Global merger control: Crossing the finish line: Raising the global bar for security clearance of cross-border transactions

White & Case LLP

A clampdown by governments across the world on potential security threats has increased the scrutiny of participants seeking clearance for cross-border mergers and acquisitions.

With governments around the world placing foreign direct investment under ever greater scrutiny, an increasing proportion of big cross-border mergers and acquisitions are being subject to national security review procedures. Keeping abreast of new laws and engaging early with national bodies has never been more important when navigating this new landscape.


Australia Infrastructure security spotlighted

The Foreign Investment Review Board has the power to intervene on any transactions that lead to the acquisition of a ‘substantial interest' in an Australian company, land, land-rich entities, agricultural land and agribusiness, or acquisitions by foreign governmental investors. The Treasurer may prohibit or order broad divestments when a transaction appears contrary to the national interest based on its impact on national security, competition, government laws and policies, the economy and community or the investor's character. In January 2017, the Australian government launched the Critical Infrastructure Centre to independently advise the Treasurer on national security risks in respect of access and control of the country's critical assets, such as ports and storage, and energy supply. In March 2018, the Security of Critical Infrastructure Act was passed to give the Minister for Home Affairs a broad power to take action to protect against threats of espionage and foreign interference to critical infrastructure. The legislation established a register of Australia's high-risk critical infrastructure, including information on asset ownership, access and control.


Canada Increased transparency is encouraged

45 days

The minimum period required for parties in a Canadian transaction raising national security concerns to seek clearance before closing.

The Canadian government has the power to review transactions that exceed a specific threshold or transactions (including minority investments) where there are ‘reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security'. Although there is no definition for the latter, authorities' examination of the potential effects on national security include the areas of defence, technology, and critical infrastructure and supply. Parties in a transaction raising national security concerns are encouraged to seek clearance at least 45 days before closing. Authorities can block the investment, ask for undertakings and/ or provide terms or conditions. Recent trends show an encouragement of foreign investment, prompting the government to issue guidelines that increase transparency.


China Cybersecurity law adds requirements

In 2011, China's Ministry of Commerce (MOFCOM), the regulatory body that has oversight for reviewing acquisitions, introduced a set of temporary provisions aimed at assessing the overall impact of foreign investments on China's national security, defence, economy and public interest. In 2015, China promulgated its first National Security Law, which provides more detailed rules under which MOFCOM will review, approve or terminate any transaction and to impose sanctions or divestments on acquiring companies. In addition, China's 2017 Cybersecurity Law provides for additional requirements to be placed on companies engaging in critical informational infrastructure or network and data operations.


EU Juncker outlines new measures

In September 2017, European Commission President Jean-Claude Juncker outlined legislative measures on the screening by EU Member States of foreign takeovers and investments following a significant increase of foreign direct investment into European technology assets, particularly from companies in China with links to the Chinese government. The proposed EU Regulation, which can still be amended by the EU legislature (Parliament and Council), and is currently expected to be passed by the end of Q1 2019, stops short of forcing Member States to establish or maintain investment review mechanisms. However, if they do so, frameworks should be in line with EU law. According to the non-exhaustive list of pertinent considerations, critical infrastructure and technology, security of supply of critical inputs, and access to or control of sensitive information are included. The new screening system aims to improve cooperation between Member States in vetting transactions affecting security and public order, although the Commission's views are not binding and an ultimate decision rests with the Member States.


New ‘Pacte' law will extend the foreign investments control mechanism

All foreign investors are required to file a request for prior authorisation over defence, security-related activities and dual-use technology, or activities such as gambling by non-EU investors, so that potential harm to public order, safety or national security can be assessed. The Ministry of Economy may authorise the transaction unconditionally, subject it to mitigating conditions or prohibit it. Prior clearance of the transaction should constitute a condition, whereas buyers should consider including break-up fees or opt-out clauses if conditions imposed are too burdensome. The French Government is contemplating amending the current legal framework in the Loi PACTE (Plan d'Action pour la Croissance et la Transformation des Entreprises – action plan for business growth and transformation) and is debating the law in Parliament. Notably, it will set up a list of sensitive French groups that deserve particular attention. This list will be monitored monthly by a Council of defence and national security comprised of relevant ministers. The French Government will extend the list of sensitive sectors subject to review notably to digital data storage, artificial intelligence, nanotechnologies, financial infrastructures and robotics. Sanctions for infringement to mitigations requirements will also be refined (for example, suspending the voting rights of the foreign investor and introducing fines based on the turnover realised by the target company). It is also expected to help introduce state ‘golden shares' in certain strategic assets and use BPI France state funds to encourage engagement in the event of hostile takeovers of French strategic businesses by foreign investors.


Germany Amendments introduce new criteria

German law provides for a cross-sectoral review of transactions by non-EU/EFTA based investors in all industries that are likely to pose a serious threat to public order or security. Recent amendments introduced a non-exhaustive list of criteria to determine the threat. The Ministry of Economic Affairs and Energy can also review sector-specific transactions in sensitive industries, such as arms, military equipment, encryption and other key defence technologies. Foreign investors are generally advised to apply for a clearance certificate in early stages of a transaction. Furthermore, there are proposals to reduce the entry level for foreign investment reviews from a 25 per cent threshold down to 10 per cent in equity and/or voting rights.


Italy Shares acquisitions may be subject to scrutiny

In Italy, the acquisition of shareholdings of companies engaged in activities deemed to be of strategic importance may be subject to certain limitations by the Italian Government (so-called Golden Powers). In particular, in case of purchase of shareholdings in strategic businesses operating in the defence and national security sectors, the Italian Government may impose specific conditions in relation to the security of supply, the security of information, technological transfers, and the control of exports. On 16 October 2017, in the context of the Vivendi-TIM transaction, the Italian Government exercised this power for the first time, imposing restrictions on certain strategic assets including a network unit and a software division. Both companies have challenged the decision before the President of the Italian Republic and the case is currently pending.


Japan 2017 sees enhanced enforcement

Japan's Foreign Exchange and Foreign Trade Act authorises the competent ministry to review the acquisition by a foreign investor of shares, loans and bonds of a Japanese company (known as inward direct investment), as well as the acquisition of shares of a non-listed company from other foreign investors (designated acquisition), and to change the content or discontinue the transaction. Designated acquisitions are subject to advance notice where they are relevant to Japan's national security. Advance notice is also required for inward direct investments if they affect national security, public order or safety, the Japanese economy, or involve investors from certain countries. In 2017, amendments were introduced to widen the scope of review and enhance enforcement mechanisms.


Russia Review extended to reach off-shore companies and potentially any transactions posing a threat to the national defence and state security


ownership of an entity performing activities deemed of ‘strategic importance’ to Russian national defence and security will trigger the need for approval for potential foreign acquirers

The Government Commission on Control over Foreign Investments in the Russian Federation is responsible for reviews. It oversees transactions that result in acquisition of control over Russian entities engaged in activities of strategic importance. Currently, the law lists 46 activities that include both those directly related to the state defence and security, and certain other indirectly related activities, such as TV and radio broadcasting over certain territory, extraction of water resources and publishing activities. The criteria for determining control are wide and vary according to the target in question. Foreign investors must also obtain the Government Commission's consent for certain transactions involving acquisition of a strategic entity's property. Foreign public investors are not permitted to obtain control over ‘strategic' entities or acquire more than 25 per cent of their property, and must obtain Commission consent for acquisitions of the reduced stakes in strategic entities. The special, stricter regime established for such investors has recently been extended to ‘off-shore companies' in jurisdictions such as the United Arab Emirates, Jersey, British Virgin Islands and Bermuda. The statutory period for reviewing the application is three months from the date of its acceptance for review. The Commission can extend the review period for an additional three months. In practice, the review depends on the availability of the Commission's members and may take longer. The Commission may approve a transaction with or without certain obligations of the foreign investor or reject it. Amendments to the law introduced in 2017 gave the Commission Chairman the right to decide that approval is required with respect to any transaction by any foreign investor with regard to any Russian company (not necessarily strategic) if this is needed to ensure national defence and state security. As such, the definition of ‘foreign investor' was extended to include Russian nationals holding other citizenships and Russian companies under foreign control.


UK Proposals aim to strengthen powers

While acquisitions in sensitive industries do not require prior approval, the Secretary of State for Business, Energy and Industrial Strategy (SoS) may intervene under the Enterprise Act 2002, based on public interest considerations related to national security, media plurality, quality and standards, and stability of the financial system. If the SoS intervenes, the Competition & Market Authority (and Ofcom in media cases) will investigate and report to the SoS who will then decide whether the transaction should be subject to a Phase II review or accept undertakings. The Government recently reduced the thresholds for intervention in cases involving military or dual-use (i.e., military and civilian) goods, computing hardware and quantum technology. In addition, recent proposals consider introducing a mandatory notification regime for the civil nuclear, defence, energy, telecommunications and transport sectors.


USA New legislation would extend investment oversight

The Committee on Foreign Investment in the United States (CFIUS) has the authority to review any transaction that results in foreign control of a US business. Under the Trump administration, there has been rising sensitivity towards in-bound investment and acquisitions by Chinese companies, as well as investment from traditional allies in certain sectors. Politicians have proposed strengthening the CFIUS process against emerging threats in sensitive technologies and in November 2017, US Senator John Cornyn and Representative Robert Pittenger introduced the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA), which intends to expand the scope of the CFIUS review process. As currently proposed, the legislation would extend the CFIUS review time frames, increase the scope of transactions subject to CFIUS's jurisdiction, make certain notifications mandatory, and establish a process for expedited review of certain transactions.

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