Governments are increasingly exploring new ways to better identify and assess foreign direct investments (FDI) into sensitive sectors. As noted in a previous blogpost, amongst the arsenal at the disposal of governments, cross-border cooperation is increasingly being used as a vehicle to facilitate deal detection and identify potential threats.
As the protection of national interests is typically the “raison d’être” of foreign investment regimes, the exchange of information between agencies is not as apparent as the cooperation that takes place across merger control regimes. Yet, foreign investment agencies are willing to cooperate, provided such cooperation takes place between allied countries. This largely takes place behind closed doors – meaning transaction parties have limited visibility of the process (and stakeholders involved).
However, there are two known cooperation mechanisms at a global level, namely: (i) the EU FDI Screening Regulation; and (ii) the “Five Eyes” alliance (which comprises Australia, Canada, New Zealand, the United Kingdom, and the United States). The effect of these is explored further below.
The EU FDI screening mechanism leads to increased transparency amongst EU Member States
Under the EU FDI Screening Regulation, Member States must notify any ongoing investigation to the EU Commission, and are invited to indicate whether a notified investment risks affecting the security or public order of another Member State. Other Member States are then given the opportunity to provide comments and state whether the investment at issue may affect their security or public order. Similarly, the Commission may issue reasoned opinions where an investment threatens the security or public order of more than one Member State.
In addition, it is possible for Member States and the Commission to comment on foreign investments planned or completed in another Member State, but which have not (yet) been reviewed. In the latest OECD report assessing the effectiveness and efficiency of the EU FDI screening mechanism, Member States’ authorities indicated that they viewed this avenue with more scepticism, as they either did not expect non-screening Member States to be able to contribute useful information, or did not want to embarrass non-screening Member States by approaching them using this channel.
EU Member States have generally been positive about the EU FDI screening mechanism as it has: (i) helped to make the case for the introduction of FDI regimes; (ii) helped Members States to adjust their approaches to the screening of individual transactions; and (iii) made it easier for them to explain and defend having a more robust FDI screening regime.
Last, but not least, it has facilitated the detection of transactions that have not been notified, but should have been. By way of example, in its 2020 and 2021 reports, the Italian Government noted that it was made aware of 34 and 341 transactions in 2020 and 2021 respectively, due to the introduction of the EU FDI screening mechanism. Similarly, the French government indicated in its 2021 report that: “the notification of transactions by other Member States to the European network allowed the French Treasury to detect transactions that were going to be, or should have been, subject to screening”. Companies may therefore receive questions from non-notified Member States as a result of this cooperation mechanism.
In practice, the information provided is pretty standard and is typically similar to the information provided as part of a national FDI filing. However, in a worst-case scenario such intervention may lead a non-notified Member State to request submission of a filing which (particularly if the request comes at a late stage) can cause delay and put the acquirer in a challenging position if conditions precedent are not flexible enough to cover such eventualities.
This mechanism may also lead to delays in receiving approvals in notified Member States depending on the statutory timetable. While most statutory review periods accommodate the procedure under the screening mechanism, this is not always the case. For instance, in Austria, the authority only starts its Phase I proceedings after the EU FDI screening has been concluded. By contrast, the German authority only notifies Phase II reviews to other Member States, meaning that the risk of delay to a transaction due to the EU’s screening regulation is limited, given the long Phase II review period in Germany.
Intra-continental cooperation: focus on the Five Eyes alliance
The Five Eyes arrangement brings Australia, Canada, New Zealand, the United Kingdom, and the United States into an intelligence alliance that has been in existence since World War II. Originally designed as a protectionist tool to counter Soviet influence, the relationship developed into a forum for cooperation covering subjects of mutual interest, among which is the coordination of foreign investment screening policies. The Five Eyes members cooperate by: (i) exchanging information on foreign investment activities; and (ii) encouraging the coordination of foreign investment screening policies.
Belonging to the Five Eyes alliance might additionally entail reduced procedural obligations for investors in the United States. For example, on 10 February 2023, the United Kingdom and New Zealand joined Australia and Canada in the list of “excepted foreign states”, meaning that qualifying investments originating from these countries are exempt from CFIUS’ mandatory pre-closing filings and expanded jurisdiction over certain non-controlling investments and real estate transactions.
The scope of the cooperation is not strictly limited to the Five Eyes countries and examples of contacts with other authorities, in particular in Western countries, demonstrates a wish to reinforce deal detection and enhance alignment. Although most discussions are by nature confidential, it is public knowledge that the Five Eyes countries have, in the past, exchanged classified information with other countries.
For instance, in 2016, the Chinese buyer, Fujian Grand Chip Investment Fund, attempted to acquire Aixtron. While the German government initially cleared the transaction, US President Obama blocked it, as the proposed acquisition related to Aixtron’s US assets (subsidiary and IP). There was reportedly some back-channel communication following President Obama’s decision between the US Department of Defense and its German counterparts, after which Germany withdrew its approval and reopened its investigation. The parties subsequently abandoned the transaction.
What does this mean for investors?
Cross-border cooperation between authorities means that a transaction involving a relevant foreign investment has the potential to be picked up in any jurisdiction with FDI screening capabilities. If parties are caught off-guard by a transaction being ‘called-in’ for review, this could have timing implications for the deal – and could, particularly if it occurs post-closing, ultimately result in severe sanctions (including the deal being void, fines, unwinding orders and criminal sanctions for non-compliance).
FDI must therefore be considered at an early stage and obtaining the necessary FDI approvals, and building protections into the transaction documents, will be important in managing and anticipating FDI screening risks. It is also critical to have a co-ordinated strategy on filing content to avoid any inconsistencies being detected which could lead to authorities asking further questions and ultimately to potential reputational issues, loss of credibility or (in a worst-case scenario) concerns as to the merits of the transaction.
For further information, please contact:
Nicole Kar, Linklaters
nicole.kar@linklaters.com
