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:
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.