May 11, 2020

National Security: Governments Heighten Scrutiny of FDI

Last month, I blogged about the EU’s efforts to protect suppliers of essential products from opportunistic  foreign buyers.  This Davis Polk memo says that this tighter scrutiny of foreign direct investments is by no means limited to the EU and its member states. In recent years, many countries have begun to implement their own CFIUS-like regimes for reviewing FDI, and that process is being accelerated by the Covid-19 crisis.

While the specifics of regulations governing FDI vary from jurisdiction to jurisdiction, this excerpt identifies some of the common themes that investors should be aware of:

It’s not just about defense. In some countries, the FDI screening only applies to certain sectors (e.g., France, Italy and Japan) while others catch all economic sectors (e.g., Australia, Canada and China). Germany operates two FDI screening regimes in parallel: one applies to all sectors while the other is specific to defense.

It’s not about specific nationalities. Some investors’ home states may be perceived as potentially more threatening to the host country than others. But this will generally tend to affect the outcome of the screening, rather than determine which transactions are caught by the initial filing obligation. Nevertheless, the FDI regimes of certain EU Member States (e.g. France, Germany and Spain) contain stricter rules for non-EU/EFTA investors.

Investors will usually need to be proactive in seeking clearance. In most countries operating an FDI regime, filing is mandatory. Most of the mandatory jurisdictions are suspensory: the relevant authority’s approval has to be obtained prior to closing. Other countries, such as the UK, leave it to the parties to decide whether to notify (although with the risk of the transaction being “called-in” by the relevant authority).

The process will often trigger an additional regulatory workstream. Most jurisdictions operate a clear separation between FDI screening and the antitrust merger control process. However, in some jurisdictions (e.g. Australia, Russia, China and – currently – the UK), FDI-related and antitrust issues are assessed within the same framework.

FDI screening rules are often very broadly drafted: Much discretion is frequently left to governments, enabling them to “cherry-pick” transactions of interest. For instance, many jurisdictions do not define key concepts (such as, “national defense”, “key infrastructures”, “media”, etc.) and/or have open-ended provisions.

The memo points out that the regulatory landscape for FDI is rapidly evolving, and provides some practical advice to help companies considering a foreign acquisition to successfully navigate the applicable regulatory regimes.

John Jenkins