The FDI angle:

• Scrutiny of foreign mergers and acquisitions (M&A) is part of growing protectionism since the pandemic. 
• Widening national security concerns have increased the types of deals deemed by authorities to be sensitive enough to review. 
• Why does it matter? Countries must balance scrutiny of M&A deals with maintaining their investment attractiveness. Investors must be more careful in their expansion plans to avoid reputational risks. 

Formal reviews of proposed deals by foreign investors to acquire EU-based companies grew last year due to geopolitical tensions, more national foreign direct investment (FDI) screening regimes and broader definitions of national security.

Authorities in EU member states handled 1444 requests for authorisations of acquisition made by the foreign investors and ex officio cases in 2022, down from 1563 in 2021, according to the European Commission's annual report on the screening of foreign direct investments published on October 19.

Roughly 55% (794) of them were formally screened – up from 21% (453) a year earlier – according to the EC report. This is the first year where more deals required formal vetting than not since the EU FDI screening regulation came into force in October 2020.   

Out of the cases formally screened in 2022, and for which member states have reported a decision, 86% was authorised without conditions, the report details; 9% involved an approval with conditions or mitigating measures, while national authorities ultimately blocked transactions in 1% of all decided cases, while for a further 4% the transaction was withdrawn by the parties.

Deals to acquire controlling interests in domestic firms are vetted by governments to prevent unfair competition and foreign entities, particularly from adversarial countries, from gaining influence over critical infrastructure and technology in sensitive industries. Ultimately, each EU member state decides which investments to screen, approve, condition, or block. 

Dealmakers and advisors say that more formal reviews of proposed deals is a reflection of a larger number of EU member states implementing national FDI screening regimes. 

Another driving factor of more formal reviews is the expansion of what EU countries constitute as national security leading to a wider scope of industries and business activities in which deals are worth investigating.

More data trends worth exploring: 

• Countries setting new FDI records in 2023
• Countries with the highest fossil fuel subsidies
• Middle East leads global tourism recovery
• Brics expansion dilutes G7 investment influence

“FDI regimes or authorities are now more likely to look at edge cases,” says Tom McGrath, a partner at law firm Freshfields. While there is discrepancy between countries, Mr McGrath adds that “broader” and “more nebulous” definitions of national security have made authorities more inclined to formally review deals.

Compared to when the EU’s regulation first came into force, there is now much “more guidance and precedent available to investors and their advisors” around the circumstances in which a filing is required, says Vincenzo Volpe, an associate in the London antitrust and FDI department of Ropes & Gray. 

“This means that a higher percentage of notified cases are found to qualify for formal screening,” he explains, adding that there are now fewer “fail-safe” filings as investors feel more comfortable about not notifying transactions unlikely to be eligible for review.

The majority of notified FDI transactions in 2022 were still planned by investors from six countries, namely the US, UK, China, Japan, Canada, Cayman Islands and the UAE. But the proportion of FDI deals in the EU planned by ultimate investors from other countries – such as Singapore, Jersey and Australia – grew from 30% to 37%. 

There is now “more caution exercised” before investors from sensitive jurisdictions like China and Russia deploy capital in Europe, according to Annie Herdman, an antitrust and FDI partner at Ropes & Gray. “They need to be very committed and know they are in for enhanced scrutiny when investing in sensitive sectors,” she says.

The sectors in which FDI deals were formally reviewed also shifted between 2021 and 2022. Notably, the share of manufacturing deals grew from 44% to 59% in Phase II cases. This is where the European Commission undertakes a more detailed assessment of the possible effects of deals on security and public order.

An OECD review of EU regulation published in October 2022 found that “delays, inefficient procedures, duplication of work or tight timelines” lead to unsatisfactory national screening decisions. The European Commission is expected to propose a revision of the EU FDI screening regulation by the end of 2023.