< Back to insights hub


Foreign Direct Investment controls – what is changing and what dealmakers should do17 April 2020

Share this Page

European countries have long welcomed a tide of inward investment, but the growing desire to protect strategic assets has turned that tide, with consequences for efficient deal making. This article considers the EU, UK, Germany and France.

"Evident before COVID-19, and now fortified by it, the fear that foreign State-sponsored companies may buy strategic assets has turned that tide."

Changing view of FDI

European countries both welcome, and restrict, foreign direct investment. Open economic policies have long carried an inward tide of investment. But, evident before COVID-19, and now fortified by it, the fear that foreign State-sponsored companies may buy strategic assets has turned that tide.

Alongside merger control, investors and owners of strategic assets must contend with legal limits on foreign ownership, and more regulatory filings. For many deals, such controls add only cost and delay; for some, they add uncertainty of outcome – a risk that, even if the deal is unobjectionable in competition law – it can still be blocked. While this risk has always existed – public interest controls imposed by individual countries on acquisitions in the defence or media sectors are long-standing – with new technology and a widening scope of what is considered “critical” infrastructure, more deals now face more scrutiny.

Managing risk in deals
With careful deal planning, this risk can be managed. To consider are:

  • Country risk: which countries have the right to review and intervene in the specific transaction?
  • Asset risk: for each country in (a) above, which assets are subject to control?
  • Ownership risk: for each country in (a) above, what levels of ownership trigger intervention? It is particularly important to have a clear understanding of the complete ownership chain, in order to be able to identify relevant foreign ownership.
  • Process: what timescales apply to Governmental screening?
  • Documentation: two aspects apply. First, what is needed for a complete notification? Second, what conditions need to be included in transaction documentation?

In our practice we see how the parallel analysis of merger control and foreign investment control in deals is becoming more important. Depending on the parties’ requirements, some transactions can be structured to avoid the need for separate foreign investment screening but where this is not possible, parties are best advised to assess at the outset the risks of government objection and to prepare their case thoroughly.

EU – Regulation 2019/452 (the “FDI Screening Regulation”)

The Regulation provides a framework for EU Member States to screen foreign direct investments into the EU, on the grounds of security or public order, and for Member States to cooperate with each other and with the EU Commission. The existence of an EU framework is designed to reduce to a minimum the inconsistencies that may arise in different Member States’ own regulation.

The EU will supervise how Member States apply their laws to foreign direct investment. It may issue opinions to Member States, where a proposed foreign direct investment is likely to affect projects or programmes of EU interest. These programmes include Galileo, EGNOS, Copernicus, Horizon 2020, Trans-European networks for Transport, Energy and Telecommunications, European Defence Industrial Development Programme, and Permanent structured cooperation (PESCO).

"The existence of an EU framework is designed to reduce to a minimum the inconsistencies that may arise in different member states’ own regulation."

We note below how German and French law are being amended to take specific account of the Regulation.

The Regulation takes effect from 11 October 2020 and will therefore apply only briefly to the UK during the Brexit transition period, which is scheduled to end on 31 December 2020.

In the context of the COVID-19 crisis, the European Commission on 26 March 2020 adopted a Communication on Guidelines for Member States on foreign direct investment (FDI) and the free movement of capital from third countries and the protection of European strategic assets, with a view to the application of the FDI Screening Regulation.

UK – new law proposed on national security intervention

Current powers to intervene
The UK Government has powers to intervene in certain mergers to protect the public interest. The law distinguishes between public interest and special public interest interventions. For public interest cases, where the jurisdictional thresholds of UK merger control are met, and the transaction might affect national security, media plurality or the stability of the UK financial system, the Secretary of State may intervene to decide.

For special public interest cases, a merger situation must have been created which fails to meet either the turnover or share of supply jurisdictional tests. The special public interests are stated to be: (a) involvement of a relevant government contractor; (b) a modified 25% share of supply test referring to newspapers of any description in the UK or a substantial part; and (c) a modified 25% share of supply test referring to broadcasting in the UK or a substantial part.

Focus on national security
The Government can today intervene in mergers to protect the public if these raise national security concerns. Transactions concerning any of the three sectors below may be subject to intervention on national security grounds where specific thresholds are met.

The sectors are: (a) development or production of items for military or military and civilian use; (b) the design and maintenance of aspects of computing hardware; and (c) the development and production of quantum technology.

As amended in June 2018, the jurisdictional thresholds for national security cases have been lowered so that intervention can take place where the target business has a UK turnover over £1m and either the existing share of supply test must be met (25% share created or enhanced), or the target must have a share of supply of 25% or more of relevant goods or services in the UK. The requirement in the usual share of supply test – for there to be an increment in share of supply in all cases – has been removed for these sectors.

< Back to insights hub

"There will be a new voluntary notification system which promises quick and efficient screening of transactions for potential security concerns."

Further reform coming
In addition to these changes, which were intended to be only the start of wider reform, the Government announced in December 2019 that it would introduce new legislation to strengthen its powers to scrutinise and intervene to protect national security.

There will be a new voluntary notification system, sitting alongside the existing merger control rules, which promises quick and efficient screening of transactions for potential security concerns. The Government will be able to add conditions to a transaction or, as a last resort, block it. Beyond that, many details were proposed in the Government’s consultation in July 2018, but a draft bill has not yet been published.

The new power would apply in all sectors of the economy and to businesses of any size. The broad policy intent can be gathered from the 2018 consultation.

In that consultation, the Government proposed a power to intervene in “trigger events” that may create a risk for national security, whether owing to the nature of the activities of the entity, or the nature of the asset, to which the trigger event relates. Many different transactions could be trigger events, for example:

  • the acquisition of more than 25% of shares or votes in an entity;
  • the acquisition of significant influence or control over an entity;
  • the acquisition of further significant influence or control over an entity beyond the above thresholds;
  • the acquisition of more than 50% of an asset; and
  • the acquisition of significant influence or control over an asset.

As formulated by the Government in its consultation, trigger events would include:

  • acquiring ownership of the servers of a business that provides services to a defence contractor;
  • acquiring control over the intellectual property of code on which data servers operate for the benefit of an energy provider;
  • buying land adjacent to or overlooking a national infrastructure site or a sensitive government facility; and
  • acquiring assets physically located outside the UK including both physical assets and intellectual property rights where these are key to the provision of critical functions within the UK.

It is not yet known when the Government will publish the draft bill introducing these changes. The reforms have been some time in coming, and COVID-19 may delay this further.

Germany – new law pending

On 8 April 2020, the Federal Government submitted a draft change to the Foreign Trade Act (Außenwirtschaftsgesetzes or “AWG”). Through this change, the rules on examining investments will be significantly tightened. The new rules will have to be considered in transactions involving direct or indirect acquisitions by non-EU based acquirers – and this will likely be made law soon, alongside changes to the Foreign Trade Regulation (Außenwirtschaftsverordnung or “AWV”).

Current law
In examining investments, German investment control law differentiates between sector-specific – in particular for the defence sector – and non-sector specific – for other sectors. The core of the rules can be summarised as follows:

Sector-specific examination
Direct or indirect share acquisitions by foreign investors of at least 10% must be notified. The implementation of such acquisitions must be suspended and the validity of any implementing acts would be provisional until cleared by the Federal Ministry for Economy and Energy (Bundesministerium für Wirtschaft und Energie or “BMWi”) or the deadline of three months (from receipt of complete documentation) has expired without a prohibition decision.

Non-sector-specific examination
A non-sector-specific examination can take place in any economic sector if a non-EU national acquires a domestic business or a direct/indirect holding of at least 25% of the voting rights in a domestic business.

The test for prohibition is whether public order or security of the Federal Republic of Germany would be endangered by the acquisition.

For specific target businesses, acquisition of only 10% will trigger the duty to notify the BMWi of the sale contract. For example, if the target business operates “critical infrastructure” (for example, in energy), particular cloud computing services, or media (where they are opinion-forming and have particular news content and overall impact). Equally, businesses providing software supporting critical infrastructure, telecoms (and its surveillance) and telematics may be covered.

Even if no duty to notify arises, the BMWi may call in the case for review within three months of learning about the deal, with a limitation period of five years from concluding the contract. To avoid legal uncertainty, parties can apply for a comfort letter.

If the BMWi examines the case, the transaction remains provisionally valid; only if it is then prohibited does it become ineffective. The test for prohibition is whether public order or security of the Federal Republic of Germany would be endangered by the acquisition.  This requires an actual and sufficiently serious danger to be shown, one which touches a fundamental interest of society.

Principal changes
Through the reform, the non-sector-specific investment control rules will be considerably widened.

Extension of standard of review
It is intended that the amended AWG will adopt the standard of review of the FDI Screening Regulation: in future, the BMWi will consider, for non-sector-specific cases, whether the investment in a domestic business can be expected to impair public security and order in Germany or in another EU Member State, or projects/programmes with a Union interest. Until now, an examination was limited to actual endangerment of public security and limited to Germany.

"Deliberate breach of the suspensory obligation is a criminal offence carrying a penalty of up to five years in prison or a fine."

Suspensory obligation for notifiable acquisitions
If the acquisition is notifiable (particularly those concerning critical infrastructure), it may not, in future, be implemented until BMWi clearance has been obtained. The prohibition on implementation, in part, goes further than that found in merger control. It encompasses, in addition to the exercise of voting rights and the directing the exercise of voting rights, also approval of the payment of profits or economic equivalents, and the disclosure of information which is related to the nature and purpose of the business under review or has been designated in an order as significant.

According to the explanatory memorandum, among other things this concerns access to technology relevant for security or to technical or digital hubs with the potential for significant misuse, as well as the leakage of information relevant for security. The prohibitions apply from the time of the acquisition contract. The explanatory memorandum assumes that in the due diligence and negotiation phases, information with particular relevance to possible damage to public security or order is not likely to be disclosed. The disclosure of commercial or other business-related information, by which the investor can judge the economic merits and risks of the acquisition, will remain permissible.

Deliberate breach of the suspensory obligation is a criminal offence carrying a penalty of up to five years in prison or a fine. Negligent breach will be an administrative offence carrying fines.

Expansion of notifiable transactions
The BMWi has announced that the list of critical infrastructure and technologies in the AWV will be considerably widened. In future, artificial intelligence, robotics, semiconductors, biotech and quantum technology will also be covered. With the COVID-19 pandemic, it is also possible manufacturers of medical products and pharmaceuticals will also be examined; however, a draft amendment of the AMV is not yet available.

We recommend, similar to merger control, that in every acquisition of a stake through direct or indirect participation by a foreign acquirer, you check whether it must be notified, or at least whether a comfort letter should be applied for. Where it must be notified, a clearance decision (or expiry of waiting period without prohibition) must be a condition precedent to closing.  Furthermore, you should avoid actions which – according to the AWG – would breach the suspensory obligation. Consider in particular what information can be disclosed.

"Prior to this decree, an administrative declaration was required for any foreign investment transaction on French territory."

France – return of the State

Current law

Three new texts
In an environment dominated by the return to State sovereignty and the need to protect industrial assets of national interest, French investment regulations have recently changed, while regarding the COVID-19 crisis, the French government recently announced that it would provide strong financial support to French industry, including through nationalisations, against the risk of external predation.

In 2019, three important texts have significantly modified the foreign investment regime in France:

– The PACTE law of 22 May 2019; and

– Two regulatory texts from the very end of 2019: decree n°2019-1590 and the decree of 31 December 2019.

New sectors within the scope of authorisation
These texts are part of a significant change in the French system for controlling foreign investors, initiated by Decree no. 2017-932 of May 10, 2017. Prior to this decree, an administrative declaration was required for any foreign investment transaction on French territory, to determine whether the transaction required administrative authorisation. Now, the procedure is reversed. The principle is that of requiring authorisation prior to foreign investment made in a list of sectors described as sensitive. In line with the Regulation, Decree n°2019-1590 of 31 December 2019 included in the previous list, new sectors such as space activities, digital media, food safety and critical technologies including energy storage and quantum technologies.

The carrying out of an authorised investment is subject to an ex post administrative declaration to enable the Minister of the Economy and Finance to exercise his control beyond the authorisation given. This declaration is mandatory, with failure to do so punishable by law.

Principal changes

Chain of control
The Decree and Order of 31 December 2019 have strengthened the scope of French FDI regulation, by introducing the concept of chain of control, which enables the French authorities to trace the ownership of an entity governed by foreign law, a natural or legal person of foreign nationality or of French nationality, but domiciled outside French territory, back quite a long way. They can thus thwart corporate arrangements aimed at “Europeanising” or “nationalising” a foreign investment by setting up cascades of companies established in other European Union countries or on French territory.

"They can thus thwart corporate arrangements aimed at "Europeanising" or "nationalising" a foreign investment by setting up cascades of companies established in other European Union countries or on French territory."

Strengthened sanctions
The PACTE Law has given important powers to the Minister of the Economy, among which powers of injunction under penalty payment, the amount of which the Minister unilaterally fixes (without, however, being able to exceed the sum of €50,000 per day of delay), the effective date and the terms and conditions.

Attention may be paid to the provisions of Article L151-3-1 of the Monetary and Financial Code, introduced by the PACTE Law, which lists four exorbitant precautionary measures if the protection of national interests appears to be compromised or likely to be compromised:

“a) To pronounce the suspension of voting rights attached to the fraction of shares or corporate units that the investor should have been required to hold with prior authorisation;

b) Prohibit or limit the distribution of dividends or remuneration attached to the shares or corporate units that should have been held by the investor with prior authorisation;

c) Temporarily suspend, restrict or prohibit the free disposal of all or part of [the] assets; and

d) Designate a representative responsible for ensuring, within the company to which the activity mentioned in I of Article L. 151-3 applies, the protection of national interests. This representative may obstruct any decision of the corporate bodies that may affect these interests. Its remuneration shall be set by the Minister for the Economy; it shall be borne, together with the expenses incurred by the agent, by the company with which it is appointed”.


Due diligence and Condition precedent
The authorisation of the Minister of Economy and Finance when required, is a prerequisite for the foreign investment operation to be carried out. This means that the parties are obliged to examine the question of the possible submission of a foreign direct investment operation to the prior authorisation regime, as early as the due diligence phase, and to treat the need for such prior authorisation as a condition precedent to the completion of their contractual arrangements.

Request for prior opinion
Operations for which a foreign investor or a French target company have doubts may be subject to a request for a prior opinion. Requests for a prior opinion, as well as the steps taken further to the filing of a foreign investment authorisation application, must remain compatible with the now relatively strict rules applicable in France, to lobbying and the prevention of conflicts of interest (L. no. 2013-907, Oct. 11, 2013 and D. no. 2017-867, May 9, 2017). We share that opinion of some authors (P. Dupeyrat and P. Lignières) who suggest the possible establishment of a lobbying structure independent of the operator’s actors, which will be subject to the supervision of the relevant French authorities.

A system of exemption from authorisation is provided for when the investment is made between undertakings all belonging to the same group, except where the group seeks to transfer abroad all or part of a branch of activity. A specific regime is also provided for when a foreign investor has already been authorised to acquire control of the same French company.

Corporate structuring
The concept of chain of control now prevents corporate structures based on a cascade of companies incorporated in France or outside of France, for example in one or more European Union member countries, acting as a screen between a foreign operator and the target company.

Jeremy Robinson, a former regulatory partner in our London office, also contributed to this article.

< Back to insights hub