August 2020 Issue
In March 2019, the European Union (EU) introduced FDI Screening Regulation (EU 2019/452) to establish a framework for screening foreign direct investment (FDI) into the bloc. Covering a broad range of foreign investments affecting ‘security or public order’, the regulation will apply broadly from 11 October 2020.
The regulation is the EU’s first step toward adopting an EU-wide review process similar to the Committee on Foreign Investment in the United States (CFIUS) in the US. Although the regulation lacks a CFIUS-style blocking mechanism or suspension powers at EU-level, it does facilitate cooperation and information-sharing between the European Commission (EC) and EU member states.
The regulation was introduced amid growing concern among member states about the impact of certain foreign acquisitions (involving Chinese buyers, for example) of EU targets.
Since then, FDI has become an area of increasing focus due to the economic distress caused by the COVID-19 pandemic. Governments across the world are adopting a range of measures to address FDI, some of which seek to tighten existing regimes to prevent a sell-off of strategic businesses to foreign investors during the crisis and in its aftermath.
In March, reports of an alleged attempted US takeover of German company CureVac, which is working to develop a COVID-19 vaccination, served as a notable reminder of the importance of protecting businesses within the EU.
“The guidelines have been welcomed by some manufacturer associations and labour groups keen to guard against losing corporate control to foreign acquirers.”
To further strengthen measures, in March the EC issued guidance to EU member states on deploying FDI screening to protect critical businesses and assets in these challenging times. According to the EC, the aim is to “preserve EU companies and critical assets, notably in areas such as health, medical research, biotechnology and infrastructures that are essential for our security and public order, without undermining the EU’s general openness to foreign investment”.
In its guidelines, the EC notes: “Among the possible consequences of the current economic shock is an increased potential risk to strategic industries, in particular but by no means limited to healthcare-related industries” and “there could be an increased risk of attempts to acquire healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance developing vaccines) via foreign direct investment.”
When announcing the release of the guidelines, Ursula von der Leyen, president of the EC, said: “If we want Europe to emerge from this crisis as strong as we entered it, then we must take precautionary measures now. As in any crisis, when our industrial and corporate assets can be under stress, we need to protect our security and economic sovereignty. We have the tools to deal with this situation under European and national law and I want to urge member states to make full use of them. The EU is and will remain an open market for foreign direct investment. But this openness is not unconditional.”
The guidelines have been welcomed by some manufacturer associations and labour groups keen to guard against losing corporate control to foreign acquirers.
Member states can screen FDI from non-EU countries on grounds of security or public order. Protection of public health is recognised as an overriding reason in the general interest. As a result, member states can impose mitigating conditions on a proposed deal, or prevent a foreign investor from acquiring or taking control of a company.
Prior to application of the regulation in October 2020, 14 of the 27 member states have already introduced domestic legislation in order to achieve compliance, with laws that provide some form of FDI control or screening procedure.
While some member states have been deploying FDI screening mechanisms for a number of years, and are simply enhancing existing regimes, others will be establishing screening measures for the first time.
In May, Germany announced an amendment to its FDI ordinance which adds new businesses to the existing catalogue of critical infrastructure, most notably in the health sector, that will be subject to FDI screening going forward. The amendment allows the German government to review acquisitions by non-European Economic Area (EEA) investors holding voting rights of 10 percent or more of German domestic businesses operating in the health sector, including the development and production of material medicinal products and medical devices. The amendment is permanent and will not expire when the COVID-19 pandemic ends.
The reality is that protectionism and FDI screening are likely to outlast the spectre of COVID-19, particularly for strategically important sectors such as technology and healthcare. Though the EU has historically been open to FDI, for better or worse the bloc appears to be prioritising political and national security concerns. The guidance issued to member states earlier this year will only strengthen this commitment.
© Financier Worldwide
BY
Richard Summerfield