Recent years have seen an upswing in foreign direct investment (FDI) reviews—a trend that has only accelerated sharply since the onset of the pandemic. Countries with no previous history of general foreign investment screening—the UK, Denmark and Switzerland among them—are introducing wide-ranging reviews for the first time.
In countries that already have FDI screening in place, the scope of reviews is expanding to encompass a broader range of sectors than ever before, including healthcare assets, as reviews become both more stringent and more frequent.
North America—CFIUS tightens its grip
Among the most notable recent changes to the global landscape of FDI screening was the passing of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) in the US. Since coming fully into effect in February 2020, FIRRMA has significantly overhauled the review process of the Committee on Foreign Investment in the United States (CFIUS), including expanding the range of transactions that CFIUS is able to review on national security grounds.
FIRRMA also introduced the requirement for mandatory filings in certain cases. New resources and CFIUS’s increasingly aggressive pursuit of non-notified transactions means that even already-closed deals are now more likely to come under scrutiny.
Transactions involving semiconductors sit at the top of CFIUS’s priorities, given the chips’ role in defense applications. CFIUS scrutinizes not only military semiconductor transactions, but all types of deals involving US semiconductor companies, including those making chips for personal computers, cellphones, cars and consumer electronics.
Meanwhile in Canada, the government is becoming increasingly proactive in initiating security reviews. A significant number of these result in divestiture orders—the majority involving investors from China.
In contrast to its North American neighbors, FDI screening in Mexico is somewhat less assertive than that of either the US or Canada. Inbound investments, whether direct or indirect, are generally allowed without restrictions or the need to obtain prior authorization. Exceptions include the acquisition of stakes in transportation and development banking. Additionally, foreign investment in several key sectors is subject to a 49% cap.
Harmonizing processes across Europe
Historically, Europe has featured a complex mosaic of different FDI regimes. Each country is responsible for its own investment screening, and rules vary considerably from country to country. Despite the single market, most EU member states regard any inbound investment (even from EU neighbors) as foreign.
While there is no one-size-fits-all approach towards reviews, recent moves by the European Union are intended to promote greater coordination between the 27 EU member states. The key instrument here is the EU Screening Regulation, which came into force in October 2020.
The regulation is primarily intended to encourage harmonization of differing review mechanisms at the member state level, but it does not provide the European Commission with a veto or enforcement rights over transactions.
Bigger changes are in the pipeline. These include a proposal to tackle foreign subsidies, which could make clearances for M&A by state-backed inbound investors involving EU targets harder to come by. The proposed regulation would target foreign-subsidized transactions, as well as any kind of subsidized commercial activity affecting EU markets, including bids for public contracts.
The EU is backing more investments into semiconductor production, to shore up the European supply chain and reduce dependence on foreign firms. The European Commission (EC) just announced the European Chips Act, which will open up an additional €15 billion in public and private investments through 2030. This is on top of 30 billion euros of public investments that had previously been earmarked. While encouraging the investment, the EU is also encouraging member states to look carefully at the deals as they come through.
As for other changes within individual EU member states, Denmark instituted a general cross-sectoral FDI review for the first time in 2021. The Investment Screening Act aims to prevent foreign direct investments from posing a threat to national security or public order through screening and possible interventions.
In the Netherlands, proposed FDI legislation would see a significant expansion of existing sector-specific screening (which currently covers telecoms and some utilities) to encompass potentially any M&A or investment targeting vital state interests. Meanwhile, Germany’s Federal Ministry for Economic Affairs and Energy (BMWi) continues to tighten its scrutiny of foreign investments around key technologies, industries and know-how.
Outside the EU, Switzerland, which currently has few inbound controls, is looking to introduce a new foreign investment authorization regime. Details are still under discussion and new legislation is not expected to come into force until 2023.
In the UK, the new National Security and Investment Act (NSIA) has just been implemented, introducing mandatory security clearances for certain types of transactions for the first time. The NSIA takes a sector-based approach to assessing potential national security risks related to investment in (or acquisition of) businesses with activities in the UK, requiring notifications from investors acquiring stakes in entities active in sensitive sectors.
Certain types of transactions within each sensitive sector in the UK will require mandatory notification, but the government has the leeway to investigate transactions in sensitive sectors that are not subject to mandatory notification.
APAC steps up measures
The tempo of FDI reviews in the Asia-Pacific region continues to gather pace, with most major jurisdictions tightening scrutiny of inbound investment.
China’s national security review (NSR) is expanding to encompass foreign investments in sectors such as defense (including investments in assets located near defense facilities), critical agricultural products, critical infrastructure, critical IT, and internet products and services. Against this background, 2021 saw the promulgation of the new Data Security Law in China, which establishes a data security review system under the NSR regime.
Elsewhere in Asia-Pacific, Japan continues to tighten foreign direct investment reviews but also offers a prior notification exemption. India has recently eased FDI stipulations in some sectors (such as telecommunication and insurance), although government approval is required for all foreign investments from countries sharing a land border with India.
In Australia, a wide variety of investments by foreign businesses require review and approval. Recent developments include an increased focus on compliance activities, enforcement and audits—particularly with respect to tax and data conditions. And in New Zealand, recent reforms have increased the government’s ability to take national interest considerations into account, but have also looked to exclude lower-risk transactions from consent requirements.
The rise in FDI scrutiny has been a trend for a number of years—but this hasn’t stopped 2021 from being the biggest year for M&A on record. With regulation ramping up in so many countries, deal processes will inevitably grow in complexity.
But with such compelling deal drivers in the M&A market—including low interest rates, high levels of liquidity, buoyant stock markets and the ever-increasing need for digital transformation—there is good reason to believe M&A activity will continue to be elevated in 2022.
With FDI review trends and strong tailwinds for M&A activity, managing increased FDI scrutiny has become a critical component of cross-border deals, and deal processes may take longer and require more work, particularly if they involve multiple jurisdictions.
For a complete guide to the state of play and recent developments for FDI reviews in 21 key jurisdictions, see the White & Case online report Foreign direct investment reviews 2021: A global perspective.