Following the Covid-19 outbreak, many governments around the world have tightened their foreign investment regulation in an attempt to protect critical assets from predatory behaviour.
Rather than a sudden shift in attitude, however, the virus has mainly caused jurisdictions to continue to expand on a protectionist trend that was already taking place. While some measures are likely to be temporary, others look set to stay.
Law firms Ashurst and Herbert Smith Freehills have published informative documents on both existing FDI regulation and the changes brought about by Covid-19.
EU protective stance
The EU, which was already embarking on something of a protectionist path, has seen its member states taking more steps towards expanding their FDI legal frameworks in the wake of the pandemic.
At union level, the EU Foreign Direct Investment Screening Regulation was adopted in March 2019 and is due to come into effect in October 2020. The legislation establishes an EU-level mechanism to coordinate the screening of foreign investments likely to affect the security and public order of its member states.
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However, rather than establishing FDI screening at the EU level or requiring member states to introduce specific FDI screening mechanisms, the regulation sets out the common criteria and standards that such mechanisms should adopt. It also aims to establish a process for cooperation and communication between the European Commission and the EU member states.
While the regulation aims to harmonise the communication process on FDI into countries, the ultimate decision as to whether a particular investment should be permitted will remain with the member state where the investment is conducted.
After the virus outbreak in early 2020, the European Commission published FDI guidelines urging members to be particularly vigilant to avoid a sell-off of EU-based businesses.
Most measures taken at national level were aimed at including new sectors – biotech in particular – and protecting traditionally critical ones such as energy, transport and communication by lowering the threshold for stakes acquired by non-EU or European Economic Area (EEA) investors.
Here is a round-up:
France – the Ministry of the Economy and Finance established on 1 May 2020 that biotechnologies be included in the list of technologies that are subject to foreign investment screenings by the government.
During the initial pandemic outbreak, the government also announced a decree to lower from 25% to 10% the threshold for stakes acquired by non-EU/EEA investors in French-listed companies that are active in the sectors normally subject to FDI screenings. The Ministry of Economy has indicated that the legislation will be active until 31 December 2020.
Germany – On 27 April 2020, a draft of the 15th amendment to the Foreign Trade and Payment Ordinance was published, which was recently approved. According to the change, governmental authorisation is required for foreign acquisitions of 10% or more in enterprises involved in the production of vaccines, medicines and protective medical equipment, among other key public health sectors.
More specifically, the amendment expanded the list of specifically protected sectors to also include digital radio authorities; development, manufacturing and supplying components for personal protective equipment; essential drugs; in vitro diagnostics in the field of infectious diseases; medical devices for infectious diseases and components; and raw materials.
The review also requires to be taken into account whether an acquirer is directly or indirectly controlled by a non-EEA government, or whether such control over the acquirer may be exercised, in particular by the ownership structure or in the form of financial resources, over and above a negligible level.
Later in 2020, the government will also discuss whether to include areas such as artificial intelligence, robotics, biotechnology or semiconductors.
Italy – While Italy is normally open to foreign investment, its government has the power to block transactions or impose prescriptions for specific sectors that are deemed strategic. This is known as the Golden Power Decree, whose remit was expanded on 9 April until 31 December 2020 as a result of the virus outbreak.
Previously, filings were obligatory for foreign investment in the national defence, national security, energy, transportation, communications (including 5G networks) and high-tech sectors. They now include the financial, credit and insurance sectors; various categories of critical infrastructure; sensitive facilities; supply of critical inputs; critical technologies and dual-use items; food security; media freedom and pluralism; and access to sensitive information.
The extended decree also covers acquisitions of controlling interests and assets by EU entities within the energy, transportation and communications sectors and acquisitions by non-EU entities representing 10% or more of share capital, where the investment value exceeds €1m, as well as any subsequent acquisition exceeding 15%, 20%, 25% and 50% in companies owning assets with strategic relevance within the energy, transportation and communications sectors.
Poland – The Polish government announced on 23 April 2020 that it will require notification to the Office of Competition and Consumer Protection of any planned takeovers of certain domestic companies by non-EU investors. The industries in focus include energy, medicine, pharmaceutical, food, transport, logistics, data processing and telecommunications.
Spain – Spain is also normally open to foreign investments, but on 18 March it introduced new restrictions that establish that acquisition by non-EU/European Free Trade Association investors of 10% or more of the share capital of Spanish companies in strategic sectors will be subject to administrative authorisation.
The strategic sectors are broad, and include critical hard and soft infrastructure and related real estate assets (including energy, health, water, transport, communications, media, processing and data storage, aerospace, military, electoral and financial infrastructures); military and critical dual-use technologies, including nanotech and biotech; supplies of essential commodities; and sectors with access to sensitive data including personal data.
Foreign investors will also need authorisation if they are directly or indirectly controlled by a third-country government; have made any investment in sectors affecting national security, public policy and public health in another EU member state; or if an ongoing administrative or judicial proceeding has been brought against the foreign investor in another EU member state, in its country of origin or in a third country concerning unlawful or criminal activities.
At present, investments of less than €1m are exempted from this prior authorisation. For investments of €1m to €5m, the authorisation procedure is simplified and resolved by a lower administrative body. For investments of more than €5m, the authorisation must be granted by the government.
US anti-China measures and Canada’s watchful take
In a similar way to the EU, the US was also progressing on a heightened scrutiny path towards FDI from certain countries under the presidency of Donald Trump. In February, the Committee on Foreign Investment in the United States (CFIUS) expanded the scope of FDI screening to include non-controlling investments in US-critical technology, critical infrastructure and sensitive personal data businesses, as well as certain real estate transactions.
By March, the aim of such screening became more explicit as the Restricting Predatory Acquisition During Covid-19 Act was introduced in Congress which, if passed, would block all acquisitions of US entities by Chinese investors until the pandemic ends, unless the CFIUS determines the investment is justified.
To address perceived weaknesses in US food supply security brought about by Covid-19, in April the Agricultural Security Risk Review Act was introduced in Congress. If passed, this bill would add the secretary of the Department of Agriculture as a permanent member of CFIUS.
FDI into Canada is regulated by the Investment Review Division of the Innovation, Science and Economic Development (ISED) Department. Under normal circumstances, in line with the Investment Canada Act, a foreign investment needs to pass the net benefit review test, which assesses whether the transaction is likely to be of net benefit to Canada. If the applicable financial threshold is not met, the investment will be notifiable, requiring a short notice of the transaction to be filed within 30 days of closing.
In April 2020, the ISED announced that it would apply enhanced scrutiny of FDI of any value in the Canadian public health sector as well as in businesses that work to supply critical goods and services. These measures will remain in force until the economy has recovered from the effects of Covid-19.
Australia normally applies a certain level of scrutiny to FDI into the country. The Foreign Investment Review Board (FIRB) evaluates transactions in all sectors and requests clearance for the acquisition of land; 5% acquisitions in media companies; 10% acquisitions by foreign government investors; and 20% acquisitions across the board.
In response to the Covid-19 outbreak, the monetary screening thresholds have been reduced to zero for all foreign investments. The FIRB has also extended the timeframes for reviewing applications from 30 days to up to six months. Such measures will remain in place for the duration of the Covid-19 crisis.
Like the US, the Department for Promotion of Industry and International Trade in India has also taken an anti-Chinese approach to FDI following the pandemic. Normally, FDI into the country requires government approval for sectors including broadcasting, banking, defence, civil aviation, telecommunications, mining, print media, multi-brand retailing and biotechnology.
Certain sectors, including lotteries, gambling, tobacco, atomic energy and certain railway activities, are not open to foreign investment. Other sectors require no approval.
After Covid-19 hit, every change of ownership of existing entities or future inward FDI from neighbouring countries requires mandatory government approval in India. The measure is widely seen to target Chinese investment. More broadly it applies to investors from China (including Hong Kong), Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan.
Japan, which normally has a relatively open FDI regime, introduced a moratorium on 25 February for the existing filing obligation for FDI into certain industries including arms, aerospace, nuclear power, space development, IT, utilities, railway, hospitals and vaccine manufacturing.
Under the new regulation, if a foreign investor cannot file a required report due to unavoidable circumstances arising from the Covid-19 outbreak, there is a moratorium. The investor must file the report without delay after the relevant circumstances cease.
All clear from here
In China, the State Administration for Market Supervision and other relevant industry regulators normally take a mixed approach to FDI. While forbidden in certain sectors, such as the media, and restricted in others, FDI is actively encouraged in specific sectors.
On 1 January, the Foreign Investment Law came into effect unifying the existing foreign investment legal regime under a single legislation. Under the new law, any foreign enterprises established after 1 January 2020 will need to comply with either the Company Law or the Partnership Enterprise Law of the PRC (as applicable) in respect of areas such as organisational form, corporate structure and governance.
China adopts a negative list regime, restricting foreign investment in sectors included in the list. According to the 2019 negative list published by the National Development and Reform Commission and the Ministry of Commerce, there are 40 sectors with restrictions on foreign investment, including media, telecommunications, education and medical institutions.
Recently the Chinese government has announced that the list will be shortened in 2020 but will include sectors such as financial services, medical institutions, telecommunications and education.
No changes have been made to China’s FDI regime in the wake of Covid-19. However, the Chinese government has issued high-level guidelines to encourage and stabilise foreign investment in the country in light of the pandemic.
China is likely to continue to pursue foreign investment and demonstrate progress towards its international commitments to open up more of its economy.
The UK does not have any specific legislation to regulate FDI. The Competition and Markets Authority can intervene if an FDI process is seen as posing any threat to public interest issues. No specific regulation was rolled out as a result of Covid-19 to regulate FDI into the country, but over the past two years the government has been intervening more often in transactions threatening national security.
Latin American countries have also not introduced specific changes to their FDI regimes in the wake of the pandemic outbreak. Apart from Brazil, which has been liberalising its economy since the 1990s and is one of the world’s largest recipients of FDI, most of the other countries in the region have for the past few years been working towards opening up their FDI regimes in order to attract more foreign investment.
Chile, Colombia and Peru are considered strong examples of how a modernised FDI framework is key to promoting and retaining FDI. Other countries, such as Argentina, Costa Rica and Ecuador, are still working on modernising their regimes in order to increase their attractiveness for FDI.