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FI Monitor Issue 8, 2024

Court challenges to FDI decisions

Governments and agencies increasingly intervene in transactions on FDI grounds, either by prohibiting them outright or imposing mitigating measures. This trend is global and significant, with potentially heavy financial and strategic implications for all parties involved. Surprisingly, very few of these decisions face legal challenges, which may suggest either satisfaction with the outcomes or an absence of grounds for challenge. However, the reality is much more nuanced. 

Several factors contribute to the scarcity of legal challenges to FDI decisions. One key factor is the inherent confidentiality or sensitivity surrounding the concerns that prompt government intervention. Additionally, governments often serve as the ultimate arbiters, particularly in safeguarding national security interests. These dynamics create a complex environment where legal recourse is limited despite the potentially profound impact of FDI decisions.

The lack of judicial oversight and the limited publication of cases present significant challenges. Many of the laws governing FDI are relatively new and require interpretation. In most legal regimes, courts play a vital role in interpreting laws and establishing a body of case law that fosters a common understanding of how authorities should wield their powers. This accumulation of legal precedents enhances predictability and legal certainty for investors and businesses alike. However, a lack of judicial oversight and transparency can undermine legal certainty and, if unchecked, confer too much discretion on an authority when exercising its powers. 

This contribution highlights the reasons behind the scarcity of legal challenges in FDI matters and proposes several proactive steps that parties can take to safeguard their rights. By doing so, they can position themselves favorably for potential legal challenges, should the need arise. 

FI monitor issue 8

Legal uncertainty is both a consequence and a contributing cause of the lack of court cases. Investors, without a clear understanding of their prospects in court, often hesitate to challenge negative decisions. Instead, they may opt to abandon deals altogether or reluctantly accept conditions to secure transaction approval. This problem is compounded by the time constraints inherent in many transactions. Often, the viability of acquiring another business hinges on completing the deal within a relatively short timeframe. Waiting – potentially years – for court proceedings to conclude before executing an agreement is often impractical, especially when it exceeds contractual termination deadlines (the so-called “long stop date”).

While seeking interim injunctions to expedite transactions may seem like a solution, it is fraught with difficulties. European courts typically set a high threshold for demonstrating urgency, even when national security concerns are invoked. Experiences with merger control challenges also suggest that obtaining interim measures is exceedingly rare. This is illustrated by Siltronic’s attempted acquisition of Global Wafers, adjudicated by the Administrative Court of Berlin in January 2022 (Verwaltungsgericht Berlin, Decision of 27 January 2022, Case Number 4 L 111.22). Despite the German Ministry for Economic Affairs’ lengthy review of almost 14 months without reaching a decision, the court refused to grant injunctive relief as the parties approached the long stop date. The Court deemed that there was no urgency, suggesting that the parties could simply extend the long stop date or conclude a new contract. Moreover, the potential consequences of wrongfully granting relief were deemed more severe than those of wrongfully denying it, given the national security implications versus the private financial interests involved.

The observed scarcity of court cases can also be a consequence of limited public information. In many jurisdictions, court challenges against FDI decisions will be litigated behind closed doors as they often concern matters of public security. For example, in the UK, the government can apply for a so-called “closed material procedure” shielding court proceedings from public scrutiny. At least two decisions under the UK regime have been challenged in court, but very few details are publicly known.

If we look at the court cases that have been made public, we identify two key patterns.

  • Challenging FDI decisions on substantive grounds is difficult as courts often defer to governmental discretion on the types of transaction that may pose a risk to national security.
  • Most challenges, therefore, focus on procedural grounds such as failure to respect a party’s rights of defense or follow due process.

Limited substantive review 

The Italian Verisem case is an example of the limited scope of substantive review in FDI cases. Verisem, a distributor (but not producer) in the Italian plant seeds market, faced the prospect of the Italian government prohibiting its acquisition by Chinese state-owned company Syngenta due to perceived risks to food security in Italy. Despite Verisem’s challenge, the Italian Supreme Court (Consiglio di Stato, Judgment of 9 January 2023, Case Number 289/2023) upheld the government’s decision, emphasizing the “very broad discretion” vested in governmental assessments of national interest. While it did find that the government’s decisions must be founded on “coherent reasoning, based on the criteria laid down by law,” it ultimately upheld the prohibition on the basis of potential harm to the national interest. Similarly, in the Global Wafers/Siltronic case, the court echoed this sentiment, highlighting the wide margin of discretion accorded to governments. It stressed that governmental concerns would need to be “extraneous from the outside and/or not relevant at all” to be deemed illegal. In the US context, the insulation of Presidential decisions using CFIUS authority from substantive review is enshrined in statute, which provides that the President’s determinations are not subject to judicial review.

However, questions arise regarding the compatibility of such broad discretion with obligations to protect the fundamental rights of investors and companies. For instance, the European Charter of Human Rights safeguards property rights, including the freedom to sell property. Moreover, the EU Treaties’ provisions on freedom of establishment and capital protect the rights to buy and sell shares, extending even to third-country investors. The consistent jurisprudence of the EU Court of Justice underscores that national governments cannot restrict these fundamental freedoms solely for economic reasons. Additionally, governments should not possess such broad discretion that prevents courts from exercising proper judicial oversight and striking down discriminatory exercises of power (see most recently the Xella judgment). In light of these concerns, the European Commission’s draft for a new FDI Screening Regulation, published in January, underscores the importance of respecting fundamental freedoms in the application of FDI regimes. It emphasizes both the principle of non-discrimination and the Commission’s role in ensuring Member States’ compliance with these fundamental freedoms. 

Challenging decisions on procedural grounds

While courts may be hesitant to scrutinize FDI decisions intensely on substantive grounds, they often compensate by ensuring fair procedures and due process. Recent cases in Germany exemplify this approach.

In one instance, the Administrative Court of Berlin quashed an FDI prohibition by the German government on procedural grounds. The court found that the acquirer’s right to be heard was infringed because they were not given the chance to respond to accusations after all relevant facts were collected. It also held that the government had missed the statutory deadline for a prohibition and refused attempts by the government to give itself more leeway when calculating deadlines (VerwaltungsgerichtBerlin, Judgment of 15 November 2023, Case Number 4 K 253/22, Aeonmed/Heyer Medical). 

Another case concerned the German government closing proceedings without deciding on the substance, citing a belief that the acquirer had no valid contract (there were arbitration proceedings ongoing on the valid exercise of pre-emptive rights). On appeal, the Administrative Court ruled that the government had no right to intervene in the private dispute between the parties or to close the proceedings without deciding on the acquirer’s application. Tacit clearance was deemed to have been granted after the expiration of the statutory deadline (VerwaltungsgerichtBerlin, Judgment of 7 November 2023, Case Number 4 K 536/22, Alcmene). Notably, in both cases, the court explicitly avoided deciding on the substance of the cases and focused purely on procedural aspects where it applied a strict approach.

The focus on procedural questions is even more pronounced in the United States. Though the President’s substantive decision may be immune from review, that immunity may not extend to constitutional claims. In the 2014 case Ralls Corporation v CFIUS, the courts ruled that the President’s decision violated Ralls Corporation’s due process rights by not providing a reasoning for its decision. However, questions remain unanswered regarding due process, such as whether CFIUS can unilaterally impose mitigation measures without providing the parties first with notice of the action, the basis for the action, and opportunity to comment.

As government interventions in transactions citing national security concerns increase, we expect to see a rise in judicial challenges of FDI decisions. This trend is likely to be fueled by the evolving case law that confirms the availability and potential for successful appeals and establishes clear judicial review. While developments will vary by jurisdiction, procedural issues are expected to initially dominate as grounds for challenges. 

However, depending on the latitude afforded by the courts to government agencies in developing case law, parties may also gain confidence in challenging the evidence and substantive reasoning behind negative FDI decisions in some jurisdictions. This confidence could grow, especially if courts are able to strike an appropriate balance between safeguarding confidentiality interests (related to national security) and parties’ rights to access information (“equality of arms”).

Another area ripe for challenges is the necessity and proportionality of mandated remedies, particularly in Europe (whereas consented remedies can usually not be challenged). Consequently, although seeking judicial protection against negative FDI decisions remains challenging, parties involved in transactions subject to (potential) FDI review processes should be aware of the avenues available for judicial redress. 

Despite the significant discretion afforded to FDI authorities, they remain bound by obligations to ensure procedural fairness, protect parties’ rights of defense and act within their statutory powers. Parties can hold authorities accountable to these duties by understanding applicable laws and regulations, including:

  • the authority’s power to gather evidence from parties and third parties;
  • the obligations on the authority to conduct reviews with due process, such as providing access to evidence, maintaining confidentiality of sensitive information, allowing reasonable time scales for responses to information requests, and enabling parties to respond to allegations and provide adequate input on the remedies; and
  • any requirements for the authority to impose remedies that are necessary and proportionate to mitigate identified concerns.

Understanding the checks and balances inherent in an authority’s powers and the rights afforded to parties throughout the process will help to ensure the review is carried out within the rules and, in the worst-case scenario, enhance the prospects of a successful challenge in court.

With thanks to Freshfields’ Sarah Jensen, Alvaro Pliego Selie, Uwe Salaschek and Matthias Wahls for contributing this update.

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Our team

Please get in touch with us or your usual Freshfields contact if you would like to discuss these or any other regulatory issues in more detail.