• The UK Government consults on changes to the National Security and Investment Act.
• The new Irish FDI regime was signed into law and is expected to come into force in Q2 2024.
• An update on the state of Dutch FDI review confirms active enforcement and adds clarification on retro-active application.
• Seemingly small but impactful changes of the French FDI regime ahead.
• German courts overrule FDI decisions of the German FDI authority. Judicial protection is possible, but more likely succeed on the basis of procedural breaches.
• The Italian Government vetoes an acquisition in the defense sector by French Safran.
• The European Commission published its third annual report on EU FDI screening, providing an overview of FDI enforcement trends and statistics and also published the results of its consultation on the evaluation and revision of the EU FDI screening regulation.

UK Government consults on changes to National Security and Investment Act

On November 13, 2023, the UK Government opened a consultation on proposed changes to the National Security and Investment Act, less than two years after the regime came into force.

Oliver Dowden MP, the Deputy Prime Minister and formal decision-maker under the regime in his role as Cabinet Secretary, describes the consultation as an opportunity for respondents to share views on how the NSI regime “can be even more business friendly while maintaining and refining the essential protections” needed to protect national security.

In addition to broader questions on stakeholders’ experience of the regime to date, the consultation seeks views on several possible changes. The most significant questions from an investor perspective include:

• Whether certain types of transactions could be exempt from the mandatory notification regime, such as some internal reorganisations; and
• How the 17 sensitive areas of the economy in which a mandatory notification of investments can be required might be amended, including by narrowing the scope of the “artificial intelligence” definition and adding new categories for semiconductors and critical minerals (which are currently covered only in related sector definitions).

For further information on the consultation, please see our analysis here.

New Irish FDI regime signed into law and expected to come into force in Q2 2024

On October 31, 2023, the Irish President signed into law the Screening of Third Country Transactions Act, bringing Ireland into line with the EU FDI Regulation. The new regime requires mandatory notification by non-EEA investors for investments in Irish assets or undertakings that relate to: (a) critical infrastructure, whether physical or virtual; (b) critical technologies and dual-use items; (c) supply of critical inputs; (d) access to sensitive information; or (e) the freedom and pluralism of the media. 

Transactions that fall outside the mandatory sectors can be called in for ex officio review  where security or public order concerns arise. The new regime will also have retrospective effect, as the Government will be able to review transactions that completed up to 15 months before the Act comes into force. For further information, please see the announcement by the Irish Government here and new legislation here.  

Update on state of Dutch FDI review

On November 27, 2023, the Minister responsible for FDI control in the Netherlands updated Parliament on the state of Dutch FDI review including statistics on the number of notifications and investigations. This is the first official update since the entry into force of the general FDI regime in June 2023. The statistics confirm an active enforcement of both the sector-specific and general FDI regimes with the latter giving rise to a significant uptick in notifications and investigations. 

The update also clarifies that, other than companies active in vital services, the retro-active application of the general FDI regime only applies to companies active in dual-use technology and/or military goods. This retro-active application – which exists only until the end of January 2024 – allows the responsible Minister to require the notification of transactions that closed after September 8, 2020 and that give rise to serious national security concerns. In contrast to earlier reporting, the acquisition of Nowi, a Dutch microchip startup, by Chinese-owned semiconductor maker Nexperia’s could therefore not be called in for review.     

For more information on these developments, please see our analysis here.

French FDI control regime soon to be extended to the extraction and processing of critical raw materials and to local branch offices of foreign entities

On August 24, 2023, the French Ministry of the Economy and Finance announced its intention to extend the sectors eligible for FDI control in France to the mining sector, and in particular to the extraction and processing of critical raw materials considered essential to industrial sovereignty and independence.

The implementing decree is expected to be adopted shortly. No indication has been given concerning the list of the concerned raw materials but it can be expected that it will be in line with the Commission’s proposal for a Critical Raw Materials Act and include, notably essential battery raw materials.

French FDI control will also be extended to branch offices in France of foreign entities conducting sensitive activities. This measure is designed to avoid circumvention of the regulation whereas the French regime currently only covers entities with legal personality in France or branches of such entities.

German Courts overrule FDI Decisions

German courts have recently overruled two decisions of the German FDI authority, the Federal Ministry for Economics and Climate Action (“BMWK”). The reasons for the judgments have not yet been published. The following is based on press releases.

In one case, Austrian acquirer Alcmene, with ultimate beneficial owner in Guernsey, envisaged to acquire a stake in German PCK refinery Schwedt from Shell. After the parties concluded a purchase agreement the BMWK began the investment review. Meanwhile, a German Rosneft subsidiary, co-owner of the refinery, exercised a pre-emptive right, blocking Alcmene’s acquisition. As a result, Alcmene withdrew its initial FDI filing. After Rosneft’s subsidiary was put in trusteeship by the German government following Russia’s invasion of Ukraine, Alcmene re-submitted its FDI filing. Shell then terminated the transaction upon the long-stop date and the BMWK terminated the ongoing FDI review. Alcmene initiated arbitration against Shell for terminating the transaction and initiated a claim against the BMWK for terminating the FDI review. The court held that the discontinuation of the review proceedings by the BMWK was unlawful because it had no legal basis. The administrative proceeding initiated at the request of Alcmene could only have been discontinued with the consent of Alcmene. The court further held that since such consent was never given, and due to the pending arbitration proceedings between Alcmene and Shell, the envisaged transaction is (tentatively) alive and in the meantime had been notionally cleared because the review period available to the BMWK had lapsed.

In a second case, the BMWK had prohibited the acquisition of the German medical devices manufacturer Heyer Medical  by Chinese Aenomed (see our blog post here). In April 2020, the BMWK initiated a review after becoming aware of the transaction through public sources. Aenomed then submitted a filing applying for clearance in July 2020. In August 2020, the BMWK initiated a phase II review and eventually prohibited the transaction in April 2022. The court nullified the BMWK’s prohibition on two grounds: First, the BMWK had violated the fundamental right of Aenomed’s to be duly heard in the proceedings. The BMWK only held one hearing with Aenomed in May 2020, after which the authority continued its investigation and made several further information requests. Until it finally prohibited the acquisition in April 2022, the BMWK did not conduct a second hearing of Aenomed. Second, similar to the Alcmene/Shell case the court held that the transaction had been notionally cleared because the review period available to the BMWK had lapsed before it opened a phase II proceeding in August 2020. In particular, the court clarified that the initial review period started in April 2020, when the BMWK learned about the transaction through publicly available information. This initial review period did not start over when Aenomed filed for clearance in July 2020.

Both cases show that judicial appeal against the BMWK’s FDI decisions is possible in practice. At the same time, judicial appeal is more likely to be successful if the BMWK breached or disregarded procedural rules. In neither case did the court make a judgment of the substantive assessment of the BMWK as to whether the transactions would have affected public order or security. Generally, challenging the BMWK’s decision on substantive grounds is difficult, because of the BMWK’s discretion and political prerogative, leaving courts with limited judicial authority to assess and overturn them. 

Italy vetoes Safran’s acquisition of Microtecnica

On November 16, 2023, the Italian Government vetoed the acquisition of Microtecnica, an Italian company active in the design and development of flight control actuation systems. The proposed acquirer is Safran, a French high-tech group active in the aviation, defense and space industries. Microtecnica is a subsidiary of RTX, the US defense and aerospace group. Microtecnica is part of a broader perimeter of high-technology actuation and flight control activities that RTX had agreed to sell to Safran. Reportedly, the German Government also weighed in and raised concerns about the proposed acquisition.

The veto is one of the very few issued by the Italian Government in the about 11 years since the inception of its current FDI screening regime, and the second one in relation to an acquisition by a French investor. Under Italian law, the Government’s decisions under the FDI regime may be appealed before the Regional Administrative Court of Rome. Safran is reported considering to challenge the veto in court.

The European Commission’s report of its consultation on the evaluation and revision of the EU FDI screening regulation

On November 28, 2023, the European Commission published the results of the targeted consultation on the evaluation and revision of Regulation (EU) 2019/452 (the “Regulation”), which it ran between June 14 and July 21, 2023.

Based on the outcome of the consultation, overall, it does not appear that the Regulation will experience a major overhaul, possibly with an exception on the scope of application based on the nationality of investors.

Highlights of the consultation are as follows:

• The vast majority supported the view that the Regulation should also apply to investors established in the European Union but ultimately controlled by non-EU nationals. At present, and consistent with EU law (including the case-law of the ECJ, as most recently reiterated in the “Xella” case (C-106/22)), the Regulation only applies to investments made by “foreign investors”, defined as investors that are nationals of, or entities established in, a non-EU country.
• Most respondents have expressed a strong preference in having the ultimate responsibility on screening decisions remain with the individual Member State, including in those cases where the investment concerns more than one Member State or involving EU critical assets, although at the same time supporting the view of close cooperation with other Member States and the Commission.
• Many respondents have complained about the lack of harmonization in the timelines of screening processes in the various Member States, as well as on the fact that at present all investments falling within the scope of the Regulation must be notified to all Member States and the Commission, as opposed to a subset to be identified based on certain criteria.

The European Commission’s annual screening report

On October 19, 2023, the European Commission published its third annual report on the screening of foreign direct investments into the Union, following previous editions published in September 2022 and November 2021. Cleary Gottlieb’s review of the Report can be found here and notable findings are as follows:

• The vast majority of M&A and greenfield FDI into EU have originated from the U.S. and the UK, while FDI from China has steadily declined in the last three years.
• EU FDI lands primarily in Western Europe, and targets 5 main sectors – Information Communication and Technology, Manufacturing, Professional, Scientific and Technical activities, Finance, and Retail.
• 22 EU Member States now have an active FDI regime, while the remaining 5 EU Member States are expected to join the EU FDI block next year.
• 55% of FDI filings in EU led to screening and decision, up from 29% in 2021 and 20% in 2020.
• 423 FDI filings were reviewed under the EU screening cooperation mechanism, up from 414 in 2021 and 265 in 2020; 90% of the 423 filings originated from only 6 countries – Austria, Denmark, France, Germany, Italy, and Spain.
• The vast majority of notified deals in the EU continue to be cleared unconditionally – 86% in 2022, 73% in 2021, and 79% in 2020. Prohibitions and deal abandonments were limited to 4-5% of the notified deals in 2021 and 2022, a noticeable drop from 9% in 2020, and in line with the Commission’s message that the EU is open to FDI and that “Member States only deny transactions that pose very serious threats to security and public order”. The remainder (c. 10-20%) of cases required remedies, primarily of a behavioral nature.
• Phase II in-depth reviews focused primarily on the manufacturing and IT sectors. Within manufacturing, FDI agencies targeted energy, cybersecurity, data processing and storage, health, semiconductors, communications, transport, defense, and aerospace.
• Semiconductors remain the most prominent FDI sector likely to attract in-depth scrutiny and potential prohibition (depending on the investor’s origin).