Key Takeaways

• Foreign Direct Investment (FDI) controls are proliferating around the globe. Since the pandemic, “health” has become a particular focus. 
• Several countries have adapted their existing FDI rules, or introduced new ones, to address concerns about national autonomy and supply chain disruption. Some of these changes are general, but some are specific to healthcare. 
• Plans for cross-border M&A in the healthcare sector should take close account of potential FDI screening requirements, in addition to usual merger controls.  

Since well before the pandemic a pattern could be observed internationally of limits on foreign direct investment. The pandemic has sharply accelerated this trend: countries are strengthening existing regimes or introducing new systems to prevent opportunistic foreign takeovers of strategic businesses, and more generally companies weakened by the crisis. The healthcare sector has become a particular focus around the world, with the obvious pre-occupation of governments to ensure autonomy in the production of essential healthcare products, and access to new treatments. We describe some of the major changes in this OnPoint. While the primary aim of these developments is to respond to short term needs in the context of the pandemic, they will also allow countries longer term to review a wider spectrum of foreign investments.

In Europe, the new EU FDI Regulation (2019/452) will enter into full force on October 11 this year. The Regulation enables the European Commission to provide guidance to EU Member States about their national screening procedures and establishes a non-binding advisory role for the Commission. The Regulation already identified healthcare as a likely critical infrastructure and biotechnologies as a critical technology. Their importance was emphasized and reconfirmed early in the pandemic with the European Commission issuing FDI guidelines to the Member States with a specific emphasis on healthcare. The FDI guidelines are applicable now, even before the entry into force of the EU FDI Regulation in October, and also remind the EU Member States of ways beyond FDI screening to protect healthcare security, e.g. through the acquisition of golden shares or the application of exceptions to EU free movement principles. (Read our whitepaper.)  

Some of the key changes at European Member State level in response to the pandemic are noted here, as at the time of writing; but the list continues to lengthen as time passes:

• Austria lowered its foreign investment screening threshold earlier this month to catch acquisitions of 10% of the voting rights in companies active in critical sectors; this list includes research and development in medicines, vaccines, medical devices and personal protective equipment until the end of 2022. The new regime also provides for a “start-up exemption”, e.g. exempting acquisitions of targets with a turnover below EUR 2 million.
• In France, healthcare is considered as a strategic sector when essential for the protection of public health since 2014. An Order of 27 April 2020 added research and development on biotechnologies to the list of critical activities. More recently, the Government adopted a Decree temporarily lowering the investment threshold triggering FDI screening from 25% to 10% for investments in French listed companies by non-EU investors. The Decree of 22 July 2020 provides a simplified authorization procedure for such investments. The Decree applies to investments taking place as of 6 August until 31 December 2020.  
• Germany has recently extended national controls following the pandemic.  Acquisitions of minimum 10% of the voting rights in healthcare companies now need to be notified.  The aim is to maintain essential know-how and production capacities in Germany so as to secure the functioning of the German health system. Further reforms are pending (see our note here).  
• Hungary temporarily widened its FDI screening mechanism. While there is still some uncertainty as to how the system will apply in practice, it has the potential to be very broad and to include any type of health-related activities, including manufacturing of pharmaceutical products and medical devices. The investment threshold which triggers FDI screening has also been lowered to include acquisitions of more than 10% of share capital representing a value of at least approximately €1 million. These changes will apply until the end of 2021 but may become permanent. 
• Italy temporarily extended the list of relevant sectors to include critical technologies and critical inputs. It also for the moment changed the investment threshold triggering FDI review to include acquisitions of 10% of share capital or voting rights representing a value of at least approximately €1 million as well as acquisitions of control by EU investors. These changes will be in effect until the end of 2021. 
• Poland temporarily transformed its extremely narrow FDI screening into a fully-fledged screening mechanism as of 24 July 2020, for two years. The new regime applies to acquisitions of more than 20% of share capital of a Polish undertaking active e.g. in the manufacturing of medicines and medical devices, as well as certain health-related software. A EUR €10 million turnover threshold also applies. 
• Slovenia introduced an FDI screening regime on 31 May 2020 which applies to acquisitions of 10% holdings in critical sectors, including health, medical products and protective equipment. 
• Spain amended its FDI screening mechanism through several decrees to address the concerns triggered by the pandemic. Under the new regime, acquisitions of more than 10% of share capital, exceeding €1 million, in a variety of sectors, including health and biotechnologies, need to be notified. The new regime now also applies to EU investors in which a third country investor owns at least 25%. Although the amendments were initially introduced as temporary, they appear to have been made permanent.
• A proposal is also pending in Czech Republic to introduce an FDI screening mechanism and Ireland is considering whether to do the same.

The United Kingdom is introducing new rules on foreign investment. Reform had been pending since the end of 2020 but has been accelerated by the pandemic: new rules have been adopted to protect UK businesses critical to combating coronavirus and future public health emergencies. These new powers will enable the government to intervene if a business that is directly involved in the pandemic response – for example, a vaccine research company or a manufacturer of personal protective equipment – finds itself the target of a takeover. These latest changes to the Enterprise Act are intended to mitigate risks in the short term ahead of more comprehensive powers in the forthcoming National Security and Investment Bill.

The US has not issued Covid-19 specific CFIUS guidelines but there will undoubtedly be heightened scrutiny for non-US investors taking equity stakes or providing financing which grants the lender equity type rights. There has been increasing focus in the US in recent years on so-called “critical infrastructure” – which is understood to include aspects of the economy related to healthcare, pharmaceuticals and related supply chains – and CFIUS regulations already call for heightened scrutiny of foreign investments in critical infrastructure.

Other countries such as Canada have stated that they will subject health-related investments to higher scrutiny. Australia and New Zealand have temporarily zeroed the monetary threshold triggering FDI notification; Australia also announced new permanent changes to apply as of Q1 2021. Japan is also expected to tighten its rules and include healthcare.

Since the COVID-19 pandemic the healthcare sector has come to the fore as critical: beyond the general around opportunistic purchase of any struggling business, Governments are specifically concerned to safeguard public health and to avoid disruption and de-localisation of necessary supplies. But the extent of what is covered by FDI “healthcare” screening will vary as between countries e.g. limited to public health, or broader to include also biotechnologies. And similarly, the size of investment triggering national screening requirements is highly variable. Those promoting candidate M&A deals in the healthcare sector face a new set of hurdles to overcome, requiring up-to-date information and close coordination of work on regulatory filings.