The EU regulation and guidance
EU regulation 2019/452, the FDI Screening Regulation, provides a framework for EU Member States to screen foreign investments into the EU on the grounds of security or public order, and for Member States to cooperate with each other and the Commission.
This is designed to minimise inconsistencies that may arise in different Member States’ own regulations. The EU will supervise how Member States apply their laws to FDI and may issue opinions where a proposed FDI is likely to affect projects and programmes of EU interest, such as Galileo, the satellite navigation system, or Trans-European networks.
The regulation takes effect from 11 October 2020. Ahead of its implementation, the EU has published Guidance, strongly counselling against opportunistic FDI and warning that “vigilance is required to ensure that any such FDI does not have a harmful impact on the EU’s capacity to cover the health needs of its citizens”.
Member States are entitled to use their respective FDI screening mechanisms, such as “golden shares” or other nationalization measures to inhibit FDI. The Guidance also provides that they can step in and act as market participants to prevent predatory takeovers where national security or public policy concerns are present.
The UK application
Powers of intervention
While the UK does not have a dedicated framework to regulate FDI, the Government may intervene in public interest cases where the jurisdictional thresholds of UK merger control are met and the transaction might affect national security, media plurality, or the stability of the UK financial system.
The Special Public Interest Regime is also in force: in mergers that involve government contractors that hold or receive confidential defence-related information and certain newspaper and broadcasting businesses, the Government may intervene where no turnover or share of supply tests are met.
Reform
As a preliminary measure, modifications to the existing Government powers to intervene in a transaction on public interest were made in June 2018. These expanded the scope of the Government’s existing jurisdiction to intervene in transactions in the UK military and dual-use, computing hardware, and quantum technology sectors by reducing the merger control thresholds from £70 million to £1 million and removing the share of market test.
The Government stated that the new legislation will allow it to “scrutinise investments and consider the risks that can arise from hostile parties acquiring ownership of, or control over, businesses or other entities and assets that have national security implications”. This is to ensure that “hostile parties or groups cannot circumvent our rules on a technicality by acquiring an asset rather than acquiring the business itself”.
Developments since the reform
- On 29 November 2019, senior ministers stated that the UK’s regime for screening foreign investment was insufficiently robust. Michael Gove, the Cabinet Office minister, said that he sought to strengthen the government office responsible for FDI screening. In agreement, Boris Johnson stated that investments from China posed “clear difficulties” for critical national infrastructure and to the UK’s relations with the United States, Canada, New Zealand, and Australia (the Five Eyes intelligence-sharing alliance).
- On 26 March 2020, the European Commission adopted a Communication on guidelines for Member States on FDI, the free movement of capital, and the protection of European strategic assets in which it calls for them to make “full use” of their existing regimes to limit FDI impacting COVID-related critical sectors.
- The UK Foreign Affairs Committee launched an inquiry on 7 April to examine how the UK Foreign and Commonwealth Office (FCO) assesses whether a potentially hostile party is seeking to secure significant influence or control over a UK company and in what circumstances the FCO should intervene. The National Security and Investment Bill 2019-20 was introduced into UK Parliament in December 2019 with the aim of giving the Government increased powers of security and is still going through the legislative process. A further focus of the inquiry is on what safeguards are required in the Bill to ensure that the FCO has a full role in the decision-making process in relation to interventions.
- Recently, in a letter of 3 June 2020 addressed to the Executive Vice-President of the Commission, the Chairman of the EPP Group in the European Parliament commented that “we must step up our efforts to block foreign takeovers of vulnerable European companies struggling to survive the crisis.” In light of the economic downturn, it urges the Commission “to take bolder and decisive actions throughout legislative and regulatory measures, including regulations, such as a temporary ban on foreign takeovers.” In order to preserve the industrial and corporate assets of EU-based companies, it urges that this is the “time to create all favourable conditions for our companies to relaunch or continue their operations steadily and sustainably and keep jobs in Europe.”
- On 17 June 2020, the Commission published a White Paper laying out proposals to level the playing field regarding foreign subsidies, which may be used by non-EU companies to outbid or undercut EU rivals. The proposals seek to bridge a “regulatory gap”, particularly foreign subsidies which appear to financially facilitate acquisitions, or support the operations, of EU undertakings. They address such challenges stemming from the openness of the EU’s single market by curbing investments by state-backed foreign companies that distort fair competition. They further propose to exclude unfairly subsidized companies from bidding for EU public-procurement projects and that foreign companies should be obliged to provide access to their infrastructure or research results.
Public consultation on the proposals will run until 23 September 2020, following which the Commission will prepare the most appropriate way to address the distortions created, including appropriate schemes for legal instruments. You can read more in our previous client alert.
- Most recently, on 22 June 2020, an expansion of the 2018 reform was put forward for debate in order to mitigate short-term risks ahead of the Bill’s enactment and enable the Government to intervene in three sectors which are central to national security: artificial intelligence, cryptographic authentication technology, and advanced materials. Both Houses of Parliament will need to debate and subsequently approve this proposal but, according to some sources, this is expected to take place within the next few months. Further, and coming into force immediately as of 23 June, the Government will be allowed to intervene if a business which is “directly involved in a pandemic response”, such as a vaccine researcher, is made the target of a takeover.
Impact
The new FDI-related measures will likely impact deal timetabling of transactions caught by the applicable domestic FDI rules and will likely require foreign investors to engage directly with the applicable Member State about the scope of the proposed investment. According to the UN Conference on Trade and Development, FDI inflows may drop by between 30 per cent and 40 per cent during 2020 and 2021 as a direct result of the COVID-19 pandemic.
In 2019, national security concerns led the UK Government to intervene in Advent International’s proposed acquisition of the aerospace and defence company, Cobham Plc, and in Connect Bidco’s acquisition of Inmarsat. It has since also sought to challenge the change of control and alleged relocation of technology of a UK supplier of security technology and high-end semiconductors by a Chinese company.
Foreign investors should therefore ensure that long stop dates and regulatory clearance closing conditions take into account the expected delays caused by the new rules when agreeing transaction documents, as well as closely reviewing their governance rights and reserved matters.
Conclusion
It is uncertain what the post-COVID-19 economy will look like and how global investments will flow in reaction.
It is, however, clear that an increasing number of countries in the EU, including the UK, are toeing a fine line between encouraging investment and ensuring that the COVID-19 pandemic will not allow opportunistic foreign control over sensitive sectors. Investigations and government intervention may therefore become more commonplace, particularly as we are already seeing the UK Government’s powers applied to further sectors that have become critical during the pandemic.
Client Alert 2020-399
