Global foreign investment control regimes - Changes in light of COVID-19

The EU Foreign Direct Investment ("FDI") Screening Regulation was adopted in March 2019 and is due to come into effect in October 2020.¹

It sets out an EU-level mechanism to coordinate the screening of foreign investments likely to affect the security and public order of its Member States. This mechanism provides for an obligation to exchange information between Member States and the European Commission as well as the possibility for the Commission and Member States to issue comments and opinions on specific transactions up to 15 months after the foreign investment has been completed.

The ultimate decision as to whether a particular investment should be permitted will remain with the Member State where the investment is conducted.

• In advance of the FDI Screening Regulation coming into force in October 2020, the European Commission published FDI Guidelines on 25 March 2020,² urging Member States:
  
  • To be particularly vigilant to avoid a sell-off of EU businesses;
  • To make full use of existing national foreign investment screening mechanisms to take fully into account the risks to critical health infrastructures, supply of critical inputs, and other critical sectors (a non-exhaustive list is provided); and
  • For those Member States that do not currently have a (fully-fledged) screening mechanism, to set up such mechanisms and in the meantime to use all other available options to address cases where a foreign acquisition would create a risk to security or public order.³
• The Commission also suggested restrictions could be introduced on the free movement of capital based on the public interest (which includes public health) or public security exceptions set out in Art. 65 TFEU.
  
  • Such restrictive measures could in particular be taken to (i) ensure security of supply or provision of essential public services, (ii) address threats to financial stability and (iii) restrict "predatory buying" by foreign investors of companies with valuations on capital markets well below their true or intrinsic value based on the actual or potential impact of those investments on the safeguard of the public interest.
• EU national governments are encouraged to share information with the Commission, and between Member States on strategic FDI.
• On 16 April 2020, the Trade Commissioner Phil Hogan announced that the European Commission was planning to start monitoring inbound M&A activity and facilitating information exchanges among Member States on pending FDI.

France

Ministry of the Economy and Finance (Treasury)

As a principle, foreign investments in France are free and generally only trigger statistical declarations to be made to the Banque de France following completion of the transaction.

However, a prior authorisation by the French Minister in charge of the economy must be sought for investments in certain sensitive or "strategic" business sectors.

• From 1 May 2020, biotechnologies are included in the list of critical technologies that are subject to foreign investment screening by the French Government.
  
  • Note the French state had already recently extended its foreign investment scrutiny to cover a number of additional industries, and reduced the ownership threshold from 33.33% to 25%. These changes came into force on 1 April 2020.
• A decree has also been announced which envisages lowering from 25% to 10% the threshold for stakes acquired by non-EU/EEA investors in French listed companies active within the sectors subject to foreign investment control regulation. Such transactions would be notifiable and the Minister would have 10 days to decide if the transaction should undergo a prior authorisation process. The text of the decree is currently under preparation. Subject to its finalisation and adoption, the French Ministry of Economy and Finance has indicated that this change is expected to be applicable for the second half of 2020 and to last until 31 December 2020.

Germany

Federal Ministry for Economic Affairs and Energy

While Germany generally maintains a liberal policy with respect to foreign investments, there are review mechanisms in place which allow the Government to scrutinise such investments for national security concerns. The applicable review mechanism depends on the industry sector in which the target company is active. 

Under the so-called "cross-sectoral review", German authorities may examine corporate acquisitions in any industry sector if there is a danger to the public order or security of Germany. The relevant threshold is 10% in case of critical infrastructure companies and 25% in case of other companies.

In addition, the so-called "sector-specific review" applies to corporate acquisitions in certain sensitive sectors (e.g. defence or IT security) which can endanger material German security interests. The relevant threshold is 10%.

• On 27 April 2020, a draft of the 15th amendment to the Foreign Trade and Payment Ordinance was published, providing:
  
  • for an extension of the list of specially protected sectors to include, amongst others, digital radio authorities, development, manufacturing and supplying components for personal protective equipment, essential drugs, in vitro diagnostics in the field of infectious diseases, medical devices for infectious diseases and components, and raw materials listed in Annex 1 of the EU list COM(2017) 490;
  • that asset deals fall within the scope of the regime; and
  • that the review should take into account whether an acquirer is directly or indirectly controlled by a non-EEA government, or whether such control over the acquirer may be exercised, in particular by the ownership structure or in the form of financial resources, over and above a negligible level.
• Accordingly, an acquisition of an undertaking in the sectors listed above by a non-EU entity will be notifiable if they involve an acquisition of a stake of 10% or more or an acquisition of a separable business unit or all essential operating resources.
  
  • This amendment was approved by the Government on 20 May 2020 and will come into effect once the amendment is published in the Federal Gazette.
  • The originally planned expansion of the list to include areas such as artificial intelligence, robotics, biotechnology or semiconductors is postponed to Autumn 2020.
• In addition, amendments to the Foreign Trade and Payment Act are being discussed, including: the lowering of the threshold such that the German Government may intervene and open review proceedings if there is an "expected impairment", rather than an "actual threat" (as is currently the case), to German public order or security; consideration of EU-wide, as well as national, interests; suspensory effects in the critical infrastructure sector; and a ban on closing prior to clearance (there is no such ban at present, although acquirers usually make clearance a closing condition in practice).
  
  • These amendments to the Foreign Trade and Payment Act are not specifically related to COVID-19, and are yet to come into force.

 Italy⁴

Presidency of the Council of Ministers (Presidenza del Consiglio del Ministri)

Italy generally does not put up barriers to international trade and foreign investments and does not discriminate between domestic and foreign investors.

However, with respect to specific sectors which are deemed strategic, in order to protect the national interest relating to security and public order and the operation of networks and systems and the continuity of supplies, the Italian Government has the power to veto  certain transactions or to impose specific prescriptions. These powers come from the so-called "Golden Power Decree", amongst others.

• Further to the outbreak of COVID-19, the powers of the Italian Government have been strengthened and the strategic sectors governed by the "Golden Power" decree have been extended. Previously, filings were obligatory for foreign investment in the national defence, national security, energy, transportation, communications (including 5G networks) and high-technology sectors.
• The strategic sectors subject to the "Golden Power" procedure have been expanded to align with the European Commission's FDI Guidelines (see above). They now include the financial, credit and insurance sectors, various categories of critical infrastructure, sensitive facilities, supply of critical inputs, critical technologies and dual-use items, food security, media freedom and pluralism, and access to sensitive information.
• Extended screening in the strategic sectors will now apply also to a) acquisitions of controlling interests/assets by EU entities within the energy, transportation and communications sectors, as well as within the sectors indicated in the European Commission's FDI Guidelines, and b) acquisitions by non-EU entities representing 10% or more of share capital, where the investment value exceeds EUR 1 million, as well as any subsequent acquisition exceeding 15%, 20%, 25% and 50% in companies owning assets with strategic relevance within the energy, transportation and communications sectors, as well as within the sectors indicated in the European Commission's FDI Guidelines.
• The Italian Government is also now entitled to initiate such review independently in the absence of a filing.
• These extended screening powers have effect from 9 April 2020, on a temporary basis until 31 December 2020. Such powers have been introduced by means of a Government Decree, which must be converted into law within 60 days to remain in force, although some amendments may occur in the conversion process.
  
  

 Poland

Office of Competition and Consumer Protection (UOKiK)

• The Polish Government announced on 23 April 2020 that it will require notification to the UOKiK of any planned takeovers of certain domestic companies by non-EU investors.
• Government committees are considering the draft amendments, which involve a temporary 24-month period of control on activities that could threaten security, order and public health. The industries which the government is focused on are the energy, medicine, pharmaceutical, food, transport, logistics, data processing and telecommunications sectors.

Spain⁵

General Directorate of Trade Policy and Foreign Investment

While Spain generally has a liberal policy on foreign investment, there are nevertheless certain notification requirements in place which allow for the Government to scrutinise activities directly related to national defence (e.g. the production of, or trade in, weapons, ammunition, explosives, war materials or aircraft). 

Moreover, freedom of foreign investment may be suspended on an ad hoc basis by the Council of Ministers when investments are deemed to affect or may affect, even indirectly, the exercise of public powers, or public order, security or public health. In such cases, the relevant foreign investment is subject to prior authorisation by the Council of Ministers. 

• Under new restrictions that entered into force on 18 March 2020 (as amended with effect from 4 April 2020), foreign investments resulting in the acquisition by non-EU/EFTA investors of 10% or more of the share capital (or leading to the effective management or control) of Spanish companies active in certain strategic sectors will be subject to an administrative authorisation.
• Foreign investments are defined as those made by non-EU/EFTA resident investors, or by EU/EFTA entities the beneficial ownership (meaning control or any stake of 25% or more in capital or voting rights) of which is ultimately held by non-EU/EFTA persons.
• The strategic sectors are broad, and include critical hard and soft infrastructure and related real estate assets (including energy, health, water, transport, communications, media, processing and data storage, aerospace, military, electoral and financial infrastructures); military and critical dual-use technologies, including nanotech and biotech; supplies of essential commodities; and sectors with access to sensitive data including personal data.
• Authorisation will also be required if the foreign investor is a) directly or indirectly controlled by a third country government (including public agencies, the military or armed forces); b) has made any investment or is involved in activities in sectors affecting national security, public policy and public health in another EU Member State; or c) if an on-going administrative or judicial proceeding has been brought against the foreign investor in another EU Member State or in its country of origin or in a third country concerning unlawful or criminal activities.
• The Spanish Government may also review foreign direct investments in sectors other than those specifically mentioned if they generally affect national security, public policy or public health.
• Temporarily, until further regulations develop these new rules, investments of under €1m are exempted from this prior authorisation. For investments of €1m to €5m, the authorisation procedure is simplified and resolved by a lower administrative body. For investments over €5m, the authorisation must be granted by the Government (the Council of Ministers) which may take up to 6 months to approve a request for authorisation.

United Kingdom

Relevant Government Minister

No specific foreign investment control regime. Mergers may be assessed by the Competition and Markets Authority under merger control legislation.

However, the UK Government can intervene in mergers where there is a public interest issue, including relating to national security; media quality and plurality; or the stability of the financial system.

No changes to the regime have been proposed in light of COVID-19. However, interventions by the UK Government in transactions which may raise public interest issues, including national security, have been increasing in the last two years.

Detailed proposals to introduce a new and separate clearance procedure for transactions raising possible national security concerns (not limited to foreign investment) were made by the Government in 2018. Whilst this has not yet resulted in specific legislative proposals, the Government did announce its intention to introduce a National Security and Investment Bill as part of the December 2019 Queen's Speech.

Australia⁶

Foreign Investment Review Board (FIRB)

FIRB reviews foreign investments into Australia under the Foreign Acquisitions and Takeovers Act 1975 (FATA). Transactions in all sectors are scrutinised, but clearance is generally required for the following foreign investments where the applicable monetary thresholds are met:

• acquisitions of land;
• 5% acquisitions in media entities;
• 10% acquisitions by foreign government investors and entities into which they have invested; and
• 20% in all other cases.

A foreign investor is defined broadly, e.g. including any entity in which another foreign person holds a 20% interest. Significant fines can be imposed for not filing.

• The monetary screening thresholds have been temporarily reduced to zero for all foreign investments into Australia. For most companies, the monetary threshold is normally A$266 million (c. US$173 million), but is lower in certain sectors.
  
  • Any proposed foreign investment therefore requires FIRB approval, regardless of the value of the investment or the nature of the foreign investor, where the other conditions of a significant or notifiable action are also met.
  • The A$0 threshold was already applicable to "foreign government investors", and private acquisitions in Australian media businesses, residential land proposals, mining and production tenements, and vacant commercial land proposals.
• As under the existing framework, acquisitions by private foreign investors of less than 20% in an Australian entity generally do not require approval (exceptions to this include Australian agribusinesses and land entities which require approval for acquisitions of more than 10%).
• FIRB has also extended the timeframes for reviewing applications from 30 days to up to 6 months (although in practice decisions seem likely to take 2-3 months in most cases). These measures will remain in force for the "duration of the coronavirus crisis".

Canada

Investment Review Division of the Innovation, Science and Economic Development (ISED) Department

If the applicable financial threshold under the Investment Canada Act (ICA) is met, a relevant foreign investment will require prior approval under the net benefit review test. In other words, ISED will assess whether the proposed transaction is likely to be of net benefit to Canada. If the applicable financial threshold is not met, the investment will merely be notifiable, requiring a short notice of the transaction to be filed within 30 days of closing.

In addition, any foreign investment in a Canadian business can be reviewed if it could have an effect on national security, regardless of financial thresholds.

• The ISED Investment Review Division announced on 18 April 2020 that there will be enhanced scrutiny of foreign direct investments of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or the Government by state-owned enterprises (or by private investors assessed as being closely tied to, or subject to direction from, a foreign government.
  
  • Such acquisitions may be subject to more detailed and lengthier reviews e.g. requests for additional information or extensions of timelines for review.
• The applicable economic thresholds for net benefit reviews under the ICA remain unchanged. However, as noted, the Canadian Government already has a pre-existing discretion to commence a national security review in respect of any transaction whereby a non-Canadian invests in a Canadian business.
• The new measures regarding transactions relating to public health or critical goods and services will remain in force until the economy recovers from the effects of the COVID-19.

China

State Administration for Market Supervision (SAMR) / Relevant Industry Regulator

Foreign investment into certain industries is prohibited (e.g. news agencies) and is restricted in other sectors. Foreign investment in some other sectors is actively encouraged.

Foreign investment into encouraged or other permitted sectors requires a relatively simple registration with SAMR. In restricted sectors, additional regulatory requirements may need to be satisfied, such as obtaining an additional prior approval from the relevant industry regulator. 

In addition, foreign investments may be subject to national security review if they may constitute a threat to national security.

• No changes to the legal regime have been proposed in light of COVID-19. However, the new Foreign Investment Law and its Implementing Regulations only came into force on 1 January 2020. They may be supplemented by additional rules and regulations in due course. Moreover, during the COVID-19 outbreak, the Chinese Government at different levels has issued a number of high-level guidelines to encourage and stabilize foreign investment in the PRC in light of the epidemic.
  
  • For example, the Ministry of Commerce of PRC issued a Circular on Further Expanding Reform and Opening up to Stabilize Foreign Investment during the COVID-19 Epidemic on 1 April 2020 to support foreign investment. This circular established several general guiding principles to promote foreign investment such as "fully supporting foreign-invested enterprises to restore normal production and operation", "promoting opening-up to a higher level" and "continuing to optimize the environment for foreign investment".
• More industries are likely to be removed from the "Negative List" (which sets out the prohibited and restricted sectors) as China is trying to attract foreign investment and demonstrate progress towards its international commitments to open up more of its economy.

India

Department for Promotion of Industry and Internal Trade (DPIIT)

Foreign investment in India requires prior government approval in certain sectors, including amongst others broadcasting, banking, defence, civil aviation,  telecommunications, mining, print media (newspapers and periodicals), multi-brand retailing and biotechnology.

Certain sectors, including lotteries, gambling, tobacco, atomic energy and certain railway activities, are not open to foreign investment. Other sectors require no approval.

Proposals must be made to the relevant government ministry who will review. Proposals for investments in specified sectors may also require additional security clearance from the Ministry of Home Affairs.

• Transfer of ownership of any existing entity or future foreign direct investment in an entity in India, directly or indirectly, resulting in beneficial ownership by an investor from India's neighbouring countries will require mandatory government approval. The measure is seen as largely targets at Chinese investment.
  
  • This is understood to apply to investors from China (including Hong Kong), Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan.
  • Pre-existing FDI by such countries will not be impacted, unless further investments are made to increase stakes.
  • These changes are not applicable to any other form of foreign investment like foreign portfolio investment (FPI) and foreign institutional investment (FII).
• Government approval is expected to take between 8-10 weeks to obtain for non-sensitive sectors, but may take longer for sensitive sectors, such as defence. Investments affecting national security may also be subject to security clearance from the Ministry of Home Affairs, which may take an additional 1-2 weeks.

Japan

Relevant Government Ministry

Japan has a relatively non-restrictive scheme for assessment of foreign investments. However, foreign direct investments in certain industries relating to national security, public infrastructure, public safety and other specific industries (e.g. agriculture) are subject to a prior notification obligation. This includes industries such as arms, aerospace, nuclear power, space development, information technology utilities, railway, hospitals, and vaccine manufacturing.

Other investments are in principle subject to ex-post reporting obligations.

• From 25 February 2020, if a foreign investor cannot file a required report due to unavoidable circumstances arising from COVID-19, there is a moratorium for the filing obligation. The investor must file the report without delay after the relevant circumstances cease.
• Unrelated to COVID-19, the Japanese government amended the relevant regulations which previously required prior notification or ex-post reporting where a foreign investor would hold 10% or more of the voting rights or the number of shares in a listed company after an acquisition, to (i) change the threshold from 10% to 1% and (ii) exempt certain types of acquisitions (e.g. portfolio investments) from the filing obligation.
  
  • These amendments took effect in May 2020 and will be fully applicable in June 2020.

United States

Committee on Foreign Investment in the United States (CFIUS)

CFIUS is authorised to review any transaction that could result in foreign control of a US business, as well as certain non-controlling investments in US businesses that afford a foreign person access to information, rights or involvement in specified US technology, infrastructure or data.

Rules adopted in February 2020 expanded the scope of investments subject to review to include non-controlling investments in US critical technology, critical infrastructure and sensitive personal data businesses, and certain real estate transactions, and also opened up some foreign investments to possible CFIUS review for a period of five years.

• On 5 May 2020, the Restricting Predatory Acquisition During COVID-19 Act was introduced in Congress which, if passed, would bar all acquisitions of US entities by Chinese investors until the COVID-19 pandemic ends, unless CFIUS determines the investment is justified. This was in response to concerns that Chinese investors would be in a position to prey on US companies starved of liquidity.
• On 17 April 2020, the Agricultural Security Risk Review Act was introduced in Congress. If passed, this bill will add the Secretary of the Department of Agriculture as a permanent member of CFIUS, in response to perceived weaknesses in US food supply security that COVID-19 has brought to the fore.
• More generally, CFIUS is expected to increase its national security review of, amongst others, biotechnology and life sciences mergers during the crisis. It has also reportedly heightened its efforts to identify and review recent corporate transactions which were not filed with CFIUS before they closed, potentially focusing on transactions that may have contributed to shortages of critical supplies necessary to combat COVID-19.
• Other recent developments unconnected to COVID-19 include:
  
  • CFIUS filing fees have been introduced on an interim basis from 1 May 2020. Fees become payable on transactions with a value at or above $500,000 and range from $750 to $300,000 (for deals with a value of at least $750 million).
  • On 4 April 2020, the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector was created, which will conduct public interest reviews of national security and law enforcement concerns that may be triggered by foreign investment in the U.S. telecommunications sector. It may also take steps to investigate past foreign investment transactions or authorisations that have already been issued.