Podcast: FDI Screening Regimes Tightening in Europe

Europe tightens FDI regimes

Parr & Dealreporter’s, Brussels Deputy Bureau Chief, Francesca Micheletti and PaRR’s Legal Affairs Reporter, Jacob Parry join Julie-Anna Needham to discuss foreign direct investment screening regimes tightening in Europe in this week’s episode.

In this podcast, you’ll hear about:

  • Foreign direct investment or FDI screening in Europe
  • What kind of developments have we seen in recent years
  • Has the pandemic changed FDI regimes?


[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket access and SS&C Intralinks. I'm Julie-Anna Needham. In this episode, we're looking at foreign direct investment screening in Europe. I spoke to Francesca Micheletti, Brussels Deputy Bureau Chief for Dealreporter and PaRR. And to Jacob Parry, legal affairs reporter for PaRR. Hi Francesca, hi Jacob.


JACOB PARRY: Hi Julie-Anna.

JULIE-ANNA NEEDHAM: So to begin with, can you explain the context of foreign direct investment or FDI screening in Europe, and tell me if that's reflective of a wider global trend?

JACOB PARRY: The FDI control has always existed in Europe in some form or another over the past few decades. Over the past five years, we've seen an attempt to harmonize the approach across the EU, which culminated with the European Commission's proposal in 2017 to introduce a regulation that would implement minimum standards and some protocols for screening inbound investment at the EU level.

That was precipitated by many causes but one of the more important contexts was the rise in inbound investment from China through the 2010s, which culminated in the acquisition of KUKA, a German robotics company by Midea Group, a China-based manufacturer in 2016, which was taken as a major wake up call in particular by the German government.

Again, it's worth mentioning that some countries, France in particular have long had a history of scrutinizing inbound investment, in particular in sensitive sectors like defense and security. Looking back at it at 2019, in France in particular, one-third of the notifications that they receive under their FDI regime related to defense activities, about half related to energy, transport, public health, and electronic communications, and the remaining proportion in various sectors.

JULIE-ANNA NEEDHAM: And what kind of developments have we seen in recent years, and has the pandemic changed anything?

FRANCESCA MICHELETTI: Yeah, well, the pandemic has kind of accelerated rather than changed the climate because even before COVID-19, the atmosphere was already one of tightening foreign investment screening, especially at the EU level where officials often defined this new legislation that was put in place as the end of naivety towards foreign investment.

So the climate was already one of tightening, and COVID accelerated and brought many countries which did not have foreign investment screening to set up new regimes. And also, it caused the broadening of regimes or existing regimes, broadening of the sectors scrutinized particularly around health care, of course, and around critical infrastructure.

So yeah, we have seen great developments in FDI screening over the past year and this-- well, anybody, any practitioner, any lawyer working on this field, on merger control, would tell you that the FDI right now is an important factor in regulatory risk assessment around the deal, whereas before, it was definitely more peripheral.

JULIE-ANNA NEEDHAM: And you mentioned a few of them there, but what kind of deals or sectors are attracting the most scrutiny?

FRANCESCA MICHELETTI: At the moment, I would say semiconductors is really the top sector where we're seeing FDI screening activity. We have a few deals, first of all Siltronic-GlobalWafers, which are being scrutinized by EU member states and the European Commission. In Siltronic's case, it's Germany, which is leading the Foreign Direct Investment screening.

While the EU is acting through the newly launched UFDI screening procedure and it's assessing the deal to provide an opinion. So that the EU will not be the one to finally decide, it will be Germany, but the EU will put in Germany's assessment. So semiconductors obviously is a key sector because of a global shortage. It's especially key to Germany, that is why Germany is the focus of this review, also because Siltronic is a German company.

Another deal which is perhaps less high profile but still in the same sector is Dialog-Renesas. And then we have Arm-Nvidia as well, which has been talked a lot about in the UK especially, because of Arm's prominent position as a UK company.

JACOB PARRY: I think it's worth mentioning that the concerns that member state governments have are still largely driven by traditionally sensitive sectors like security and defense. And as we've seen development of new technologies such as artificial intelligence and an increase in the sophistication of robotics, we've seen concerns that were traditionally hidebound to security and defense creep into other adjacent sectors.

In terms of the profile of a buyer who's attracting the most interest, of course, these regimes are agnostic to whether or not a buyer is from one country in particular, but it's really transactions that involve Chinese buyers, those that are state-owned or somehow related to the Chinese government, or also those that are privately held.

I think it's worth mentioning two transactions that were blocked over the course of the past year in December we saw the German government step in and block the takeover in IMST, which was a radar and satellite maker company, by a subsidiary of a state-controlled China aerospace and industry group. And again, at the end of March, the Italian government blocked the takeover of an Italian semiconductor company also over FDI concerns.

Finally, what I'd say as well is that those concerns over government objections and the potential of obstacles arising in the FDI process are creeping earlier into the deal-making process. Just this month, we saw a bid by a Chinese group for Iveco, an Italian truck maker fall apart after it ran into objections from both the Italian government. And then we saw the French government piggyback on top of that.

JULIE-ANNA NEEDHAM: And looking more specifically at some of the countries, the UK is obviously left the EU now, what steps is it taking towards its own FDI screening program?

FRANCESCA MICHELETTI: Yes, well, the U.K. unveiled, last year, an ambitious reform of its FDI regime. Actually, not quite FDI because it's actually a national security investment bill, and it applies not only to foreign investments but also to UK to UK investment. So the U.K. has listed 17 sensitive sectors where it intends to apply government scrutiny.

It more recently narrowed them down a little, but still, it's quite a broad selection. And well, the bill is currently being discussed so it has not yet entered into force, but it will apply retroactively to deals announced since November last year. So again an overhaul of the existing regime we're seeing in the UK.

JULIE-ANNA NEEDHAM: And was there anything in particular that prompted that change in the UK? Obviously, it had to instigate its own rules after leaving the EU, but was there any particular deal that can be linked to?

FRANCESCA MICHELETTI: I'm not sure it was one particular deal that trigger it, unless Jacob, there is something that comes to mind.

JACOB PARRY: I wouldn't say there's one particular deal but the obvious key deal in the background is Arm-Nvidia, in which we have a U.K.-based target albeit owned by a Japanese group currently that has elicited a lot of concern, and as we saw this week, has entered a full security review in the U.K.

FRANCESCA MICHELETTI: Yeah, what I was hearing is also that, well, the aim of this UK bill is actually to scrutinize those deals which are smaller and do not typically fall under the threshold of the usual CMA review. So the difference is that a large defense deal would come under scrutiny already now, but the aim of this new bill is to actually capture smaller deals which may fly under the radar of a standard competition review through this new tool.

So really for the government to have an overview of whatever foreign direct investment is made foreign or national, I have to say the UK one is broader, applies to national investment as well.

JULIE-ANNA NEEDHAM: Thank you. And within the EU, are there any countries who are taking their own measure alongside existing EU rules and how do the two regimes work together?

JACOB PARRY: We're still seeing the rollout of the EU regulation in different member states. There are still a number of member states that do not have a FDI control regime as of April 2021 but are still in the process of either legislating one or putting one into operation. There's a few key jurisdictions that have been a bit ahead of the pack.

I think it's worth mentioning the changes in Germany in particular where a lot of multi-jurisdictional transactions have faced the need to approach the German regulator for approval. Last October, the German government introduced its changes to its foreign trade and payments ordinances, which is the way in which it has implemented the EU regulation, and the legislation on which it bases its control of inbound investment.

Among some of the changes that practitioners have looked to with a bit of concern has been the tightening of the standard in which the German government can intervene from a transaction that endangers public security to one that is likely to affect public security. I think also last year amidst the COVID-19 pandemic, there was concern coming from both major member states and the European Commission on the potential for European targets in high profile or important sectors to be undervalued.

We saw that in the March 25 communication last year where the commission highlighted those concerns in particular. In response, France lowered its thresholds for intervention for French publicly listed companies from 25% to the acquisition of a 10% share, that's been extended into 2022. We've also seen France add biotechnology to the list of sectors where targets and buyers must notify the French government.

FRANCESCA MICHELETTI: Yes, Italy also has added any investment into 5G under the list of scrutinized sectors, for example. This has led to a spike in notifications, last year, there were over 200 as were reported, which is a huge number compared to before, where there are only about 40 a year or even less. So yeah, member states are definitely acting.

It has to be stressed that the European Commission does not have the power to rule on foreign direct investment, so this new mechanism that has been put in place is simply to facilitate information exchange among member states. But it has to be underlined that it's ultimately up to the relevant member state to decide on whether to block a deal or to request some commitments. So the fate of the deal is in the hands of the member states' government, not of the European Commission.

JACOB PARRY: And I think finally on that, we're seeing, this year in particular, those outstanding member states that did not have regimes in place introduce those regimes. So I think we've seen so far Poland, the Czech Republic and the Netherlands amongst those that have either tabled legislation or laid in the process of tabling legislation. Also, countries that see a lot of inbound investment such as Ireland and Belgium will likely introduce rules this year to bring them in line with the EU regulation.

JULIE-ANNA NEEDHAM: Great, thank you. And one last question for you. What kind of impact is it all having on dealmaking?

FRANCESCA MICHELETTI: Well, I think what you hear is that dealmaking is getting increasingly harder from a regulatory perspective. We want to hear about changes to merger control, though it has to be said that merger control regimes are getting tougher, and FDI screening on top of it is certainly an added burden if you hear from practitioners involved in dealmaking.

JACOB PARRY: I think there's also an incredible lack of transparency in some countries in particular, such as Germany and France, into what the ministries are actually concerned about when they flag a transaction and then review a transaction. Something we hear from advisors occasionally is that there's really no case law when it comes to FDI control as compared with antitrust reviews in particular. And that there haven't been any blocked decisions that have been brought to European courts in which we could try to understand the basis of what these ministries are looking at, whether it be strictly for security and defense concerns or whether other considerations, such as industrial policy which is also a resurgent theme at the moment, might be slipping or creeping into some of the assessments that are being conducted.


JULIE-ANNA NEEDHAM: All right, Jacob and Francesca, thanks very much.

JACOB PARRY: Thank you.


JULIE-ANNA NEEDHAM: That was Francesca Micheletti and Jacob Parry, speaking to me, Julie-Anna Needham. Thank you for listening to this week's episode of Dealcast, presented by Mergermarket and SS&C Intralinks. Please rate, review, and subscribe to the podcast. You can find us on Apple podcasts, Spotify or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.

27 April 2021