The coronavirus disease 2019 (COVID-19) pandemic has highlighted the importance of protecting domestic access to goods, including critical medical devices, food, pharmaceuticals, and personal protective equipment (PPE).  Our global economy has allowed for accelerated growth, but inadequate strategic reserves, the inability to rapidly produce critical supplies domestically, and supply chain disruptions have left many countries unprepared for this global crisis.  Experiencing first-hand what was previously viewed by many as a hypothetical threat to the welfare of the population at large has led governments world-wide to propose protectionist measures that enhance national security reviews of foreign direct investment (FDI) in domestic companies and real estate.

In countries that have an established national security FDI review process, increased scrutiny of supply chain and offshoring risks and health-related risks, such as access to healthcare data, has already begun. 

Recognizing that current economic conditions have left many domestic companies vulnerable to foreign acquisition, several countries have accelerated the development or expansion of their FDI review processes and proposed increasingly protectionist measures.  This article outlines key developments in global FDI review regimes, including in the United States, European Union, France, Germany, Italy, Portugal, Spain, Australia, Canada, and the United Kingdom.

United States

Nicholas Klein and Christine Daya (Washington, DC)

The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee chaired by the US Department of the Treasury with representatives from several executive branch agencies.  CFIUS has jurisdiction over “covered transactions,” i.e., transactions that could result in foreign “control” of a US business; non-controlling investments in certain types of US businesses; and certain real estate transactions.  CFIUS has authority to review such transactions, and where an investment may present a threat to US national security, the President − upon CFIUS’s recommendation − can block or place conditions on the investment to mitigate the perceived threat.

On February 13, 2020, new CFIUS regulations implementing most of the 2018 Foreign Investment Risk Review Modernization Act (“FIRRMA”) took effect.  These new regulations expanded CFIUS’s jurisdiction to review a wider variety of US investments, including certain non-controlling investments in US businesses and real estate transactions.

CFIUS review largely is a voluntary process whereby the parties to a transaction may receive a safe-harbor from future CFIUS review upon satisfying the Committee that there are no unresolved national security risks.  However, there are two circumstances where parties must file with CFIUS: (i) the US business produces, designs, tests, manufactures, fabricates, or develops a “critical technology” for use in connection with certain industries; or (ii) certain transactions involving a direct or indirect investment by a foreign government.

COVID-19 impacts: focus on supply chains and health sector among expected changes

CFIUS remains focused on the national security threats posed by Chinese investment.  Recently, 18 Republican senators expressed concern over threats to the US defense industrial base presented by the current economic conditions, warning that the Chinese “vast political-industrial apparatus will undoubtedly prey upon cash-stripped American companies during this crisis.”  The letter encouraged CFIUS “to scrutinize any transaction or investment by [Chinese] state-owned or private enterprises that could threaten or undermine the national security of the United States.”  On May 5, 2020, reflecting the heightened concern of predatory investment from China, Congress introduced a bill (H.R. 6706) to bar all acquisitions by Chinese investors until the COVID-19 pandemic ends, unless CFIUS determines several factors are present to justify the investment.

Although CFIUS has been concerned with foreign access to US personal healthcare information – leading to the forced divestiture of two US businesses that had been acquired by Chinese entities^[1] – the COVID-19 crisis is likely to increase CFIUS’s attention to investments in the health and pharmaceutical sectors more broadly, including in areas that were previously viewed as less sensitive.  Significant domestic shortages in medical devices, supplies, and PPE, which rely heavily on non-US manufacturing and supply chains, have proven to present a direct and substantial national security threat.  Recent statements by executive and legislative branch officials indicate that CFIUS will be a central component of a more aggressive approach to securing domestic supply of these items.

CFIUS’s concerns with threats to supply chain security, which have traditionally centered on critical industries such as defense and telecommunications, are likely to expand following COVID-19.  Supply chain security for domestic consumption of a much broader range of products will likely become a central tenet of CFIUS national security reviews.  A prime example is the introduction of the Agricultural Security Risk Review Act in the US Congress on April 17, 2020.  This Act seeks to add the Secretary of the Department of Agriculture as a permanent member of CFIUS in response to the weaknesses that COVID-19 has exposed in US food supply security.  As Congressman Frank Lucas (Oklahoma) stated poignantly upon introducing the bill, “I’ve always known that food security is a vital part of our national security but in the COVID-19 pandemic, Americans have been able to see that firsthand. I believe that foreign investment in our nation’s food supply chain deserves increased scrutiny and that’s why I am introducing this important piece of legislation today.”

Foreign investment, joint ventures, and other collaborative projects in pharmaceutical research, development, and manufacturing is another area of concern highlighted by COVID-19 that is likely to face increased CFIUS review.  US dependence on China for nearly 80 percent of antibiotics and the Active Pharmaceutical Ingredients (APIs) used to manufacture a wide range of drugs has led to bipartisan calls for investigations and legislation to counter the threat posed by limited US pharmaceutical manufacturing capability.

These issues are compounded by the fact that market volatility and company devaluations have left many US businesses – particularly technology startups operating in the healthcare space – on tenuous financial footing, which creates a target-rich environment for adversarial foreign investment.  Companies facing challenging financial conditions should be extra cautious in accepting a lifeline from a foreign investor without first considering the potential CFIUS implications.  The Defense Department’s top acquisition executive, Ellen Lord, recently expressed concern that the US defense industrial base was more “vulnerable to adversarial capital” channeled through shell companies during the crisis and suggested “strengthening and expanding national security investment reviews” under CFIUS in response.  The Defense Department is currently discussing legislative options with lawmakers to better equip the US government with adequate statutory tools to intervene if necessary.

Beyond the increased scrutiny of transactions about which it is notified, CFIUS has quadrupled its efforts to monitor corporate activity to identify and review transactions that were not filed with CFIUS before they closed.  Focused primarily on transactions completed in the past three years, CFIUS may seek to identify past transactions that contributed to the shortages of critical supplies necessary to combat COVID-19.

European Union

Richard Sterneberg, Bertold Bär-Bouyssière, and Yannick Treige (Brussels)

The European Union created a common FDI screening mechanism – complementary to mechanisms already in place in some member states in April 2019.  Regulation (EU) 2019/452 establishes an information sharing mechanism between member states to assess potential threats to security and public order in one or more member states by FDI in another.  This Regulation originally had a October 1, 2020 effective date – but that date may be advanced given the current circumstances. It is not yet clear how the mechanism will be implemented and where the reporting lines will be.

When an EU member state or the European Commission (EC) consider that FDI in a member state (planned or completed) poses a threat to security or the public, or is of relevance to an EU funding program, the Commission and member states can issue opinions that feed into the national screening process of the country where the investment is taking place.  Under Article 7 of the legislation, both the EC and member states also can comment on ongoing or completed FDI in an EU member state even if it is not currently being screened in that country.  The delay for such ex post scrutiny is 15 months after the targeted project’s completion.

The legislation encourages national legislators to “consider all relevant factors, including the effects on critical infrastructure, technologies (including key enabling technologies) and inputs which are essential for security or the maintenance of public order, the disruption, failure, loss or destruction of which would have a significant impact in a member state or in the Union.”

The regulation provides a non-exhaustive list of sectors and technologies that could be considered critical, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure.  It does not, however, limit its scope, and it formally applies to all sectors.  For example, in a recent statement, Commissioner Breton called to protect the tourism sector from opportunistic takeovers.

The legislation effectively puts the EC at the center of an extended transnational information sharing system, leaving the decision to block or authorize the investment (possibly with conditions) exclusively to the national authorities in accordance with national law.  However, where the Commission issues an opinion, the member state shall give it “due consideration” or, where the investment affects projects of Union interest, take it into “utmost account.”  These novel and unclear legal standards leave open the consequences for a non-abiding member state, and it is questionable whether the legality of Commission opinions will be subject to judicial review.  Currently, 14 EU member states (and the United Kingdom) have such a mechanism in place.

COVID-19 impacts: European Commission encouraging member states to tighten FDI review

During the COVID-19 pandemic, the EC issued additional guidance to member states on how to use National and EU FDI screening mechanisms before the formal entry into force of the legislation on or potentially before October 2020. According to the EC, “member states need to be vigilant and use all tools available at union and national level to avoid that the current crisis leads to a loss of critical assets and technology.”

The EC guidance focuses on healthcare, stating that capacities or related industries such as research establishments (for instance developing vaccines) via FDI, are of particular strategic interest.  The guidance also covers other sectors of key interest to member states and has a series of far-reaching political implications that will impact FDI screening in the European Union in the long term.

The European Commission’s central role in FDI screening could lead to increased scrutiny and politicisation of FDI into the EU

The European Union’s founding treaties set political objectives for the EC, stating that “[t]he Union shall uphold and promote its values and interests and contribute to the protection of its citizens.”  In light of recent developments, the EC is likely to use its new position as an information hub and advisory power extensively to support it its role as the guardian of the European interest.  Even before the COVID-19 pandemic, European sovereignty, including technological sovereignty, was a core driver behind the EC’s new industrial strategy.  The regulation gives the Commission far-reaching means to use its advisory powers to highlight and influence projects.  Article 10 of the recitals introducing the regulation also indicates that the Commission will be actively monitoring mechanisms designed to circumvent national screening mechanisms and screening decisions.  The 15-month delay for ex post comments also gives the EC considerable leeway to screen concluded projects.

The EC is setting out best practices for national on FDI screening mechanisms

While Regulation 2019/42 ostensibly leaves decision-making powers with national regulators, it contains multiple indications (Articles 2, 3 and 4) on evaluation criteria, procedure, and setup of national regulators.  This is especially relevant as the Commission calls upon those 13 member states that have not yet established full-fledged screening mechanisms to do so as soon as possible.  Experience from other areas has shown that European legislation often sets standards in national practices across member states, even without direct European implication.

The political focus at the member state level has shifted from open trade and supply chains to protecting European industrial capacity

While the regulation purports to promote open supply chains, the political focus has shifted to citizens’ health and security, and to a lesser extent the build-up of domestic healthcare devices/products production capacity.  The overall political environment is likely to become less favorable to foreign investors in some sectors of the EU economy in the immediate future.  And the incoming German presidency of the EU has indicated that trade is a “priority.”

What does this all mean for investments and supply chains?

The main regulatory focus for foreign investment will remain with national regulators.  However, the current political context is likely to lead to increased scrutiny, including at the EU level.  Investors should be ready to demonstrate the added value of their investment for the host country and the EU both in terms of domestic capacity and overall societal benefit.

Conditionality attached to FDI across the EU is likely to become more stringent in strategic areas beyond healthcare.  Other concrete areas on regulators’ radar include aviation, maritime transport, and the digital economy.  While the EU remains outwardly committed to open supply chains, the current focus on re-establishing “domestic” production could lead to FDI screening tools being used to support businesses relying largely or exclusively on EU-based suppliers.  FDI screening processes will become increasingly politicized and controversial in the post-COVID-19 world.

In this environment, and with the EC’s power to get involved up to 15 months after completion of the project, investors and businesses seeking to invest in the EU will have to consider public perception and potential politicization of their project.  Strategic engagement and well-thought-out government affairs strategies will be essential to getting deals across the finish line.

France

Edouard Sarrazin and Clara Deveau (Paris)

In 2018, the French government initiated a major reform of the FDI regime, the last part of which became effective on April 1, 2020. This reform has radically modified and strengthened the French FDI regime, notably by (1) lowering the equity investment threshold constituting “control” to 25 percent; (2) extending the concept of control to include significant influence; and (3) introducing a two-stage review procedure very similar to the CFIUS control procedure in the United States.  The list of sensitive sectors covered by the prior authorization regime has also been expanded, for the third time since 2014, now to include activities relating to print and digital press, energy storage, and quantum technologies, next to traditional sectors such as protecting public health or preserving any establishment of vital importance.

Alongside this new FDI control regime, the French Ministry of Economy’s enforcement has intensified, with less reluctance to make use of the wide range of sanctions available, or even to prohibit a transaction that would jeopardize France’s strategic interests.  Overall, the French Ministry of Economy, and the government generally, have expressed their intent to better preserve France’s strategic interests against hostile acquisition, with a focus on R&D activities and technology sectors.  For example, the Minister of Economy, Bruno Le Maire, recently used his veto power to prevent the contemplated takeover of the French night vision company Photonis by the US defense manufacturer Teledyne.

COVID-19 impacts:  even stricter controls expected as political will builds

On April 29, 2020, Minister Le Maire announced on a French TV morning show that new protection measures would be adopted to block hostile takeovers during the COVID-19 pandemic.  These measures include modifying the FDI control regime as follows:

• The decrease in the equity investment threshold from 25 percent to 10 percent in flagship French companies acquired by non-European investors; and
• The extension of the scope of the control to biotech companies, including for example those working on a vaccine against COVID-19.

The first measure should be temporary and should apply at least until the end of 2020, while no indication has been given as to the second measure, which could be permanent.  The date when these rules will enter into force and the precise content of the decree are still pending and could evolve in the coming days.

This announcement does not come as a surprise and is in line with several other indications that the COVID-19 pandemic will not disrupt the FDI review process in France, but rather will strengthen the existing policy to protect the country’s economic interests.

For example, the French Treasury has recently announced, in a communication addressed to the professionals of the sector, that the government will apply strictly the existing FDI control during this crisis, in view of the important challenges it constitutes for several French companies, in particular those active in sensitive sectors.  In addition, some state representatives have revealed that this situation could help the government to reach a consensus on broadly using the FDI control regime, particularly between the Ministry of Economy and the Foreign Affairs Ministry, which was previously more reluctant on these issues.  Minister Le Maire’s announcement of the decree tends to confirm this analysis.

Similarly, within the Parliament and more specifically within the French National Assembly, a common interest in using the FDI control regime seems to have emerged, including from political parties usually less diligent on these topics.  For example, deputies of the French Socialist Party submitted an initial bill at the beginning of April , aimed at extending the existing prior authorization regime to all economic sectors (and not only to strategic sectors) during the period of the health emergency plus an additional three months.  The proposal also requires the that the government prepare a report on its control action and submit it to Parliament.  Some proposals also have been made by the French Right, which notably strengthen the requirements for approval of foreign investment.

Overall, even if the intervention ultimately will be carried out by decree, the Parliament’s heightened sensitivity and focus may, on a long-term basis, increase its effort to oversee the FDI control regime and impose transparency measures in the continuity of those adopted in the PACTE law in 2019. 

All these initiatives are motivated by the same desire to protect French “economic sovereignty” in the short term but with an undeniable impact on the long term by reinforcing a policy trend several years in the making.  Further, with the legal and practical tools at its disposal and the national political will to protect key European companies, the French government is also intent on being a regional leader on FDI national security issues within Europe.  Indeed, France has been a voice for action on implementing the EU FDI guidance adopted last year and has insisted on the need for immediate cooperation on cross-border cases in the context of the current crisis.

Germany

Prof. Dr. Ludger Giesberts and Dr. Thilo Streit (Cologne)

The German Federal Ministry of Economy and Energy (“BMWi”) identifies and reviews foreign investments.  Although not very active after its 2008 inception, BMWi has investigated more transactions in recent years.  BMWi has blocked only one transaction, but it is likely that many transactions have not occurred or have been abandoned when facing review.

Under current regulations, BMWi approval is required both for (1) investments exceeding 10 percent voting rights by non-German investors in specific sectors (i.e., defense industry, encryption technologies), and (2) investments exceeding 10 percent voting rights by non-EU investors in critical infrastructure; however, transactions may close before receiving approval.  Investments in other sectors exceeding 25 percent voting rights by non-EU investors trigger BMWi jurisdiction, but not mandatory filing and approval requirements.  Moreover, voluntary filings and approval will provide a safe-harbor from future BMWi review.

COVID-19 impacts: broadened regulations on foreign investment

In response to the COVID-19 pandemic, on April 28, 2020, BMWi announced a draft amendment to the German Foreign Trade and Payments Ordinance (AWV) that is expected to take effect in the coming days.  Originally planned to be part of a larger reform effort to tighten its FDI review regime announced in January 2020 and intended to take effect on October 22, 2020, BMWi decided to push the amendments forward.  Under the draft amendment, the notification requirements for acquiring German entities by non-EEA entities (to include asset acquisitions) are extended to include the following:

• Service providers responsible for safeguarding the state’s undisturbed and reliable communication infrastructure;
• Manufacturers and developers of PPE (including preliminary products or components);
• Manufacturers and developers of important pharmaceuticals;
• Manufacturers, distributors, and developers of medical devices and in vitro devices for diagnosis, prevention, monitoring, prediction, prognosis, treatment, or alleviation of life-threatening and highly contagious infectious diseases (including preliminary products or components); and
• Miners and processors of certain critical raw materials and their ores.

The notification requirement also will apply to owners of manufacturing installations and technology with regard to the aforementioned products.  In addition, the amendment now authorizes BMWi to consider, in evaluating potential national security risk, whether the investor (i) is directly or indirectly state-owned, (ii) has been a party to actions with negative effects to public safety and order, or (iii) presents considerable risk that it, or persons acting for it, have committed certain economic crimes or export control violations.

On April 2, 2020, BMWi announced a new draft parliamentary bill to amend the German Foreign Trade and Payments Act (AWG) to implement Regulation (EU) 2019/452, described above, which will increase BMWi’s authority to review a broader range of transactions.  The draft bill contains broader measures than anticipated, also potentially in response to the COVID-19 pandemic.  The bill is expected to pass parliament without major amendments and to take effect on October 22, 2020, the same date the EU Regulation takes effect.

Among the more significant changes, the new draft bill, if enacted, would lower BMWi’s scrutiny standard for reviewing the threat posed by foreign investment.  Currently, reviews of transactions may be prohibited or mitigated if there is an actual threat of “sufficiently grave endangerment.”  The proposed bill would reduce the threshold for such action to “probable impairment” of public order and safety of the Federal Republic.  Further, BMWi will consider the “probable impairment” of public order and safety of not only the Federal Republic of Germany, but of all EU member states with regard to critical EU programs.

The proposed bill will require BMWi approval before closing critical infrastructure investments (as scoped in the EU regulation) to include energy, transport, water, health, communications, media, data processing or storage, defense, insurance, media or financial infrastructure, development of sector-specific software, and sensitive facilities – and investments in businesses and entities as mentioned in the draft AWV amendment mentioned above.  This pre-approval requirement is expected to apply well beyond the currently governed critical infrastructure and businesses addressed in the AWV amendment, as BMWi has announced that it intends to broaden the scope of investment control to transactions involving artificial intelligence, robotics, semiconductors, biotechnology, and quantum technology by an amendment of the Foreign Trade Ordinance.  Failure to obtain BMWi approval before closing, or issuing voting rights or dividends, will be subject to imprisonment of up to five years and criminal fines. 

While post-investment scrutiny by BMWi in the defense sector and involving encryption technologies is not time-barred, post-investment review for critical infrastructure is limited to five years.  However, because a separate ordinance governs post-investment review, it is unclear whether the five-year limitation will remain or will be removed to align with the existing rules for ex post scrutiny.

Although not driven exclusively by the COVID-19 pandemic, the proposed legislation and BMWi’s interpretation of its authority have been influenced by the current situation.  It is likely that the decision to include criminal penalties for failure to obtain required approval in the recent legislation and the anticipated broadening of transactions subject to approval were, in part, a reaction to the current crisis.  Further, preventing “probable impairment” to the “public order and safety” is likely to see a broadened interpretation apply, especially to the provision of health services, equipment, and medicine.

Italy

Alessandro Boso Caretta and Domenico Gullo (Rome)

The Golden Power Law (Law Decree No. 21 dated 15 March 2012; Law No. 56 dated May 11, 2012) authorizes the Italian government to scrutinize investments by foreign persons in certain sectors and assets deemed strategic for the national interest.  Under this law, the government has “special powers” (so-called Golden Powers), including to veto or impose conditions on FDI transactions that may pose a threat to the national security or the public order.

Golden Power filings are required for controlling investments in specific sectors and assets by EU and non-EU investors.  A Golden Power filing must be made within 10 days after signing or adopting the corporate resolution approving the transaction and, in any case, before its implementation.  The Italian government has 30 or 45 business days to review (depending on the sectors for which the filing has been made; such timeframe is subject to either a 10- or 20-day potential extension), during which any voting or non-economic rights attached to the acquired interests are frozen until approved by the government.

COVID-19 impacts: accelerated implementation of EU FDI guidance and temporary increased restrictions

On April 8, 2020, Articles 15 and 16 of Law Decree no. 23/2020 (“Liquidity Decree”) introduced material changes to the Italian FDI regime that broaden the scope of the Golden Powers.^[2]  These changes are intended to protect Italian strategic companies and assets, and prevent hostile and speculative takeovers that may follow the economic crisis triggered by the COVID-19 pandemic.

The Liquidity Decree has expanded the Golden Power regime to encompass all the sectors listed in Article 4 of Regulation (EU) 2019/452, including financial, credit, and insurance sectors.  Before this amendment, the Golden Power regime covered (i) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure; (ii) critical technologies and “dual use items” (items which can be used for both civil and military purposes – including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy, storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies); (iii) 5G broadband electronic communications networks; and (iv) defense and national security.  Now, the Golden Power regime also may review investments in financial, credit, and insurance sectors, supply of critical inputs (including energy or raw materials and food security), access to sensitive information (including personal data, or the ability to control such information), and media freedom and pluralism.

In addition, Article 15 of the Liquidity Decree has introduced temporary measures aimed at mitigating the negative effects of the COVID-19 pandemic, which will apply until December 31, 2020.  These temporary measures expand the Golden Power authority to review (and thus the duty to submit a Golden Power notice for approval) the following types of transactions:

• Any resolution, act, or transaction that involves a change of the ownership, control, availability, or destination of assets in the sector listed in Article 4 of Regulation 2019/452 above, including the financial, credit, and insurance sectors;
• Any acquisition of a controlling (typically, 50 percent or greater) equity interest by foreign entities (both EU and non-EU) in the sectors listed in Article 4 of the Regulation 2019/452 above, including the financial, credit, and insurance sectors (previously, the duty to notify would have arisen only in case of acquisitions carried out by non-EU entities); and
• Any acquisition of voting or capital interests by non-EU investors that results in a greater than 10 percent interest(and, subsequently, 15 percent, 20 percent, 25 percent and 50 percent), including any interest already held, in the sectors listed by Article 4 of the Regulation 2019/452 above, including the financial, credit, and insurance sectors, provided that the value of the investment is equal or greater than €1 million (previously, the duty to notify in case of non-EU investment was triggered only in case of acquisition of controlling equity interests).

Until December 31, 2020, to determine whether a foreign investment may affect national security or public order, Article 15 of the Liquidity Decree provides that, inter alia, the existence of direct or indirect control by a public administration of an EU member state must also be taken into account (previously, the control to be taken into account was only that of a non-EU state).

Article 16 of the Liquidity Decree implements some procedural changes, including granting the government the authority to (i) exercise the Golden Power ex officio, with respect to all the sectors covered by the duty to notify, in case of breach of such a duty; and (ii) request that public administrations, public and private bodies, companies, and other third parties provide information and documents in support of a Golden Power review.

Article 16 also specifically addresses the importance of the Golden Power regime with respect to the 5G broadband electronic communications networks sector.  It clarifies that, in exercising the Golden Powers in a review of foreign investment in that sector, the principles and guidelines articulated at the international level and by the EU must be considered in the assessment of the “elements showing the presence of vulnerability factors which may jeopardise the integrity and safety of networks and data which flow thereinto.” 

Portugal

Mariana Ricardo, Gonçalo Castro Ribeiro, and Miguel Mendes Pereira (Lisbon)

In 2014, Portugal enacted laws to safeguard strategic assets essential to guarantee national security.  In accordance with the legal regime in force, the Council of Ministers has the power to oppose legal transactions that result, directly or indirectly, in a non-EU/EEA foreign investor acquiring direct or indirect control over infrastructure or strategic assets.

Under the existing legal framework, strategic assets include the main infrastructure and resources for defense and national security, or for the provision of essential services in the areas of energy, transport, and communications.  Transactions may be opposed when they (1) result, directly or indirectly, in the exercise of a dominant influence over these assets, regardless of their legal form, and (2) are determined to jeopardize in a sufficiently serious manner defense and national security or the security of the country’s supplies and services essential to the national interest.  An opposition decision deems null and ineffective all legal acts relating to the transaction, including those concerning the economic exploitation or the exercise of rights over the assets or the entities that control them.

Despite the legal framework in place, Portugal has privatized to Chinese companies several assets that many would deem as strategic, including the national electricity transmission grid, the main energy operator, and the main private bank.

When assessing the FDI framework in Portugal, many overlook the requirement to report to the Portuguese Central Bank all positions and transactions made by foreign investors.  These rules apply to all legal persons residing or pursuing business in Portugal who conduct economic or financial transactions with a foreign country or foreign exchange operations, equal to or greater than €100,000, considering total inflows and outflows.  The information should be reported on a monthly basis, up to the 15th business day following the end of the month to which the data refer, through a specific system maintained by the Portuguese Central Bank.

COVID-19 impacts: the emergence of strategic assets in the health sector

The legal framework for FDI review has not been directly impacted by the COVID-19 pandemic to date.  Commenting on the EC guidance to member states on national and EU FDI screening mechanisms, the Minister for Foreign Affairs stated that Portugal “supports the decision that came out of this debate,” underscoring that the country “looks at this perspective of the European Union with the serenity of those who know that this is a breakthrough, because we ourselves have been forced, in the past, to open strategic companies in privatization processes carried out in haste or without due safeguards, imposed by the so-called troika.“

The Portuguese government has, however, taken other measures to protect the country’s sovereignty, notably by more firmly establishing the health sector as a strategic asset.  With the approval of the State Budget Law for 2020, the government created the National Medicines Laboratory, part of the Army structure and carrying out duties of the Ministry of National Defense and the Ministry of Health.

This Laboratory has been entrusted with research and producing medicines, medical devices, and other health products, reducing the country’s dependence on the pharmaceutical industry and affirming national sovereignty in this area.  Moreover, the government has been rethinking public-private partnerships in the health sector, and there are signs that COVID-19 may reinforce decisions not to renew existing contracts, thus allowing the country to regain control over important healthcare facilities.

Spain

Joaquin Hervada and Teresa López-Bachiller (Madrid)

On March 17,  2020, the Spanish government adopted royal Decree-Law 8/2020, which strengthens Spain’s FDI review regime under Law 19/2003, and aligns it with the EU guidance in Regulation (EU) 2019/452.  The new law requires prior administrative authorization for transactions where the investor acquires a 10 percent or greater equity interest in a Spanish company or control over its managing body.  This prior administrative authorization is required when the investor is:

1. not a resident in the European Union (EU) or European Free Trade Association (EFTA);
2. resident in a country within the EU or the EFTA but is controlled by a non-resident; or
3. a foreign public or publicly controlled company or sovereign fund, regardless of its residence.

Under the new law, investments that meet the above criteria in any sector require preapproval where the investors are (a) a foreign government or sovereign wealth fund; (b) foreign investors who have already invested in security, public health, or public policy sectors in another EU member state; or (c) foreign investors subject to administrative or judicial proceedings anywhere in the world for engaging in illegal activities.

Investments by other types of investors only require prior administrative approval if they are in a critical sector of the Spanish economy, which, aligning with  the definitions in Regulation (EU) 2019/452, include the following:

• Critical infrastructure, whether physical or virtual, (including energy, transport, water, communications, media, data processing or storage, aerospace, defense, electoral, and sensitive facilities), as well as land and real estate that are key to the use of these infrastructures;
• Critical technologies and dual-use items as defined in Article 2 paragraph 1, of Council Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, the aerospace, defense, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies;
• Critical inputs: energy or those relating to raw materials and food safety;
• Sensitive data: sectors with access to sensitive information, in particular personal data, or with capacity to control such information; and
• Media.

Although the Spanish government has intended revisions to its FDI framework in response to the EU guidance, due for implementation in October 2020, the COVID-19-associated threats to the global supply chain and resulting devaluation impacts on companies has accelerated implementing this strengthened FDI review law. 

The Spanish government has been clear that it will intervene in transactions that are anticipated to have an adverse effect to the country’s national security, public order, or public health.  During the transitory period while the law is fully implemented in regulations, the Spanish government has agreed to apply simplified administrative procedures for transactions agreed upon before March 18, 2020 and for transactions valued at less than €5 million.

Australia

Chris Mitchell and Chanel Mercurio (Melbourne)

Under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and its associated regulations, the Australian Treasury reviews and approves foreign investment.  The Australian Foreign Investment Review Board (FIRB), a body established within the Australian Treasury, advises the Australian treasurer and government on foreign investment policy and administration.  The Australian Treasury has significant power to block, impose conditions, or require divestment of foreign investment in Australian land, businesses, or entities that constitute a “significant action” under the FATA – which generally includes change of control transactions and acquisitions of interests in Australian land exceeding varying monetary thresholds.  Certain types of significant actions are also considered “notifiable actions,” requiring notification to and preapproval by the Australian Treasury. 

A “notifiable action” under the FATA includes when a foreign person acquires (i) an Australian agribusiness; (ii) a substantial interest (an interest of at least 20 percent) in an Australian entity; or (iii) an interest in Australian land (including a direct freehold interest, lease or license, or an acquisition of an interest in an Australian land company or Australian land trust).  Unlike for a significant action, there does not need to be a change in control for actions relating to Australian entities to be notifiable actions.  Under normal circumstances, only notifiable actions exceeding monetary thresholds – of A$1.2 billion for investors from certain countries in a Free Trade Agreement with Australia, and A$275 million for most other investors – require notification to and prior approval from Treasury.  Special requirements and no monetary thresholds typically apply for foreign government investors and certain sensitive businesses.

COVID-19 impacts: temporary expanded preapproval requirements and processing delays

On March 29, 2020, the Australian Treasurer announced immediate changes to Australia’s foreign investment regulations under the FATA seeking to safeguard Australia’s national interest as the COVID-19 pandemic continues to build pressure on the Australian economy.  The two key changes announced were as follows:

• All proposed foreign investments that are subject to the FATA require approval by the Australian Treasurer, regardless of the value or the nature of the foreign investment. 
• Timeframes for approval of foreign investment will be extended from the current statutory 30-day period to up to 6 months.

These changes have reduced the monetary thresholds for all “significant actions” and “notifiable actions” to $0, requiring prior approval for all “notifiable actions” regardless of value of the investment.  Notably, these changes would capture internal corporate restructuring involving changes to ownership or rights that would itself be considered a “notifiable action,” and entry into commercial and other leases exceeding 5 years (including options to renew).  Transactions subject to a definitive agreement entered before 10:30 pm (AEDT) on March 29, 2020 are not subject to these new rules.

These new measures are temporary and intended to last only during the COVID-19 pandemic – however long that may be. The Treasurer has stressed that “[t]his is not an investment freeze. Australia is open for business and recognises investment at this time can be beneficial if in the national interest.”

FIRB has issued a new Guidance Note 53 which provides an overview and some practical examples of how the new measures are to be applied by FIRB.

Practical implications for FIRB notifications

The changes to the FIRB regime have resulted in significantly more notifications and applications requiring approval from FIRB, which is impacting FIRB’s processing times.  FIRB is prioritizing urgent applications for investments that directly protect and support Australian businesses and jobs and will consider commercial deadlines related to those proposed investments. Equally, more routine applications, such as entering into a new lease agreement, will also be appropriately prioritized.

To benefit from FIRB’s prioritization efforts, new applications should stress the benefits of the proposed transaction to Australian business, including how it will secure jobs and support Australia’s economic recovery.  Applicants pending before FIRB should consider a supplementary submission to highlight these factors in support of expedited treatment.

These amendments significantly increase Australia’s foreign investment review for all current and proposed foreign investments.  Detailed consideration of these approval requirements is necessary to avoid any adverse commercial and timing implications.  FIRB has indicated that, in these uncertain times, compliance with Australian’s foreign investment regime will be a priority for the Australian government.  Failure to comply with the notification and preapproval requirements could be subject to a disposal order, civil penalty orders, and criminal prosecutions.

Canada

Catherine Pawluch (Toronto)

Under the Investment Canada Act (“ICA”), the Minister of Innovation, Science and Industry (“Minister”) reviews foreign investment in Canada.  The ICA has two primary review purposes: (1) significant acquisitions of control to ensure they are likely to be of net economic benefit to Canada, and (2) investments that could be injurious to national security.  Successive Canadian governments have administered the ICA in a manner that has increasingly demonstrated the view that FDI ensures that Canadian businesses can invest in innovation and to compete in the global economy.

On April 18, 2020, the Canadian government announced a new policy affecting foreign investment screening (“Policy”).  While it is not yet certain how the Policy will be enforced, foreign investment transactions in Canada will be assessed through the lens of the COVID-19 pandemic.

Economic benefit to Canada

Under the ICA, where a specified monetary threshold is exceeded, the direct foreign acquisition of control of a Canadian business is subject to a review and pre-closing approval by the Minister.  The foreign investor may not complete the transaction unless the Minister determines that the investment likely provides a “net benefit to Canada.”

The financial threshold for triggering a net benefit review for private-sector investors from World Trade Organization (“WTO”) member countries is $1.075 billion in Enterprise Value; for private-sector investors from free trade agreement partners, it is $1.613 billion in Enterprise Value.  The financial thresholds are lower for investors that are state-owned enterprises (“SOEs”), including sovereign wealth funds or other entities controlled or influenced by a foreign government.  For SOEs from WTO member countries, the relevant threshold is $428 million, based on the book value of the assets of the Canadian business (Asset Value).  The threshold for non-WTO investors is $5 million for direct and $50 million for indirect acquisitions (Asset Value).

For foreign investments in Canadian businesses that are engaged in a “cultural business,” a term that is broadly defined in the ICA, the thresholds for review are $5 million and $50 million (Asset Value) respectively, for direct and indirect investments.  This applies even to Canadian businesses only incidentally involved in a cultural business. 

A net benefit review is not required when acquiring control of Canadian businesses valued below the relevant thresholds.  However, investors must submit a notification of the acquisition of control. A notification is also required whenever an investor from a WTO member country indirectly acquires control of an existing Canadian business (that is, where a foreign company that has a Canadian subsidiary is acquired), or when a non-Canadian investor makes an investment to establish a new Canadian business.  Such investments may trigger a national security review, as discussed below.

National security

Separate from the net benefit review process, the ICA permits the Canadian government to review investments that “could be injurious to national security.”  These provisions apply to any foreign investment (including a minority investment) in a Canadian business, the establishment of a new Canadian business, or even to a foreign entity conducting business in Canada.  The government may impose any measures that it considers advisable to protect national security (which may include blocking a proposed investment, imposing conditions on an investment, or ordering the investor to divest control of the Canadian business or the entire investment). 

The ICA does not define “national security,” which injects significant discretion and corresponding uncertainty into the investment review process.  In 2016, the Minister issued Guidelines on the National Security Review of Investments, which outline the factors taken into account in assessing investments under the national security provisions, including whether the investment is likely to impact (1) critical infrastructure; (2) delivery of critical goods and services to Canadians; or (3) the supply of any goods and services to the Government of Canada.

There are no monetary thresholds for national security reviews, which must be initiated 45 days after filing a notification or application for review, or 45 days after completing a transaction or implementing an investment not subject to notification or review.  The entire national security review process, if triggered, can take up to 200 days (unless extended by agreement between the investor and the Minister).

COVID-19 impacts:  foreign investments subject to enhanced scrutiny

On April 18, 2020, due to the COVID-19 pandemic, the Canadian government issued a new FDI Policy.  Notably, in announcing the Policy, the government stated its concern that “many Canadian businesses have recently seen their valuations decline as a result of the pandemic…These sudden declines in valuations could lead to opportunistic investment behaviour.”

As a result, the Policy provides that the government will scrutinize foreign investments of any value, whether a controlling or non-controlling interest, in Canadian businesses that are related to “public health” or “the supply of critical goods and services to Canadians or to the Government.”

While the Policy does not change the applicable thresholds for net benefit reviews under the ICA, it is expected that FDI net benefit reviews in Canadian businesses that are related to public health or the supply of critical goods and services to Canadians or to the government will be subject to more detailed reviews.

Further, depending on its interpretation of the “public health” and “critical goods and services” in the current environment, the government has signaled that it may cast a wider net in applying the national security review provisions to foreign investments.  The similarity in the wording chosen in the Policy to that used by the government in the Guidelines on the National Security Review of Investments (as described above) suggests that, in addition to investments in public health-related businesses, the Policy may also apply to foreign investments in sectors that previously have been identified as components of Canada’s critical infrastructure.  These sectors include energy and utilities, finance, food, transportation, government, information and communication technology, health, water, safety, and manufacturing.

In addition, the Policy states that the government will subject all foreign investments by state-owned investors or by private investors “assessed as being closely tied to or subject to direction from foreign governments” to enhanced scrutiny under the ICA, regardless of the value of such investments.  The increased scrutiny of all foreign investments by SOEs or by private investors with foreign government ties appears to be based on the view that “some investments into Canada by state-owned enterprises may be motivated by non-commercial imperatives that could harm Canada’s economic or national security interests.”

The nature and extent of this enhanced scrutiny is not yet clear.  Examples provided in the Policy statement refer to the Minister requesting additional information from investors or extensions of time for review “to ensure that the Government can fully assess these investments.”  Conditionality attached to investments is likely to become more stringent in public-health related business and in strategic areas beyond.  The government may also require written commitments (referred to as undertakings) from a foreign investor, which address how the acquired Canadian business is to be operated.

The Policy applies until the economy recovers from the effects of the COVID-19 pandemic.  This leaves an open-ended time horizon, which could extend well into the future.

United Kingdom

Alexandra Kamerling and Martin Strom (London)

There is no specific stand-alone mandatory clearance regime regulating foreign inward investments in the UK.  However, review is incorporated as part of the UK merger control regime which creates several ways for the UK government to intervene in and regulate foreign direct investments.

Under the Enterprise Act 2002 (EA2002), the government can intervene when a transaction constitutes a “relevant merger situation” that implicates one or more of three specific public interest issues (national security, financial stability, or media plurality).  A relevant merger situation arises where (i) two or more enterprises cease to be distinct and (ii) the target’s UK turnover exceeds £70m or the transaction creates or increases a share of supply of 25 percent of goods or services in the UK.  In relation to the second category, lower thresholds apply to mergers which relate to certain national security sectors (e.g., military or dual-use goods).  The UK government can also intervene on the same public interest grounds (i.e., national security, financial stability, or media plurality) in cases involving: (1) government contractors who hold or receive confidential defense-related information, and (2) certain newspaper and broadcasting businesses.  Finally, until the end of the transition period, the UK can intervene under the EU Merger Regulation (EUMR) in proceedings relating to European mergers to which the UK government asserts a legitimate interest.

The UK government has a limited number of additional ways to intervene in certain foreign direct investments, in addition to those under the EA2002 and EUMR, as follows: (i) where non-UK entities purport to acquire “important manufacturing undertakings” and where such acquisition would be contrary to the interests of the UK (which could include suppliers deemed essential in the COVID-19 pandemic such as pharmaceutical companies, ventilator manufacturers, or PPE manufacturers), and (ii) where the government has special shares in a company (typically shares with special rights, retained following a privatization of the relevant company) giving it certain rights (e.g., that no one shareholder can hold more than a stated percentage of the company’s equity without the prior consent of the government).

Stated intention to move to a stronger regime

The National Security and Investment Bill, announced in the Queen’s Speech on December 19, 2019, will (if implemented) strengthen the government’s power to intervene in mergers to protect national security interests and would replace the current powers under the EA2002.  In particular, the Bill will bolster the government’s ability to scrutinize investments by “hostile parties” in businesses or assets with national security implications.  The main elements of the Bill include (i) establishing a notification system whereby businesses will flag transactions with potential security concerns to the government for screening; (ii) enabling the government to mitigate national security risks (e.g., by adding conditions to a transaction or blocking it outright); and (iii) establishing an appeal process for affected parties.  The new powers would apply to all sectors of the UK economy, without reference to the parties’ share of supply or turnover.

While the Bill is not a direct response to the current COVID-19 pandemic, if implemented, it will inevitably grant the UK government more powerful tools to protect UK business from foreign direct investments, where such investments threaten UK national security interests.  The current proposal is not particularly detailed and does not contain a definition of “national security.”  If the government takes an expansive approach to “national security,” the Bill could allow the government to intervene in a wide range of proposed foreign investments to ensure that the UK’s national security interests are sufficiently protected.

COVID-19 related developments

The UK competition regulator, the Competition and Markets Authority (CMA), has established a COVID-19 task force and published several guidance documents and press releases in relation to any measures it will, or might, take in response to the pandemic.  CMA has published a guidance document on its approach to merger investigations.  However, the current guidance does not specifically address FDI and the need to protect UK interests in such transactions.  It remains to be seen whether the CMA or the UK government will issue specific guidance on the approach it will take to FDI during the current pandemic.

Conclusion

As the global economy absorbs the shock of the COVID-19 pandemic, foreign investment opportunities are expected to increase to unprecedented levels.  The combination of cash-rich investors and companies urgently seeking capital is likely to create an active market for global investments, particularly in countries committed to backstop precipitous declines in key industries.  The importance of understanding and accounting for the national security impacts to a proposed transaction is critical to achieve successful outcomes.  Companies and investors alike should carefully monitor changes in FDI regulatory processes and develop a strategy early to navigate successfully the regulatory process.

 

DLA Piper has a global team of attorneys monitoring these regulatory developments and interacting with key government agencies and officials regularly.  Please contact any of the authors or your usual DLA Piper contact if you have questions about this article or would like to discuss FDI review implications for any current or proposed investment.

 

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This information does not, and is not intended to, constitute legal advice.  All information, content, and materials are for general informational purposes only.  No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.