10 key themes
The impact of newly strengthened powers of political intervention in cross-border deals
Foreign investment control – the ‘new normal’ for cross-border deals
Foreign investment screening remains a key consideration for dealmakers in 2020. The ongoing trend is for governments to introduce new powers or strengthen existing powers to screen – and potentially impose restrictions on – foreign investments.
Against a backdrop of growing trade tensions, this is leading to heightened politicisation of deal-making and increased deal execution risk, or, at the minimum, delays to deal timetables. It is therefore more important than ever to incorporate effective strategies to identify and mitigate these risks into transaction planning from the outset.
CFIUS is now at version 3.0, with strengthened jurisdiction, enhanced enforcement powers, and millions of dollars of new resources to review transactions, monitor and enforce compliance, and co-ordinate with other countries, many of which are just advancing to versions 1.0 or 2.0 of their own foreign investment review regimes. This makes it critically important for dealmakers to develop a solid foreign investment review strategy early on.
Mandatory notification requirements are becoming more standard
Over 100 jurisdictions now have foreign investment or public interest laws – most notably in Europe, Asia, Australasia and North America. Of these, a growing number are introducing mandatory notification requirements with respect to some foreign investments.
2019 has seen a further increase of governmental powers to screen and potentially intervene in cross-border M&A. It is therefore critical to conduct a foreign investment filing risk assessment up front and factor this into deal structuring and planning.
Even jurisdictions that were traditionally voluntary are introducing mandatory notification requirements in some sectors. In the US, national security review by the Committee on Foreign Investment in the United States (CFIUS) used to be entirely voluntary, but a mandatory notification regime was introduced in October 2018 with respect to investments in US critical technology companies. By February 2020, investments by foreign persons in which a foreign government holds a ‘substantial interest’ (currently expected to be 49 per cent) will be subject to a mandatory filing requirement if the target US business is a critical technology company, is involved in critical infrastructure or holds certain sensitive personal data.
In the UK, legislation for a stand-alone national security review process has been proposed for 2020. Initial government analysis suggests a much greater level of review and intervention under the new rules than has historically been the case. While a voluntary system, those familiar with the UK’s voluntary merger control regime will appreciate that the regime is likely to have real enforcement impact.
The UK is moving towards greater levels of intervention, with new rules on the horizon expected to increase the level of review significantly. In 2019, enforcement of national security issues under the existing rules was directed for the first time at acquisitions by private equity and pension funds – including the take-private of Inmarsat by a consortium of US, Canadian and UK funds – indicating that all types of buyer should expect scrutiny, irrespective of their country of origin.
Co-operation and convergence of foreign investment regimes
Co-operation among competition authorities worldwide has been the norm for several years with established frameworks and networks. International consensus has been built around procedural and substantive issues. Historically, there has not been similar convergence or co-operation among foreign investment review authorities, but that is changing to some extent.
While national foreign investment regimes can differ materially in terms of the types of transactions captured, the key sectors at risk and the types of concerns identified, we are seeing increased co-operation and convergence be it through:
- formal frameworks as in the EU;
- increased informal exchange between relevant authorities; or
- cross-fertilisation of existing ideas across jurisdictions.
There are known examples in which CFIUS has reached out to its counterparts in other jurisdictions with respect to a particular transaction, and legislation to be implemented by February 2020 directs CFIUS to undertake greater international engagement in support of US national security interests. With the possibility of countries (and their investors) being ‘excepted’ from certain of CFIUS’ authorities – based, in part, on the robustness of the respective jurisdiction’s foreign investment regime – there will be greater incentives for convergence and co-operation.
The EU is also incentivising greater convergence and co-operation, at least between EU member states. The new EU rules, applicable from 11 October 2020, provide for a co-operation mechanism between member states and the European Commission in screening direct investments from outside the EU on public security grounds. While the ultimate decision over whether to permit a foreign investment will remain with member states, the mechanism allows for information to be requested from the national authorities, and for the European Commission to issue non-binding opinions to which member states must give ‘due consideration’.
The new rules are applicable retroactively in part, so opinions may be issued up to 15 months after the investment is completed. This means that foreign investments completing from 11 July 2019 onwards face possible intervention via the co-operation mechanism once the mechanism is established. Such transactions could, depending on available remedies under national law, be subject to enforcement action against the investment post-completion, so special care should be taken when assessing whether a foreign investment filing should be made.
The new EU co-operation follows a series of increasingly protective foreign investment measures in European countries. Currently, more than half of the EU member states have some form of foreign investment screening mechanism: it will be interesting to see if others will now follow suit, and how proactive the Commission will be in issuing non-binding opinions to national governments.
Growing intervention by governments worldwide
It is not just the number of regimes and their respective review mandates that is expanding: the longer-term trend is towards greater intervention by national authorities. In the US, for example, the number of transactions subject to mitigation, prohibited or abandoned in light of CFIUS opposition has been growing steadily.
This enforcement trend is likely to continue as national authorities acquire greater powers for intervention:
- in France, new powers in 2020 will allow the Minister of the Economy to unwind, amend or prescribe interim measures in relation to transactions that have been implemented without prior authorisation; and
- in China, against the backdrop of US–China trade tensions, it is possible we will see an increased number of cases reviewed under China’s national security regime that until now has only been rarely used.
Broadening the scope of foreign investment control
Foreign investment review has extended far beyond what was traditionally considered to constitute ‘national security interests’ and now often captures a wide range of sectors. The focus is increasingly on infrastructure (communications, energy, transport, defence), advanced (largely commercial) technologies (AI, nanotechnologies, quantum computing, robotic systems) and big data.
The interpretation of what is included in these sectors can be surprisingly broad, with a particular customer contract or kind of data being enough to bring a transaction within the scope of review. The concept of ‘critical’ infrastructure or technology is increasingly used by regimes, without a clear definition of ‘critical’.
In Japan, the scope of review was recently widened:
- firstly, in terms of sectors subject to review, to include IT and telecommunication technology manufacturing, software development and infrastructure provision; and
- secondly, in terms of the extent of involvement in the target company, by lowering the filing threshold from shareholdings of 10 per cent to 1 per cent.
New rules in Italy have extended the scope of foreign investment review to 5G networks. A number of jurisdictions, such as Germany, have broader, non-sector-specific regimes. This will also be the case in the UK if the proposed new rules are enacted, after the existing rules were recently broadened to cover certain aspects of computing hardware and quantum technologies.
The rapidly expanding scope of foreign investment controls is impacting deal risk in multiple sectors. Targeted due diligence informed by expertise in the types of acquisitions that may be caught is essential in order for foreign investment risk to be identified sufficiently early in deal planning.
Lower trigger conditions leading to more reviews
In the past, many foreign investment regimes only caught either controlled investments or investments above a certain shareholding and of a certain size. Now, there is a growing trend towards lowering the thresholds to capture smaller minority and non-controlling investments:
- Germany’s foreign investment rules capture any transaction relating to critical infrastructure where as little as 10 per cent of shares is being acquired;
- in the US, CFIUS’ expanded jurisdiction to review non-controlling, non-passive investments of any size in certain US businesses will be fully implemented by February 2020; and
- in the UK, while the proposed new rules will require a level of influence to be acquired, it will be a low level, and there will be no materiality-based threshold requiring the target to have a specified level of turnover in the UK (with the current turnover threshold having already been reduced to £1m in 2018 for intervention in certain industries).
Looking ahead in 2020:
Conduct a foreign investment risk assessment up front: just as a cross-border deal requires a multijurisdictional analysis of antitrust filings, an analysis of foreign investment implications is also advisable, particularly in the most ‘at-risk’ sectors and/or where one of the investors is state-owned or has other ties to the state. Remember that the deal may be subject to foreign investment review even if there is no corresponding antitrust filing in that jurisdiction.
Anticipate detailed questioning on ownership structures: remember that reviewing authorities may require extensive information on ownership structure, transaction rationale and target activities beyond the information typically requested by the antitrust authorities. This should be factored into timetables and deal planning. Private equity funds and other financial investors should be prepared for questions about fund structure and the access afforded to limited partner investors.
Consider the transaction structure: authorities are gaining greater powers to review a wider range of transaction types (eg minority stakes, asset acquisitions), but certain deal structures, such as consortia arrangements or limitations on shareholder rights, can minimise the review process.
Have a clear communications strategy from the outset: close contact with the relevant authorities to ensure that decisions are based on an accurate understanding of the technologies and business activities of the target company is critical. Engagement with authorities and relevant stakeholders (including politicians) is also key to ensuring the investment rationale is properly understood.