More and more jurisdictions requiring FDI notifications
Despite slower M&A activity last year compared to the record year 2021, the number of countries introducing instruments to screen foreign investments is still growing. While not all transactions require a mandatory filing, more and more regulators are keen to at least call-in transactions for review if they aren’t sure whether a deal might entail a national security issue. In the EU, the vast majority of Member States already have FDI screening instruments in place.
In 2023, important hubs for business activity and incorporation of companies such as Ireland, the Netherlands, Belgium and Luxembourg are expected to follow. Croatia, Cyprus, Estonia, Greece, Sweden and Switzerland also have plans underway to amend or introduce national security screening mechanisms. In addition, a number of non-European countries have recently announced plans to modernise their investment control regimes – for example, Canada in December 2022.
National security screenings - a Swiss knife for trade and security policy
No one likes to be called protectionist. And despite some gloomy predictions, globalisation and international M&A hasn’t yet come to an end. States therefore need to have an instrument that allow them to have a bigger say in trans-border transactions without entirely scaring off investors. FDI screenings are the tool of choice as they allow for enough flexibility whether to require a filing or to review ex officio, as well as for solving a case short of prohibiting it, e.g. by requiring commitments from the companies.
As governments often have a great deal of discretion as to what they consider to be “security” issues, and as successful court challenges of such decisions are rare (unlike in antitrust cases), FDI screenings provide for a low-risk instrument for politicians to interfere in business decisions. Beyond the broad concept of national security, some governments may be tempted to use FDI filings to address other policy objectives such as foreign trade relationships. For parties to transactions it will be even more important in 2023 to consider the political context of the markets they operate in and to pre-plan for FDI reviews in advance by preparing a convincing storyline to explain the benefits of the proposed deal.
Security - everybody’s darling
In a time of multiple global challenges such as climate change, supply chain issues, war and building back gingerly from the pandemic, “national security” is a concept broad enough to cover many things. With this in mind, expect 2023 to bring even more sectors of the economy under the FDI review spotlight, including traditional areas such as fossil fuels, [more modern ones like] renewable energy activities as well as battery technology for storage and e-mobility.
Also, the technology and communication space with anything involving artificial intelligence, automotive components required for connected and autonomously driving cars, and network technology enabling encryption and safe data storage – all obvious candidates for FDI screening scrutiny in 2023. It goes without saying that semiconductors or critical life sciences sectors such as vaccines will continue to feature highly on the agenda of many regulators.
Minority investments, stake-building and internal re-organisations
National security reviews do not only apply to full acquisitions of critical target companies. Many jurisdictions can review minority investments or even require mandatory filings for shareholdings as low as 10% if the acquired business is active in sensitive sectors. It is also often overlooked that further stake-building may trigger renewed filing obligations if an investor exceeds certain thresholds such as 25%, 50% or 75%.
Even less intuitive is the requirement to notify internal group reorganisations or restructurings to FDI authorities. While most countries exempt intra-group transactions, notable exceptions exist for instance under the new UK NSI regime, in Italy and Austria. As companies prepare for reviving their M&A activity in the course of 2023, they should not forget about these potential traps and unintentionally miss filing requirements when preparing a target for sale or taking what seems like a small, negligible stake in a business.
A concert of regulators
Finally, 2023 will highlight the interdependence between different regulatory review instruments. In addition to more and more FDI filings, merger control and antitrust investigations of so-called “killer acquisitions” in the technology and life sciences space present a major obstacle for some global deals.
That’s not all: just before Christmas, the European Commission published the new Foreign Subsidies Regulation (FSR) which might apply to any company active in the EU that has benefitted from some form of financial support from foreign States. The notion of financial support in this contest is very broad and can cover any direct or indirect public financial advantages of whatever nature granted by a non-EU State (including now the UK). The FSR provides for ex ante (transactions and public tender procedures) and ex post reviews by the European Commission.
Finally, in view of Russia’s attack on Ukraine, sanctions and export control provisions further complement regulators’ national security toolkit.
Preparing for 2023
Companies planning for transactions in 2023 should prepare well for this variety of regulatory challenges, in particular as regards national security reviews. Turning a blind eye to FDI reviews risks missing a mandatory filing requirement which could result in fines, legally void transactions and/or even constitute a criminal offence.
Parties also must not underestimate the complexity and time required to complete the regulatory process. It will be important to be realistic when planning deal timelines and long-stop dates, recognising that national authorities don’t usually share the same timing expectations for the completion of deals as financial investors. For transactions involving critical technologies or infrastructure, or investors from states like China (that will inevitably trigger increased scrutiny in a number of prominent jurisdictions), needing 6 to 12 months to complete a national security vetting process should not be a surprise.
In order to enhance the chances of successfully closing a deal (and in a timely manner), parties should map from the very beginning the political landscape and potential supporters, such as industry associations or important customers, and communicate effectively about the benefits of the transaction. Proactive thinking about solutions to offset potential security concerns, for instance by offering certain commitments or carving-out highly critical business segments, will be absolutely critical for avoiding unwelcome surprises for deals in 2023.
The global Hogan Lovells FDI team is available across jurisdictions to help you navigate through these challenges and successfully execute transactions in 2023.
Authored by Falk Schöning and Matt Giles.