A rise in protectionism was one of last year’s foremost FDI trends, with the US pushing for tougher screening of foreign investment around the world.
The arguments for increased scrutiny have been driven by national security concerns, but the economic fallout from Covid-19 has encouraged a number of countries to ramp up screening over fears that weakened corporates could be at risk from foreign takeovers.
These efforts have been led by European authorities but as the outbreak spreads around the world other countries, such as Australia, are beginning to take similar positions to protect key national interests.
EU leads the way
The European Commission published new guidance on foreign investment screening in response to the crisis in on March 25, calling on member states to adapt their foreign investment screening mechanisms to protect sensitive assets from foreign takeover.
The current EU foreign investment screening regulation – which takes effect in October 2020 – does not allow the European Commission to block foreign investment and at present there are no plans to introduce an EU-wide screening mechanism. However, the European Commission, alongside measures introduced by member states, is in the process of taking a more restrictive approach to foreign investment.
The Spanish government has introduced a new temporary requirement for ex-ante approval for non-EU direct investment in strategic sectors including energy, transport and critical technologies.
Spain sourced a record 642 greenfield projects last year, topping the previous record of 555 in 2018, according to fDi Markets. However, global investment is set to slump this year becuase of the pandemic, making a third consecutive record-breaking year unlikely.
Although France has made no specific changes to its foreign investment laws, the French Minister of Economy has stated that the government is ready to protect key companies via recapitalisation or buying shares. The government has also announced a series of measures to help French companies, including a €300bn plan to postpone tax and social security payments as well as guaranteeing bank loans.
Prime Minister Guiseppe Conte is considering amendments to the current rules on foreign investment screening to protect companies in strategic sectors, according to Baker McKenzie. At present, the prime minister is allowed to impose conditions on certain transactions in the defence, telecoms, energy and transportation sectors, but this could be extended to all Italian listed entities if the government implements measures to qualify all Italian companies listed on the Milan Stock Exchange.
The German government put forward a draft law to tighten reviews of foreign investments on April 8. If the draft law is enacted in its current form it will significantly impact investments in certain sectors. The prohibition requirements will be lowered and companies will be unable to implement notifiable investments prior to clearance.
Foreign investment reviews are to become stricter for certain critical technologies such as biotechnology and there is a proposed amendment to the German Foreign Trade and Payments Act, which will change the scope of the review from an “actual risk” to public security to “probable impairment”.
The Australian government has announced temporary changes to its foreign investment review framework. Proposed foreign investments into Australia of all values and sectors will now require approval from the Foreign Investment Review Board. To ensure sufficient time for screening applications, the board will extend the statutory timeframes for reviewing applications from 30 days to up to six months. These changes will remain in place for the duration of the coronavirus crisis and apply to any agreements entered into after March 29.
The US government has not announced additional restrictions on the acquisitions of US businesses in light of the Covid-19 crisis. The US already had a healthcare angle in its investment assessment under its existing framework. “The Committee on Foreign Investment in the United States’ (CFIUS) assessment of the implications of transactions with respect to national security allows the committee to consider the public health consequences of a transaction wherever relevant”, explained James Barker, a partner at law firm Latham & Watkins.
The US has reformed its foreign investment review frameworks over the last few years, enacting the Foreign Investment Risk Review Modernisation Act, which is designed to increase the scope of the CFIUS and address evolving national security concerns.