Navigating the brave new world of foreign investment controls – managing uncertainty and complexity

An ever-expanding reach 

Globalisation and a shift of economic power away from Europe and the US have resulted in the emergence of ‘new investors’, including state-owned enterprises and sovereign funds, from a diverse group of countries. At the same time, political agendas have tended to become more protectionist leading to many governments reviewing their powers to regulate investments and, in many cases, enhancing them. Foreign direct investment (FDI) controls – not necessarily only aimed at foreign or direct investments – have long been in place in countries such as the US, Canada, and Australia. Many other countries, including France, Germany, and the UK, have followed suit and either adopted or tightened their regimes. In the EU there are now only two out of the 27 Member States with no regime in place and no plans to introduce one. FDI controls are an increasingly complex regulatory issue to navigate and present a potential deal risk to strategic investments and the execution of transactions.

A less predictable and certain process

Foreign investment control is much more political in nature than other regulatory processes. This tends to affect the transparency of the process and the predictability of the outcome. 

Foreign investment approvals can take significant time to secure as the review process is largely political.

Expansive scope – Merger control thresholds tend to rely on a narrow set of specific factors such as turnover, asset value, or market shares. The jurisdictional tests for FDI controls are typically complex, detailed, and open to interpretation, giving authorities significant scope to decide that the relevant tests are met. In addition, certain FDI regimes affect transactions, such as internal restructurings, not typically caught by merger control. Parties therefore need to conduct a careful analysis of the identity of all direct and indirect investors, the transaction structure and the sector to which the investment relates. 

Voluntary or mandatory – In a number of jurisdictions (for instance the US, UK and Germany), the relevant authorities have wide powers to review deals that are not subject to mandatory notification requirements. To mitigate the risk of review (and its potential impact on the deal post-completion), parties may wish to consider voluntary filings. They should not assume that only investors from higher risk jurisdictions will face scrutiny. Recent examples in the UK have shown that US and EU buyers can be looked at just as closely. And even though lower value deals may often escape merger control reviews, this may not be the case for foreign investment approvals. 

Review period and timing – Foreign investment approvals can take significant time to secure and are typically subject to reviews that are less transparent and efficient than in merger control. As the review process is largely political, predicting whether a deal may attract closer scrutiny can be challenging, and lengthy in-depth investigations may be launched to review deals that seem unlikely to raise national security concerns. This impacts on any long-stop dates and conditionality.

Structuring for success

Aside from assessing whether a transaction may trigger formal FDI approvals, parties must consider, particularly in deals which may attract scrutiny, whether the proposed structure and operation of the target entity post-completion will comply with the regulator’s requirements as well as satisfy the investment objectives. 

Intervention by FDI authorities can undermine the rationale of the deal.

Protecting deal value – FDI authorities will not hesitate to block a deal or require the unwinding of a deal closed without prior approval, if there are concerns for national security. Even if a deal is ultimately cleared, a protracted review process and remedies imposed by FDI authorities can undermine the rationale of the deal for the acquirer. Remedies may affect the decision-making process and ownership structures, or restrict the commercial independence of the business. As well as conditions precedent, when negotiating the acquisition agreement, parties should consider matters such as long-stop date, information restrictions, cooperation obligations between the parties and obligations surrounding possible commitments.

Proactive engagement with stakeholders – Parties might also consider proactively engaging with the relevant authorities to pre-empt foreign investment concerns. Aside from offering voluntary undertakings, parties may want to consider how best to engage with government bodies to provide information and reassurance. 

Exit strategy – FDI controls also have an impact on exit strategies, since they may narrow the pool of potential buyers for a business involved in activities perceived to be critical for the national interest. This may be further complicated by the interplay with antitrust – a sale to a domestic buyer may address foreign investment concerns but raise additional merger control risks.