- Home
- Insights
- Antitrust 10 key themes
- Foreign Direct Investment – Record Year ...
10 key themes
Foreign Direct Investment – Record Year for Prohibitions and New Developments
IN BRIEF
2022 saw seismic shifts in geopolitics spurred by the war in Ukraine and frictions between some of the world’s largest economies, resulting in many countries adopting more protective, if not protectionist, policies. These trends have impacted the regulation of foreign investment where we have seen a record number of deals prohibited or subjected to onerous conditions and a proliferation of new regulations and policy changes across the globe that dealmakers need to navigate. More sectors than ever are being subjected to intense scrutiny on national security grounds, including computing hardware, robotics, artificial intelligence, advanced materials and data infrastructure.
Unprecedented number of deals prohibited or unwound on national security grounds
Heightened tensions between the leading Western economies and Russia and China, together with growing concerns about technology transfer and supply chain security, saw intense political focus and media coverage on foreign investment policy and acquisitions in 2022. An unprecedented number of transactions were prohibited, abandoned or unwound due to national security or foreign investment concerns, a trend that we expect to continue in 2023.
In the United States, a better resourced Committee on Foreign Investment in the United States (CFIUS) has stepped up its efforts to identify, call in and in some cases force the divestment of completed investments that pose national security risks. The latest published statistics indicate that CFIUS reached out to parties to 135 transactions in 2021, requesting filings for eight of those transactions. CFIUS reportedly required divestment in several instances in the past year, mostly involving investors with Chinese and Russian ties. Portending even more aggressive enforcement of CFIUS mandatory filing requirements and mitigation agreements, CFIUS issued Enforcement and Penalty Guidelines for the first time in October 2022. While China and Russia are likely to remain the principal focus of these efforts, investors from other countries in sensitive businesses have received inquiries from CFIUS and are likely to also continue to experience an overall increased level of scrutiny.
On the other side of the Atlantic, within the first year of the UK’s National Security & Investment Act (NS&I) regime coming into full force, the UK government has already prohibited three transactions and issued an order to unwind two more, all of which involved Chinese- or Russian-backed acquirers of intellectual property rights over, or ownership of, advanced technologies or communications networks. A significant proportion of Final Order cases, i.e., cases where the UK government has imposed remedies, have also involved targets developing advanced or sensitive technologies as well as those owning and operating critical national infrastructure assets (notably in the energy sector).
Other European regulators have also taken a tough stance on Chinese investment in sensitive sectors such as technology, health care and critical infrastructure. For example, the German government cited protection of technological and economic sovereignty as the basis for prohibiting acquisitions of three semiconductor and wafer manufacturers in 2022, and partially prohibited Chinese shipmaker Cosco’s acquisition of a minority stake in the Port of Hamburg on the grounds of “threat to public order and security” (a controversial decision that has sparked significant debate both within and outside Germany).
Against the backdrop of the ever-increasing scrutiny of foreign investment by national governments, undertaking an upfront and rigorous FDI feasibility assessment is becoming critical in almost all deals.
|
Alastair Mordaunt |
New CFIUS Executive Order – a greater transparency of national security risk factors
On September 15, 2022, President Biden signed an executive order (EO) directing CFIUS to consider certain national security risk factors when analyzing transactions, providing greater public transparency and more definitive direction to CFIUS agencies.
The EO confirms that ensuring supply chain security and technological competitiveness are important considerations in CFIUS’ national security review, especially as it relates to the technologies of the future (advanced computing, biotechnology and clean energy technologies, among others), regardless of their current known or intended military applications. Parties should be aware that even investors from friendly countries may be closely scrutinized on these grounds. Cybersecurity and access to sensitive data also remain key factors that CFIUS takes into account in its national security review. The cybersecurity posture of both the investor and the target may be relevant to CFIUS’ assessment of the effect of the transaction on cybersecurity and the protection of sensitive data.
The EO repeatedly emphasizes with respect to each of the foregoing factors that CFIUS may consider third-party risk, meaning indirect risks from countries of concern like China. Even where the transaction has no direct nexus to such country, CFIUS may view the investor’s own investment, R&D or manufacturing relationships in such country, or dependence on revenue from such country, as risk factors.
While the EO more reflects current trends than establishes a new direction for CFIUS, it is still notable as confirmation that an increasingly broader range of US targets and foreign investors will face CFIUS scrutiny and because it may have the effect of lowering the threshold for CFIUS action whenever these factors are present. As CFIUS continues its push to engage with other countries on foreign direct investment (FDI) screening, it is also possible that many of these themes will be adopted by FDI authorities in other jurisdictions as well.
Outbound investment controls – a new layer of foreign investment regulation?
While the focus in recent years has been on regulating inbound investments, discussions around the introduction of outbound investment screening (OIS) in the United States and EU have gained momentum. OIS is intended to close the circle of government investment control: in addition to inbound screening, OIS seeks to control strategic investments abroad in countries such as China and Russia and is one additional piece of the current US/China strategy in tense geopolitical times. Some lawmakers are focused on OIS as a means of addressing the risk that strategic and financial investors may aid in the development in China or Russia of technologies that are sensitive and that the government is seeking to protect through inbound investment and export controls. Other lawmakers also see OIS as a means of addressing offshoring of critical capabilities to China and the resulting increased reliance on China.
Some limited outbound investment restrictions related to semiconductor technology have already been enacted as part of the US Creating Helpful Incentives to Produce Semiconductors Act of 2022. There are active discussions in Congress to establish a much broader form of OIS, but no legislation has received sufficient support. In the absence of legislation, the Biden administration is considering whether to create some form of OIS via EO. However, it has not yet settled on whether it will seek to establish a mechanism just to collect information or instead establish an actual screening mechanism.
The EC has also announced that it will review its control mechanisms for outbound investments. This response is likely triggered by the need for coordination between the United States and Europe on OIS to make this an efficient tool in the Western Hemisphere. However, so far, it remains to be seen whether and how the EU wants to address OIS from a European perspective or whether this will be addressed at the member state level. Several EU member states are already in discussions with the US government and assessing the implementation of OIS regulations.
Most clients have already become accustomed to FDI filing requirements. Now, governments are thinking about the introduction of outbound investment controls. Once implemented, they would add yet another layer of regulatory uncertainty for cross-border M&A transactions.
|
Frank Röhling |
Looking ahead in 2023
- Transactions in a wider range of sectors will be scrutinized. While deals in the defense and military industries and those involving critical infrastructure will still continue to attract scrutiny, we can expect foreign investment regulation to bite on deals in a wider range of sectors, especially those involving advanced or emerging technologies such as computing, advanced materials and health care, and critical infrastructure.
- Regulation of outbound investments may be on the horizon. With OIS firmly on the policy agenda in the United States and the EU, if legislated, dealmakers will need to navigate an additional layer of regulation and pay particularly close attention where capital or sensitive technology and know-how are flowing into countries that may pose strategic or national security risks.
- Proactive management of regulatory risk remains key to deal certainty. Dealmakers need effective diligence on commercial ties, in particular to China and Russia, to identify areas of potential concern early and develop an effective regulatory engagement and communications strategy that bridges commercial rationales with national and economic security goals.
With thanks to Justin Chen, Sarah Jensen, Ilka Oberländer, Uwe Salaschek and Tuna Tanik for their contributions to this theme.
10 key themes
Foreign Direct Investment – Record Year for Prohibitions and New Developments
IN BRIEF
2022 saw seismic shifts in geopolitics spurred by the war in Ukraine and frictions between some of the world’s largest economies, resulting in many countries adopting more protective, if not protectionist, policies. These trends have impacted the regulation of foreign investment where we have seen a record number of deals prohibited or subjected to onerous conditions and a proliferation of new regulations and policy changes across the globe that dealmakers need to navigate. More sectors than ever are being subjected to intense scrutiny on national security grounds, including computing hardware, robotics, artificial intelligence, advanced materials and data infrastructure.
Unprecedented number of deals prohibited or unwound on national security grounds
Heightened tensions between the leading Western economies and Russia and China, together with growing concerns about technology transfer and supply chain security, saw intense political focus and media coverage on foreign investment policy and acquisitions in 2022. An unprecedented number of transactions were prohibited, abandoned or unwound due to national security or foreign investment concerns, a trend that we expect to continue in 2023.
In the United States, a better resourced Committee on Foreign Investment in the United States (CFIUS) has stepped up its efforts to identify, call in and in some cases force the divestment of completed investments that pose national security risks. The latest published statistics indicate that CFIUS reached out to parties to 135 transactions in 2021, requesting filings for eight of those transactions. CFIUS reportedly required divestment in several instances in the past year, mostly involving investors with Chinese and Russian ties. Portending even more aggressive enforcement of CFIUS mandatory filing requirements and mitigation agreements, CFIUS issued Enforcement and Penalty Guidelines for the first time in October 2022. While China and Russia are likely to remain the principal focus of these efforts, investors from other countries in sensitive businesses have received inquiries from CFIUS and are likely to also continue to experience an overall increased level of scrutiny.
On the other side of the Atlantic, within the first year of the UK’s National Security & Investment Act (NS&I) regime coming into full force, the UK government has already prohibited three transactions and issued an order to unwind two more, all of which involved Chinese- or Russian-backed acquirers of intellectual property rights over, or ownership of, advanced technologies or communications networks. A significant proportion of Final Order cases, i.e., cases where the UK government has imposed remedies, have also involved targets developing advanced or sensitive technologies as well as those owning and operating critical national infrastructure assets (notably in the energy sector).
Other European regulators have also taken a tough stance on Chinese investment in sensitive sectors such as technology, health care and critical infrastructure. For example, the German government cited protection of technological and economic sovereignty as the basis for prohibiting acquisitions of three semiconductor and wafer manufacturers in 2022, and partially prohibited Chinese shipmaker Cosco’s acquisition of a minority stake in the Port of Hamburg on the grounds of “threat to public order and security” (a controversial decision that has sparked significant debate both within and outside Germany).
Against the backdrop of the ever-increasing scrutiny of foreign investment by national governments, undertaking an upfront and rigorous FDI feasibility assessment is becoming critical in almost all deals.
|
Alastair Mordaunt |
New CFIUS Executive Order – a greater transparency of national security risk factors
On September 15, 2022, President Biden signed an executive order (EO) directing CFIUS to consider certain national security risk factors when analyzing transactions, providing greater public transparency and more definitive direction to CFIUS agencies.
The EO confirms that ensuring supply chain security and technological competitiveness are important considerations in CFIUS’ national security review, especially as it relates to the technologies of the future (advanced computing, biotechnology and clean energy technologies, among others), regardless of their current known or intended military applications. Parties should be aware that even investors from friendly countries may be closely scrutinized on these grounds. Cybersecurity and access to sensitive data also remain key factors that CFIUS takes into account in its national security review. The cybersecurity posture of both the investor and the target may be relevant to CFIUS’ assessment of the effect of the transaction on cybersecurity and the protection of sensitive data.
The EO repeatedly emphasizes with respect to each of the foregoing factors that CFIUS may consider third-party risk, meaning indirect risks from countries of concern like China. Even where the transaction has no direct nexus to such country, CFIUS may view the investor’s own investment, R&D or manufacturing relationships in such country, or dependence on revenue from such country, as risk factors.
While the EO more reflects current trends than establishes a new direction for CFIUS, it is still notable as confirmation that an increasingly broader range of US targets and foreign investors will face CFIUS scrutiny and because it may have the effect of lowering the threshold for CFIUS action whenever these factors are present. As CFIUS continues its push to engage with other countries on foreign direct investment (FDI) screening, it is also possible that many of these themes will be adopted by FDI authorities in other jurisdictions as well.
Outbound investment controls – a new layer of foreign investment regulation?
While the focus in recent years has been on regulating inbound investments, discussions around the introduction of outbound investment screening (OIS) in the United States and EU have gained momentum. OIS is intended to close the circle of government investment control: in addition to inbound screening, OIS seeks to control strategic investments abroad in countries such as China and Russia and is one additional piece of the current US/China strategy in tense geopolitical times. Some lawmakers are focused on OIS as a means of addressing the risk that strategic and financial investors may aid in the development in China or Russia of technologies that are sensitive and that the government is seeking to protect through inbound investment and export controls. Other lawmakers also see OIS as a means of addressing offshoring of critical capabilities to China and the resulting increased reliance on China.
Some limited outbound investment restrictions related to semiconductor technology have already been enacted as part of the US Creating Helpful Incentives to Produce Semiconductors Act of 2022. There are active discussions in Congress to establish a much broader form of OIS, but no legislation has received sufficient support. In the absence of legislation, the Biden administration is considering whether to create some form of OIS via EO. However, it has not yet settled on whether it will seek to establish a mechanism just to collect information or instead establish an actual screening mechanism.
The EC has also announced that it will review its control mechanisms for outbound investments. This response is likely triggered by the need for coordination between the United States and Europe on OIS to make this an efficient tool in the Western Hemisphere. However, so far, it remains to be seen whether and how the EU wants to address OIS from a European perspective or whether this will be addressed at the member state level. Several EU member states are already in discussions with the US government and assessing the implementation of OIS regulations.
Most clients have already become accustomed to FDI filing requirements. Now, governments are thinking about the introduction of outbound investment controls. Once implemented, they would add yet another layer of regulatory uncertainty for cross-border M&A transactions.
|
Frank Röhling |
Looking ahead in 2023
- Transactions in a wider range of sectors will be scrutinized. While deals in the defense and military industries and those involving critical infrastructure will still continue to attract scrutiny, we can expect foreign investment regulation to bite on deals in a wider range of sectors, especially those involving advanced or emerging technologies such as computing, advanced materials and health care, and critical infrastructure.
- Regulation of outbound investments may be on the horizon. With OIS firmly on the policy agenda in the United States and the EU, if legislated, dealmakers will need to navigate an additional layer of regulation and pay particularly close attention where capital or sensitive technology and know-how are flowing into countries that may pose strategic or national security risks.
- Proactive management of regulatory risk remains key to deal certainty. Dealmakers need effective diligence on commercial ties, in particular to China and Russia, to identify areas of potential concern early and develop an effective regulatory engagement and communications strategy that bridges commercial rationales with national and economic security goals.
With thanks to Justin Chen, Sarah Jensen, Ilka Oberländer, Uwe Salaschek and Tuna Tanik for their contributions to this theme.
10 key themes
- Introduction
- 01. The Changing Face of Antitrust
- 02. Is Merger Control Fit for Purpose – Evolution or Revolution?
- 03. Foreign Direct Investment – Record Year for Prohibitions and New Developments
- 04. Financial Investors – In The Regulatory Spotlight
- 05. Collaboration and Licensing – New Risks and Opportunities
- 06. A Vertical Revival – Expanding The Enforcement Toolkit
- 07. A New Age For Investigations – Prepare for Agencies to Come Knocking
- 08. Digital Regulation – Contagion of New Rules
- 09. Mass Claims and Antitrust Litigation
- 10. Trade and Subsidy Control
- Contact us
