Foreign direct investment (FDI) is a critical part of the global economy. However, in recent years, government regulators around the world have increased scrutiny and, in some cases, intervened in transactions involving foreign individuals and entities – especially those that they consider give rise to national security concerns.
What has prompted the tightening of rules? Geopolitical uncertainty, cybersecurity threats, and increased protectionism are some of the motivations for governments to exercise greater control over foreign investment flow in their jurisdictions. Additionally, the COVID-19 pandemic exposed trade vulnerabilities that have made it a bigger priority for governments to be more proactive in enacting, enforcing, and widening their FDI regimes.
As a result, countries are reviewing a broader array of transactions in sectors that have typically fallen outside any review that targets foreign investments. Many are proposing new laws or tightening existing FDI regulations that screen transactions in certain industries and sensitive sectors. Many countries have stated that the increased scope of their FDI screening rules is not designed to deter investment but to help establish a more transparent process to deter malign actors, protect critical industries, and ensure competitiveness.
In this article, we explore some of the more recently updated or amended FDI screening regulations around the world, the impacts on cross-border transactions, and what corporate legal teams and law firms should keep in mind.
How does this impact mergers and acquisitions that involve foreign investors?
FDI screenings are not a new occurrence, but they are being looked at more closely. Navigating FDI screening requirements is now a critical part of the planning and execution of cross-border investments or acquisitions by corporations and the law firms that support them.
Transactions are far more likely to trigger screening requirements as more industries and sectors previously considered irrelevant from an FDI perspective, are falling within the scope of these regulations.
A key motivation for the shift in scope is that many governments are redefining what national security entails, going beyond critical infrastructure and defense to include technology, artificial intelligence, healthcare, the media, and more.
FDI regulations are evolving, so it’s important that all parties in a transaction understand FDI requirements and restrictions for overseas investments as well as transactions that take place locally but involve a foreign party or investor(s) to prevent disruptions to ongoing and future transactions.
Changing FDI regulations around the world
A notable example of a recent regulatory update is the European Union’s passing of an FDI screening regime, which went into effect in October 2020. While it does not require an EU-wide process, it does set out minimum requirements for its member states. Since its enactment, many member states have either passed new FDI rules or have reinforced or amended existing regimes locally. Among them, France, Germany, Spain, and Italy made significant enhancements to their local rules during the pandemic and have since decided to expand or keep some of those rules in place permanently. The Netherlands and Ireland are expected to pass their own FDI screening rules this year.
Moreover, the UK passed the wide-reaching National Security and Investment (NSI) Act that went into effect in early 2022. Canada, the United States, Japan, Australia, and New Zealand have also enacted or updated their local FDI rules.
FDI laws vary significantly by jurisdiction, and with many countries widening the scope for screening, it can add complexity to cross-border transactions.
Some of the key aspects of FDI screening rules to consider include:
- Origin of investment: FDI screening may be triggered by an investment originating from a foreign company or entity and from certain countries, in some cases being applicable to any investor, including domestic investors depending on the industry or sector of investment.
- Extraterritorial scope: Some countries may also include investments in foreign targets that supply goods and services or conduct business domestically within the scope of the screening regulation.
- Industries and sectors: Be aware that the list of industries and sectors that trigger a screening varies by jurisdiction and may have expanded.
- Type of transaction: FDI screening regulations may apply only to the acquisition of an interest in corporate entities but could also include the acquisition of certain assets or intellectual property.
- Thresholds for review: It’s not uncommon for countries to have different thresholds for review based on the percentage of voting rights, shares, and ownership interest that is being acquired. There may also be monetary thresholds in place.
- Notifications: Some countries have a mandatory notification requirement for relevant transactions, while others may have a voluntary notification scheme in place.
- Transaction dates: If a regulation was passed or amended recently, a jurisdiction may or may not apply the rule retroactively. It’s important to determine which transaction dates fall within the law’s scope.
- Penalties: Penalties for non-compliance vary and should be seriously considered, as parties privy to relevant transactions could face hefty fines and, in some cases, imprisonment.