Countries across Europe are taking new actions to block foreign takeovers. Share prices have plummeted due to the public health crisis caused by COVID-19, which in turn is attracting opportunistic corporate raiders. Asian firms and funds are particularly active at this time, ready to use the market slump to gain financial momentum as the health crisis relaxes in Asia and proceeds toward the Western markets. Regulators are concerned that investors from China, Saudi Arabia and other countries will take advantage of the volatility and undervaluation of European companies across industries. In response, European governments are preparing measures to defend their companies that are, while struggling financially, also strategically important. Investors should be aware that countries are taking steps to safeguard underpriced domestic companies, and that accessibility to certain cross-border transactions may become limited as the long-term economic effects of the health crisis endure.
Some of Europe’s biggest economies have announced intentions to protect domestic companies by increasing their scrutiny of foreign investments. These tactics typically involve tighter regulation at the deal screening level, including closer attention to industry-specific transactions and relaxed thresholds for blocking cross-border investments entirely. Some measures have been implemented in direct response to the COVID-19 pandemic, but others are the result of long-planned reforms.
For example, Spain has approved a particularly strict new foreign investment screening regime for any investor outside the European Economic Area. Specifically, any investment of 10 percent or more in a Spanish company engaged in technology, energy, transportation, aerospace and defense, media or healthcare now requires prior government approval.
Italy has significantly expanded its “golden power” rules in order to combat hostile foreign takeovers. These changes allow the Italian government to intervene in transactions arising out of a much wider range of industries, such as banking, insurance, healthcare and energy. Further, the authorities now have the power to screen any non-Italian proposed investor - even those within the European Union.
Germany has implemented restrictive new screening rules as well. In reviewing proposed foreign acquisitions, German authorities may now prevent a deal that will lead to a “foreseeable impairment” of German public security. The standard used to be an “actual threat,” but now serves to filter out even more potential cases of harmful foreign control.
Investors can expect more announcements by European officials in the coming weeks. The UK continues to enforce its foreign takeover rules that it tightened several years ago in light of increased security risks related to technology innovation. The French government is reviewing its current protective policies, including its unique legislative power to acquire control of a strategic company in times of crisis. While France has not yet nationalized any specific companies, it continues to monitor its current power to protect against foreign takeovers.
In March 2020, the European Commission issued guidance to European Union member states, urging them to preserve assets from foreign takeover during the current public health crisis, without undermining Europe’s general openness to foreign investment. These measures aim to supplement, rather than supplant, each individual state’s foreign investment screening protocol. We summarize this guidance in further detail in this client alert.
National protectionism was already an ongoing trend in the major Western economies, particularly in the fields of military and defense, infrastructure, and information technology. Foreign investment screenings have become prevalent in cross-border transactions, and the COVID-19 pandemic has only intensified this movement. If the public health crisis worsens into the third and fourth fiscal quarters, foreign investments may face continued delays or even suspensions. Investors from Asia, the United States and even within Europe should expect to see longer screening periods and potential intervention by the regulatory authorities. Even in cases where transactions have been envisaged long before the COVID-19 pandemic, investors may still face significant barriers to investing in certain European companies as regulators continue to monitor and adapt to the current economic climate.
Our Reed Smith Global Mergers and Acquisitions team includes multidisciplinary lawyers from the United States, Asia, Europe and the Middle East who stand ready to advise you on the issues above or others you may face related to COVID-19.
Client Alert 2020-242
