The first few months of 2023 have seen significant developments in the FDI landscape that will have a major impact on cross-border transactions. Deal makers need to be aware that the scope of FDI control is increasing:
- With the United States taking major steps towards implementing an outbound FDI screening mechanism (which are echoed in Europe) and the European Commission further developing the EU Foreign Subsidies Regulation, new game changing regulatory frameworks take clearer shape.
- Following the EU Commission’s calling of recent years, by the end of the year almost all EU member States will have adopted a national FDI screening regime.
- On 27 April 2023, the UK Government published updated guidance that reflects its developing practice. Since January 2022, five transactions have been prohibited and 10 deals have been cleared subject to remedies.
Outbound FDI Screening
Foreign direct investment control has historically been centered on inbound FDI, meaning investment inflow into a country. The tide is turning, as the United States seems ready to introduce an outbound FDI control mechanism, whereby capital outflow towards certain countries will be subjected to a screening process. Similarly, the European Commission 2023 Work Program indicates that the Commission will examine whether additional tools are necessary in respect of outbound strategic investments controls, and is prepared to revise the EU’s FDI screening regulation.
In the EU, certain Member States have also started driving an FDI outbound initiative. For example, the German Foreign Ministry’s draft document on a new China Strategy leaked in November 2022 stated that Germany is examining the creation of a legal basis for scrutinizing foreign investments by German and European companies in security-critical areas.
Most recently, in a speech on EU-China relations to the Mercator Institute for China Studies and the European Policy Centre the EU Commission President Ursula von der Leyen specified the European Commission’s thoughts on a European outbound investment screening. According to President von der Leyen, Europe should develop a targeted instrument on outbound investment in order to close gaps which allow the leakage of emerging and sensitive technologies through investments in other countries. She further specified that such outbound investment regime would relate to a small number of sensitive technologies where investment can lead to the development of military capabilities that pose risks to national security, in particular sensitive high-tech areas such as microelectronics, quantum computing, robotics, artificial intelligence, biotech. She announced that the European Commission will present some initial ideas as part of its new Economic Security Strategy later this year (the full speech can be found here and further press coverage here).
For more information, please also see our previous coverage:
Outbound Investment Screening Regime—EU May Follow In U.S. Footsteps Potential Outbound Investment Screening Regime Receives Federal Funding
German FDI Reviews of Chinese Investments in 2022 Confirm the Current Trend – Strict Scrutiny and Political Dimension in Decision Making
EU Foreign Subsidies Regulation
The EU Foreign Subsidies Regulation (“FSR”) addresses distortive subsidies granted by non-EU countries to companies active in the EU. It aims to fill the regulatory gap left by merger control, FDI control and state aid proceedings. The FSR entered into force on 12 January 2023, establishing a mandatory notification regime for certain large mergers or public tenders for companies that have received substantial financial contributions from non-EU governments. These notification obligations come into effect on 12 October 2023. The proposed notification rules impose burdensome requirements for mergers and for public procurement tenders. In February, the European Commission launched a public consultation on its proposed rules and procedures for merger and public procurement notifications under the FSR. The consultation has attracted significant comments from companies and professionals anxious about the proposed notification rules’ potential to choke investments into the EU. Several trade bodies issued a joint statement urging the European Commission to refine the proposed FSR Implementing Regulation. In their statement, the trade bodies specifically addressed issues regarding the proposed reporting obligations and demand more guidance on key concepts and mechanisms. The joint statement can be found here.
For more information, please see our previous coverage:
Commission Consults on Notification Requirements and Process for EU Foreign Subsidies Regulation
EU Regulation on Distortive Foreign Subsidies Set for Adoption
More EU Member States implement FDI Regimes
FDI scrutiny in the EU intensifies. More and more EU Member States implement FDI regimes. On 1 March 2023, Slovakia’s FDI regime took effect. Further, several other EU Member States will adopt or have adopted FDI rules that are envisaged to take effect in the course of this year: The Dutch FDI regime is expected to enter into force until summer. As of 1 July 2023 Belgium will implement an FDI regime. Sweden is currently debating an FDI regime that is envisaged to come into force on 1 December 2023. In Ireland, a proposal for an FDI Regime is making its way through the legislative process and is expected to come into force in Q2 or Q3 2023.
UK National Security Regime: Enforcement Practice and Updated Guidance
On 27 April 2023, the UK Government published updated guidance on its recently introduced national security and investment screening regime. Since the National Security and Investment Act came into force in January 2022, the UK Government has reviewed more than 800 transactions for possible national security concerns. Five transactions have been prohibited, of which four involve Chinese investors and one involves Russian investment (according to the Government). At least two of the prohibitions (Nexperia/Newport Wafer Fab and LetterOne/Upp) are reportedly under appeal. 10 other transactions have been cleared subject to remedies.
For more information on the principal additions to the UK Government’s guidance and an overview of enforcement practice over the first 16 months of the regime, please see our previous coverage: UK National Security Regime: Enforcement Practice and Updated Guidance