company Gazprom Germania might seek to lead the company into voluntary liquidation, Germany was able to place Gazprom Germania (operating important gas storage facilities in Germany) under trusteeship thanks to FDI regulation. This was the case because Gazprom Germania had been sold to another Russian investor without seeking prior authorization from the German government.
5. Five years after Midea/Kuka that initially sparked the debate on regulating FDI, screening is thus an established and far-reaching policy tool: the German government screened 306 cases in 2021, as well as an additional 240 cases filed via the EU cooperation mechanism. In the last 2 years alone, the German screening regime has been tightened four times. We expect the government to focus on implementing the existing framework – but further tightening is likely.
1. The French government is increasingly using control of FDI as a strategic tool, with a view to foster France and Europe’s strategic sovereignty. The number of cases scrutinized by the French Finance Ministry peaked to 328 cases in 2021, a 30% hike compared to the previous year, with more than half of the transactions only being authorized under certain conditions. The tightening of France's scrutiny tool did not, however, impede the rise in FDIs inflows with the country ranking first on the European FDI table.
2. This sharp rise is the direct consequence of an important revamp of France’s FDI control toolbox over the past years, which included lowering the threshold for controls and extending controls to more sectors.
3. From patriotism to a strategic tool: For years, French FDI screening was mostly a defensive tool aimed at protecting sensitive sectors such as defence and national security. Now, most scrutinized deals (57%) happen in sectors considered “essential infrastructure”. Defence and security only accounted for 13% of the deals scrutinized in the past year.
4. Being from an allied country is not enough: Russia and China have received a lot of public attention in past months. However, the practice of French authorities demonstrates that acquirers from countries considered close allies are not immune to increased scrutiny. In 2019, the government blocked US-based industrial conglomerate Teledyne’s attempted acquisition of the Photonis Group – active in the field of optronics for defence – marking the first time the government banned an investment by an allied country company. More recently, the French Finance Ministry blocked the acquisition of the retail company Carrefour by its Canadian competitor, Couche-Tard, on food security concerns.
5. This trend to tighten FDI screening is set to continue. The French Government recently opened two relevant public consultations, one dedicated to adapting FDI control and one on foreign subsidies. Both endeavours seek comments regarding the definition of “critical assets and infrastructures” and on the procedure. With a French government keen on strengthening France and Europe’s “strategic sovereignty”, the path toward tightened FDI scrutiny is to be continued over the coming months.
1. The U.S. Government continues to carefully review proposed foreign investments for national security implications through the Committee on Foreign Investment in the United States (CFIUS). CFIUS’ authority is broad, going beyond traditional sectors involving defence to include, for example, semiconductor production, telecommunications and sensitive personal data.
2. The CFIUS review process is not directed at China, Russia or any country in particular, but covers all foreign investment, with certain limited exceptions.
3. The national security screening process no longer focuses only on whether a transaction could result in foreign “control” of a U.S. business. The test today - with respect to deals involving critical technology, critical infrastructure and goods/services related to personally identifiable information (PII) - is whether a “foreign person” could gain an opportunity to affect important decisions of a U.S. entity.
4. Both China and the semiconductor industry remain subject to heavy scrutiny. This was recently illustrated by the failure of a deal between Megaship Semiconductor Corporation, an NYSE-listed Delaware corporation, and Wise Road Capital, a Chinese private equity firm, to gain CFIUS approval. The case also demonstrated that it is nearly impossible to evade CFIUS, given its expanded resources, the broad scope of its jurisdiction, and its increased focus on retroactive reviews of past transactions not submitted initially for CFIUS review. In this case, the parties sought review only after CFIUS reached out, which is not an ideal position from which to begin the process.
5. The U.S. Government may even create a “reverse CFIUS” process that would review certain outbound investments to “countries of concern”, which could include Russia and China, as well as potentially “non-market economy” countries like Vietnam.
1. With the new UK national security screening regime introduced under the National Security and Investment Act 2021 only live since January, dealmakers are still getting to grips with a process that is simultaneously both unproven and untested, and wide-ranging and comprehensive in reach.
2. The new regime itself is symptomatic of greater caution about the volume and value of overseas investment in the UK, with the political and media environment deteriorating over recent years with respect to cross-border M&A, representing a clear shift from the traditionally open and liberal FDI environment in the UK.
3. Heightened geopolitical sensitivities caused immediately by Russia / Ukraine, and a longer-term cooling of relations with China, alongside the COVID-19 pandemic and Brexit, plus concerns about the exposure of the UK to global supply chain insecurities, have created a more challenging environment for acquisitions across a range of sectors, at exactly the moment a new and far-reaching UK clearance regime is live.
4. While it is too early to reach quantitative judgements given the only months-long lifespan of the new regime, there is anecdotal evidence from companies and their advisers about lower-risk transactions being pushed into extended review under the new UK regime, suggesting a cautious approach and height-ened risk sensitivity.
5. There continues to be close scrutiny of a number of high-profile transactions that are in the final notifications, including Cobham / Ultra, Parker Hannifin / Meggitt, and Taurus International / The Perpetuus Group. All of these transactions are nearing their conclusion in the coming weeks and will give valuable insight into how Ministers are assessing and quantifying national security risk in this new, more volatile environment.
What this means for investors and sellers:
FDI screening as a factor is here to stay, creating some uncertainty for acquiring and target companies. To mitigate some of this risk, investors should be ready to explain to key stakeholders, including political audiences, why a proposed deal would be beneficial and would not undermine national security interests – taking into account any sensitivities at the local, regional, federal or international level.
Consequently, it is essential that all parties to a transaction:
Understand the political, economic and security dynamics that underpin a transaction and be ready early on to connect a deal to broader strategic goals
Assess with experienced counsel and communications advisors at the outset the myriad of regulatory issues, potential scenarios and other aspects that could arise
Be aware of a transaction’s potential vulnerabilities and consider possible remedies and mitigating measures that could serve to reassure domestic regulatory entities that it would not undermine national security
Understand how a deal relates to concerns involving supply chain security – especially in sectors that involve energy, semiconductors, healthcare, digitalization and food security
Be prepared for complex processes and potential delays in certain cases
Be cognizant of concerns beyond the obvious market, since other governments can contribute to the screening procedure and raise or reinforce concerns
Managing Director | Germany
Partner | United States
Partner | UK
Partner | France