Foreign direct investment (FDI) regimes continue to grow in number and complexity around the world, and FDI has become a key global regulatory consideration that must be carefully understood, assessed and managed in cross-border M&A. FDI regimes are expansive and various, with different rules and timelines applying to each individual jurisdiction. To avoid surprises and ensure they are appropriately protected, Taiwanese businesses and investors should be attuned to FDI considerations, both in the United States and elsewhere, when contemplating transactions.
CFIUS becomes even more active
In the US, the Committee on Foreign Investment in the United States (CFIUS) review process is considered a key national security tool by the Biden administration. In turn, CFIUS is requiring more mitigation measures to address perceived national security concerns; evolving its practices, policies and regulations; heightening efforts to identify and review non-notified transactions; and emphasizing oversight and enforcement.
In 2022, CFIUS filings reached an all-time high—just above 2021's previous record—despite a notable year-on-year decrease in M&A. Most significantly, nearly one in four transactions submitted via a full notice resulted in mitigation measures—a substantial increase from prior years, and an indication that a well-resourced CFIUS is availing itself of wider latitude to address risks in transactions.
The most recent data also shows that CFIUS is becoming less efficient. One out of three short-form declarations in 2022 resulted in a request for a full notice—nearly double the rate of 2021. Additionally, there was a spike in notices requiring a second-stage investigation, with nearly 60 percent requiring the additional 45 days.
CFIUS is also increasing its focus on oversight, compliance and enforcement. Compliance monitoring has received a boost, and officials have emphasized enforcement as a priority, advising that two civil monetary penalties have already been issued in 2023, with more pending. This represents a break with CFIUS's past: Prior to 2023, the committee only announced two penalties. Though its review process is predominantly voluntary, CFIUS continues to search actively for non-notified transactions of interest and recently announced additional resources to identify transactions for potential review.
This year has also seen changes to CFIUS policy, the most significant of which reversed course on a long-accepted practice of parties using "springing rights" as a mechanism to close before the 30-day waiting period for mandatory filings by delaying any jurisdiction-triggering rights. This particularly impacts venture capital investments, where the timing of funding is often critical. CFIUS also updated its real estate regulations to include additional locations, which can also indicate potential "close proximity" concerns that can arise in investment transactions subject to CFIUS jurisdiction.
More changes are on the horizon, with new CFIUS regulations expected in the next year. CFIUS officials have said these updates will be aimed at improving the efficiency and effectiveness of reviews; updating penalty and enforcement authorities; sharpening and enhancing tools relating to non-notified transactions; and broadly ensuring tools and processes are best aligned to the current landscape.
The US government is also moving to launch new controls over outbound investment—the first of their kind. In August, President Joe Biden issued an executive order establishing a new "Outbound Investment Program" that will require prohibitions or notifications for certain US investments into China, or Chinese-owned or controlled entities, in three sectors: semiconductors and microelectronics; quantum information technologies; and artificial intelligence. Details will be set out in forthcoming regulations but could potentially impact activities by Taiwanese companies in relation to China.
European FDI regulation in full swing
In Europe, FDI regimes continue to proliferate. Throughout 2023, several EU member states have implemented, or taken significant legislative action to implement, new FDI regimes. For example, Sweden, Ireland and Bulgaria will likely all have new FDI regimes by the end of 2023 or early 2024. Some existing regimes, such as Spain's, have undergone refinement, while Germany is expected to reform and expand its FDI regime by the end of 2023.
There is now routine coordination on FDI reviews within the EU. Following the Cooperation Mechanism of October 2020, national screening authorities must alert the European Commission and other member states of certain deals. Since then, several multijurisdictional deals where parties did not file in each jurisdiction have caught the attention of FDI authorities conducting parallel review through the Cooperation Mechanism.
The EU screening regulation does not delegate veto or enforcement rights to the Commission, but reviewing member states must consider the observations of the Commission and other member states, and intra-EU investments are subject to the jurisdiction of the European Court of Justice (ECJ). Most recently, the ECJ ruled that Hungary's foreign investment screening law is incompatible with EU law, in particular the freedom of establishment enshrined in the Treaty on the Functioning of the EU. The judgment clearly states that a protectionist measure taking the form of national FDI screening legislation amounts to an unjustifiable restriction of the fundamental freedoms protected under EU law.
Outside of the EU, the almost two-year-old UK investment screening regime resulted in five prohibitions in 2022, including one for a licensing agreement with a Chinese investor.
Similar to the US, statistics show that most European transactions are cleared unconditionally and that prohibition cases are rare. Nonetheless, FDI authorities are increasingly using conditional clearances to address national security concerns, and the political, policy and regulatory landscape continues to evolve.
Impact on Taiwanese companies and investors
Despite the rising relevance of FDI reviews in cross-border transactions, Taiwanese companies should take comfort in the fact that FDI regimes generally encourage foreign investment and that the vast majority of transactions clear. That said, the increased number and sophistication of FDI regimes can contribute to transaction uncertainty. The US, European nations and other jurisdictions are upgrading and strengthening their FDI regimes, while increasing their focus on protection of national strategic assets and working to address concerns about global supply chain resilience. There is also a general increased attention to foreign investments in critical raw materials across jurisdictions. Canada, for example, has set out a stricter framework for evaluating FDI in the critical minerals sector by certain foreign investors.
Many focus areas for FDI authorities coincide closely with the business activities of a range of Taiwanese companies, particularly in the technology sector. Semiconductors remain an especially sensitive area in most jurisdictions, and various other types of technology developments and priorities are likely to be viewed as relevant to national security. For example, President Biden issued an executive order last year highlighting microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, and climate adaptation technologies as relevant to US national security.
Taiwanese parties to cross-border deals must consider FDI issues in every relevant jurisdiction from the outset, so they can effectively manage timing and risk considerations. This includes conducting thorough due diligence on the target, understanding potential jurisdictional triggers, filing requirements and timelines in relevant countries, and developing a clear multijurisdictional strategy to proactively manage issues that may present challenges. For example, it is critical to anticipate potential mitigation measures or remedies that may be required for clearance to be granted and understand the impact they could have on the investor's goals for the transaction.
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