Posted on: 17 April 2020
International law firm Watson Farley Williams LLP says in its briefing that European countries have long welcomed a tide of inward investment, but the growing desire to protect strategic assets has turned that tide, with consequences for efficient deal making. This article considers the EU, UK, Germany and France.
Changing view of FDI
European countries both welcome, and restrict, foreign direct investment. Open economic policies have long carried an inward tide of investment. But, evident before COVID-19, and now fortified by it, the fear that foreign State-sponsored companies may buy strategic assets has turned that tide.
Alongside merger control, investors and owners of strategic assets must contend with legal limits on foreign ownership, and more regulatory filings. For many deals, such controls add only cost and delay; for some, they add uncertainty of outcome – a risk that, even if the deal is unobjectionable in competition law – it can still be blocked. While this risk has always existed – public interest controls imposed by individual countries on acquisitions in the defence or media sectors are long-standing – with new technology and a widening scope of what is considered “critical” infrastructure, more deals now face more scrutiny.
Managing risk in deals
With careful deal planning, this risk can be managed. To consider are:
- Country risk: which countries have the right to review and intervene in the specific transaction?
- Asset risk: for each country in (a) above, which assets are subject to control?
- Ownership risk: for each country in (a) above, what levels of ownership trigger intervention? It is particularly important to have a clear understanding of the complete ownership chain, in order to be able to identify relevant foreign ownership.
- Process: what timescales apply to Governmental screening?
- Documentation: two aspects apply. First, what is needed for a complete notification? Second, what conditions need to be included in transaction documentation?
In our practice we see how the parallel analysis of merger control and foreign investment control in deals is becoming more important. Depending on the parties’ requirements, some transactions can be structured to avoid the need for separate foreign investment screening but where this is not possible, parties are best advised to assess at the outset the risks of government objection and to prepare their case thoroughly.
EU – Regulation 2019/452 (the “FDI Screening Regulation”)
The Regulation provides a framework for EU Member States to screen foreign direct investments into the EU, on the grounds of security or public order, and for Member States to cooperate with each other and with the EU Commission. The existence of an EU framework is designed to reduce to a minimum the inconsistencies that may arise in different Member States’ own regulation.
The EU will supervise how Member States apply their laws to foreign direct investment. It may issue opinions to Member States, where a proposed foreign direct investment is likely to affect projects or programmes of EU interest. These programmes include Galileo, EGNOS, Copernicus, Horizon 2020, Trans-European networks for Transport, Energy and Telecommunications, European Defence Industrial Development Programme, and Permanent structured cooperation (PESCO).
We note below how German and French law are being amended to take specific account of the Regulation.
The Regulation takes effect from 11 October 2020 and will therefore apply only briefly to the UK during the Brexit transition period, which is scheduled to end on 31 December 2020.
In the context of the COVID-19 crisis, the European Commission on 26 March 2020 adopted a Communication on Guidelines for Member States on foreign direct investment (FDI) and the free movement of capital from third countries and the protection of European strategic assets, with a view to the application of the FDI Screening Regulation.
UK – new law proposed on national security intervention
Current powers to intervene
The UK Government has powers to intervene in certain mergers to protect the public interest. The law distinguishes between public interest and special public interest interventions. For 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 Secretary of State may intervene to decide.
For special public interest cases, a merger situation must have been created which fails to meet either the turnover or share of supply jurisdictional tests. The special public interests are stated to be: (a) involvement of a relevant government contractor; (b) a modified 25% share of supply test referring to newspapers of any description in the UK or a substantial part; and (c) a modified 25% share of supply test referring to broadcasting in the UK or a substantial part.
Focus on national security
The Government can today intervene in mergers to protect the public if these raise national security concerns. Transactions concerning any of the three sectors below may be subject to intervention on national security grounds where specific thresholds are met.
The sectors are: (a) development or production of items for military or military and civilian use; (b) the design and maintenance of aspects of computing hardware; and (c) the development and production of quantum technology.
As amended in June 2018, the jurisdictional thresholds for national security cases have been lowered so that intervention can take place where the target business has a UK turnover over £1m and either the existing share of supply test must be met (25% share created or enhanced), or the target must have a share of supply of 25% or more of relevant goods or services in the UK. The requirement in the usual share of supply test – for there to be an increment in share of supply in all cases – has been removed for these sectors.
Further reform coming
In addition to these changes, which were intended to be only the start of wider reform, the Government announced in December 2019 that it would introduce new legislation to strengthen its powers to scrutinise and intervene to protect national security.
There will be a new voluntary notification system, sitting alongside the existing merger control rules, which promises quick and efficient screening of transactions for potential security concerns. The Government will be able to add conditions to a transaction or, as a last resort, block it. Beyond that, many details were proposed in the Government’s consultation in July 2018, but a draft bill has not yet been published.
The new power would apply in all sectors of the economy and to businesses of any size. The broad policy intent can be gathered from the 2018 consultation.
In that consultation, the Government proposed a power to intervene in “trigger events” that may create a risk for national security, whether owing to the nature of the activities of the entity, or the nature of the asset, to which the trigger event relates. Many different transactions could be trigger events, for example:
- the acquisition of more than 25% of shares or votes in an entity;
- the acquisition of significant influence or control over an entity;
- the acquisition of further significant influence or control over an entity beyond the above thresholds;
- the acquisition of more than 50% of an asset; and
- the acquisition of significant influence or control over an asset.
As formulated by the Government in its consultation, trigger events would include:
- acquiring ownership of the servers of a business that provides services to a defence contractor;
- acquiring control over the intellectual property of code on which data servers operate for the benefit of an energy provider;
- buying land adjacent to or overlooking a national infrastructure site or a sensitive government facility; and
- acquiring assets physically located outside the UK including both physical assets and intellectual property rights where these are key to the provision of critical functions within the UK.
It is not yet known when the Government will publish the draft bill introducing these changes. The reforms have been some time in coming, and COVID-19 may delay this further.
Use this link to continue reading the briefing in full.
