Prior to the outbreak of the COVID-19 pandemic, there had been a growing and global trend of established Western economies increasingly scrutinising foreign investment in key sectors. FDI restrictions have been on the European political agenda for at least the past year, originally conceived in response to concerns over China's "Belt and Road" initiative and the EU's ability to compete with the US. They followed the strong precedent set by the US over the last few years, through its use of CFIUS to screen FDI on the grounds of national security and in certain cases block foreign investment, particularly from China.
Following the outbreak of COVID-19 and the impending global economic recession, the approach to FDI across Europe has mutated, with FDI restrictions no longer being used solely as a tool to address issues of national security, but also to combat opportunistic M&A from companies and jurisdictions with deep pockets. Ultimately the pandemic has brought into focus for many jurisdictions in Europe the stark reality that critical assets are finite and there is a need for domestic control over them to be maintained. A number of jurisdictions across Western Europe and the CEE are therefore now following the US' lead (and guidance issued by the European Commission (EC) on 25 March) by broadening their view on which sectors they view to be strategic, and the thresholds at which approvals will be required.
Since the beginning of the COVID-19 crisis, a number of jurisdictions (notably Italy, Spain, Hungary and, to a more limited extent, France and Germany) have introduced additional FDI restrictions, and various other jurisdictions (including Czech Republic and Poland) are discussing the implementation of additional FDI restrictions.
Within the EU, national law on FDI takes precedence. However, from October 2020 the EC will be entitled to send comments to Member States on transactions to which the relevant national government must give due consideration, and may feel they need to have a good reason to arrive at a different conclusion from the EC. In broad terms, we are therefore seeing (and will likely continue to see) an increased convergence on an international level across the US and Europe of what is adversarial capital, irrespective of regulations on a national level.
The key issue here for an investor is where the traps lie – any foreign investor going into the US or key European jurisdictions needs to stay abreast of the restrictions as they are today, and where they may be in the future to ensure that the expected path to liquidity is not blocked; particularly if the US continues to take a more restrictive approach and Europe continues to follow behind it.
Even prior to the pandemic, the UK had proposed a tighter FDI regime and the Government's response to a 2018 consultation is still pending. Whatever the outcome, it seems clear that a more restrictive regime will eventually emerge. Indeed, we have already seen more scrutiny of deals in sensitive sectors than would have been the case several years ago. For example, in the last 12 months, the UK Government intervened in two deals (even though backed by Western investors) in the satellite and defence sectors. Whilst both deals were approved, these examples – Inmarsat and Cobham – provide an insight into the likely approach of the UK, and suggest that deals by non-Western investors may be particularly liable to scrutiny, which means a purchaser's identity is likely to be an increasingly important factor when assessing execution risk.
This note sets out a summary of the current position across key jurisdictions across Western Europe and the CEE as at 28 May 2020. This is an ever changing situation and we will continue to update this note as and when there are key developments in the regulatory framework.
The following jurisdictions have made changes, or are expected to make changes, to their FDI regimes as result of COVID-19:
- Italy, Spain and Hungary, each of which have introduced extensive additional FDI restrictions as a result of COVID-19.
- France, which has announced limited changes to its FDI regime partly as a result of COVID-19.
- Germany, which has announced limited changes to its FDI regime as a result of COVID-19, and is considering the introduction of further FDI restrictions.
- Poland, which is considering the introduction of extensive FDI restrictions as a result of COVID-19, although the government's proposal has not yet been finalised or implemented.
Note that in the Czech Republic, while unrelated to COVID-19, legislation in relation to FDI is currently under consideration and may become more restrictive as a result of the COVID-19 crisis.
The new COVID-19 regime across Italy, Spain and Hungary, the changes in France and Germany and the proposed regime in Poland are summarised in more detail below, but broadly the approach taken by the relevant governments has been:
- to extend the scope of pre-existing FDI restrictions to "strategic sectors" which are broadly defined and materially widen the application of FDI restrictions;
- to expand the persons to whom the FDI restrictions apply, in particular bringing investments in the relevant sectors by non-EU/EEA entities within the remit of the relevant authorities; and
- to lower thresholds above which the approval requirement is triggered.
All other jurisdictions covered other than Czech Republic (Croatia, Romania, Serbia and the UK) have some level of FDI restriction which was in existence prior to the COVID-19 crisis, as detailed in the table in Appendix I below.
The UK has not introduced any additional FDI measures as a result of the COVID-19 crisis but tightened up its rules in 2018 concerning some specific sectors. However, as noted above, over the last couple of years the UK Government has also been considering plans to introduce tighter FDI rules but, following a public consultation, no conclusions have yet been reached.
- Pre-existing regime required prior notification of any FDI capable of posing a potential threat to (i) the defense and national security sectors; (ii) the energy, transportation, communication and high-tech sectors; and (iii) 5G technology infrastructure (or any 5G technology related components).
- New COVID-19 regime expanded the scope of the FDI restrictions to a number of additional strategic sectors, being: (i) critical infrastructure (including water and health); (ii) critical technologies and dual use items (including, AI, robotics and biotech); (iii) supply of critical inputs; (iv) access to sensitive information (including personal data); (v) media; and (vi) financial, credit and insurance.
- The primary effects of the new COVID-19 regime are: (a) the sectors covered by the FDI restrictions have been expanded (see above ); (b) any transactions resulting in the change of ownership, availability or change in the use of assets in any of the expanded strategic sectors is subject to approval (under the prior regime, the notification was limited only to transactions relating to the defence and national security, energy, transportation, communication and high tech sectors); (c) any acquisition of control of any company operating in any of the above sectors by an EU/EEA entity is subject to approval (previously this only applied to acquisitions of interests in companies in the defence and national security sectors); and (d) any acquisition by a non-EU/EEA entity of at least 10% (and any subsequent acquisition exceeding 15%, 20%, 25% and 50%) and above EUR 1m is subject to approval (previously this only applied to acquisitions of control of companies in the energy, transportation, communication and high tech sectors, and any acquisition of interests in companies operating in the defence and national security sectors).
- The new regime therefore expands both the scope of the restrictions, and lowers the thresholds applicable.
- The new measures described under the third bullet above, letters (b), (c) and (d) will remain in force until 31 December 2020 for all investors, while afterwards non-EU investors (pending the issuance of the relevant Prime Minister decrees that will detail the relevant assets) will continue to be subject to the obligation to notify the acquisition of controlling shareholdings in companies operating in any such new sectors.
- Pre-existing regime required notification of any foreign investment, and pre- authorisation for: (a) investments from countries considered tax havens; (b) activities related to national defence and security; or (c) (for non-EEA investors only) gambling and audiovisual media.
- New COVID-19 measures require prior authorisation for FDI, FDI now being defined as investments over EUR 1m: (a) that result in a non-EU/EEA investor owning at least 10% of the share capital of a Spanish company (listed or unlisted); or (b) which otherwise enables a non-EU/EEA investor to have effective participation in the management or control of a Spanish company, and where: (i) the non-EU/EEA investor is a certain type of investor (such investors being: (A) those controlled by the government of a third party; (B) those already invested or involved in security, public health or public policy in another EU Member State; or (C) those subject to proceedings in another Member State for criminal or illegal activity); or (ii) the investment is into a strategic sector (i.e. critical infrastructure, critical technologies, supply of critical inputs (e.g. energy and raw materials), sectors with access to sensitive information, and media.
- The new regime therefore again expands the scope of the restrictions, the scope of investors to whom the restrictions apply, and lowers the thresholds applicable.
- The new restrictions are to remain in place until the Spanish Council of Ministers adopts a resolution to lift them.
- Pre-existing regime requires approval for investments by non-EU/EEA/Swiss investors into strategic sectors (including military, financial services, power and communications) where the investor: (a) acquires a stake exceeding 25% (private companies) or 10% (public companies) or otherwise has "dominant influence"; (b) establishes a branch in Hungary to carry out strategic activities; or (c) acquires a right to use infrastructure or assets indispensable for strategic activities.
- New COVID-19 measures require prior authorisation for any non-EU/EEA/Swiss investment which is: (a) into Hungarian "strategic companies", where "strategic sectors" are energy, transport, communication, and any other sector of "strategic importance". "Strategic importance" is defined in line with EU criteria, with reference to any investment that might impact security or public order (including financial, credit, insurance, critical infrastructure and critical technologies); and (b) the investor acquires: (i) majority control; (ii) at least 10% ownership (for investments above EUR 1m); or (iii) any level of interest over 25% when pooled with any other foreign investor's interest. No threshold applies to any acquisition of infrastructure or assets defined as "indispensable for the operation of strategic companies". Finally, any increase in ownership above 15%, 20% or 50% requires a further notification.
- The new measures will apply until 31 December 2020 although a draft bill suggests that the restrictions may remain in place after 1 January 2021.
- Pre-existing regime requires approval for any investments over a certain threshold (acquisition of control or a branch for all investors, and 25% threshold for non-EU/EEA investors) in "sensitive activities" likely to jeopardise national defence interests, public order and public safety (e.g. defence, critical infrastructures such as energy, transport, and R&D in critical technologies such cybersecurity).
- French government has announced that: (a) 25% threshold will be lowered to 10% for investments in listed companies (until the end of the year); and (b) R&D activities in biotechnologies has been added to the list of "sensitive activities" (this is a permanent change).
- Pre-existing regime requires filing and approval for any investments over a certain threshold in sectors of particular concern (e.g. defence) (10% for non-German investors in specific sectors, and 10% (if listed on statute as a "critical activity") for non-EU/EFTA investors, and an intervention right (coupled with a voluntary filing) for a "non-objection certificate" for acquisitions by non-EU/EFTA-based investors of at least 25% of the voting rights of a German target active outside of those listed sectors but still sensitive to public order or security.
- A draft proposal was recently approved by the government as a result of COVID-19 to extend the list of "critical activities" in relation to which the 10% threshold for non-EU/EFTA investors applies to a number of additional healthcare sectors (including developing or manufacturing protective equipment, certain medicinal products, medical devices and in vitro diagnostic medical products).
- No other specific COVID-19 measures, although Germany's legislation (which is broad) may be construed more rigidly as a result of COVID-19.
- Additionally, legislation to tighten Germany's FDI rules was in progress prior to COVID-19. Suggested changes include that a "likely impediment" (rather than an actual threat) will be sufficient to block transactions in the future, and the addition of additional critical industries, such as AI, robotics, and more broadly biotechnology.
- Current regime requires a post-investment notification of foreign investments to the National Bank of Poland, with government clearance required for investments in 9 expressly listed companies.
- Polish government has published a draft regulation introducing COVID-19 measures restricting FDIs by non-EEA entities in strategic sectors of Polish economy. However the proposal is not yet final and has not yet been adopted. Timing is currently unclear, but this is expected over the early part of the summer.
- It is expected that the COVID-19 measures will apply to non-EEA investors acquiring at least 20% of the capital or voting rights in "protected entities". "Protected entities" are Polish entities that, in at least one of the two preceding financial years, recorded turnover in Poland exceeding EUR 10 million and (1) are publicly listed in Poland; and/or (2) hold assets classified as parts of critical infrastructure (e.g. energy networks, key food and water provision facilities, communication networks, transportation networks and financial systems); and/or (3) develop or maintain critical software (e.g. in relation to managing energy supply, water supply, cash supply and financial transactions); and/or (4) operate in strategic business areas.
- Although not finalised as yet, if introduced, the new COVID-19 measures would be a significant increase to the FDI restrictions currently in place in Poland.
- Based on the available information, the measures would apply for 2 years.
As more countries introduce FDI restrictions – whether temporarily to protect companies from significant reductions in enterprise values that might prompt opportunistic M&A, or permanently, buyers and sellers will need to factor global FDI issues into their risk assessment. FDI will not only become more of an issue when concluding a deal but, for financial sponsors, will also be a factor to consider when thinking about a likely exit in due course.
Click here to download Appendix I - FDA Analysis (PDF)