Merger control review has long been a key factor in M&A transactions, with public companies well accustomed to making the necessary filings, managing substantive risk and factoring approvals into the timeline to close. In the wake of COVID-19 highlighting national economic vulnerabilities and supply chain disruption, however, foreign direct investment (FDI) screening regimes have become an equally important consideration.

Internal restructurings and new investments, even passive minority interests, have the potential to trigger an FDI review. This cuts both ways: On the one hand, the low thresholds mean that FDI adds to the regulatory burden of public companies doing deals, with their shareholder composition a potentially complicating factor. On the other, stakebuilding by institutional investors who previously may have largely escaped regulatory scrutiny is now also possibly notifiable.

What is FDI review?

Historically, FDI regimes were typically very narrowly focused on inbound investment into sensitive areas such as defense. That has expanded substantially to include a wide range of economically strategic sectors such as energy, healthcare, biotech, food security, raw materials, telecoms and businesses that collect or maintain sensitive personal data.

There is no consistent bright line percentage threshold below which transactions escape regulatory scrutiny and, unlike merger control, FDI rules vary greatly among countries. While most jurisdictions do have minimum thresholds, governments usually have the ability to “call in” (i.e., request to review) any investment they deem of national interest. The most relevant factors to consider for an FDI analysis are therefore:

• Target risk: Any acquirer or investor needs to consider whether a target comes within the relevant national FDI rules and, if so, how sensitive its activities are and whether those may give rise to a national security risk. That could include factors such as whether any IP it owns and develops could also be used for military or surveillance purposes.
• Acquirer risk: There is heightened scrutiny of any third-country acquirers considered to be state or government investors. This typically incudes not only state-owned enterprises and sovereign wealth funds, but also entities such as public sector pension funds, universities, and the like. A public company’s shareholder base can therefore potentially change its own risk profile if it includes such investors.

Managing FDI scrutiny

Given current geopolitical tensions, scrutiny of foreign investment will continue to increase. A number of recent high-profile deals such as the strategic partnership between Vodafone and Emirates Telecommunications Group have had to accept material conditions in order to proceed due to the sensitivity of the target’s operations and the identity of the investor. Others have been abandoned altogether, such as U.S.-incorporated Flowserve Corporation’s acquisition of Canadian company Velan Inc., which was blocked by France on national security grounds (see this Debevoise Debrief for more information).

Public companies should also be mindful of the impact their shareholder base may have on any approval process. Even if an individual investor’s holding may not itself trigger a filing requirement, the overall investor composition of a public company in the aggregate (third-country government investors are aggregated by country) may impact the company’s risk profile for FDI purposes. The fact that public companies are regulated and subject to greater scrutiny by authorities does not translate into a lighter FDI review.

Finally, a public company’s business activities may be sufficiently sensitive for FDI purposes that larger minority or stakebuilding investors trigger an FDI filing. This in turn might require a public company to disclose potentially sensitive information about itself in any filing that a non-controlling investor has to make. While there would typically not be any contractual obligation to assist in making any filings for market purchases, the notified governmental agencies can request any necessary information directly from the company.

Challenges

FDI filings can be onerous. In many cases, FDI reviews are suspensory, take longer than merger control, and are more opaque and less predictable due to the involvement of different government stakeholders and intelligence services. In addition, FDI filings often have burdensome disclosure requirements including governmental (supply) relationships, R&D efforts and the like, and potentially personal information about the officers and directors may have to be provided.

Care and consistency in the disclosure of information is therefore particularly important given the increased information sharing taking place among national governments and intelligence agencies involved in FDI screening. For example, the European Commission and its member states actively cooperate with each other to exchange information and share concerns related to specific investments, as well as with international partners such as the United States. Failure to do so risks potentially invasive follow-up questioning—and, potentially, fines for providing misleading information.