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FDI and digital assets

FDI joins competition and regulatory rules as major consideration in digital infrastructure M&A deals

With the arrival of Foreign Direct Investment (FDI) regimes, a whole new layer of regulatory concerns is now imposed on investments in the communications sector. These investment review and control systems run unashamedly against the long-prevailing tide of market opening: they represent the clear triumph of security concerns and national interest over principles of free movement of business and capital.  

In this way, regulators are increasingly considering communications infrastructure as either:

  • critical national infrastructure, or
  • important national assets

This has led to a parallel chain of approval, which sits alongside any competition process or criteria, although the two tracks may have aspects in common. The FDI approvals are generally carried out by a minister or government department and are more often a political rather than a strictly legal process. This allows a wide range of discretion, as well as less formality. Whilst most regulatory regimes have specified assessment periods, timing can be more uncertain in FDI than merger control processes. In addition, FDI review of these transactions depends on varying definitions of “public interest”, such as public order, national security, protection of individual rights and supply chain reliability.

FDI controls often capture agreements, acquisition types and structural mechanisms that may fall outside merger control rules. Furthermore, many FDI regimes apply irrespective of any turnover or other thresholds.

National industrial policies have evolved quickly to reflect the growing importance of digital infrastructure and communications in society, and the new methods of working and living that have developed during the epidemic. The protection of digital infrastructure and the security of communications networks are key, for example, to the UK’s new National Security and Investment Act. This includes expansive sectoral definitions and, when it comes into force later in 2021, will require the mandatory notification of (among other deals) a broad array of digital and communications-related transactions. Other countries such as Germany have for some time considered the operation of IT infrastructure, housing and hosting, content delivery networks and cloud computing services as “sensitive”, requiring mandatory notifications of direct or indirect investments by non-EU/EFTA persons. Since May 2021, foreign investment in companies developing or manufacturing network components also often require notification.

These considerations interact in a complex way with new investment models for digital infrastructure. Earlier models, such as the national champion/dominant operator/single network communications paradigm, have evolved into a broader ecosystem.

Now, there are almost always multiple stakeholders, both at the network and services level - including service providers, network owners and operators (mobile and fixed) - as well as “over the top” players that use telecom networks to deliver communications and related services.

What’s more, a new range of funders and lenders has emerged, providing “neutral host infrastructure” that make networks available on a “connectivity as a service” basis. This can further complicate regulators’ ability to gauge the potential impact of M&A on domestic infrastructure and services.

With FDI considerations increasingly impacting communications deals, national and regional regulators will need to update their models and guidelines in order to reflect the wider range and greater number of infrastructure and service providers.

Authors

Chris Watson
Chris Watson
Partner
Global Head of TMC
London