Key Takeaways
- Countries have recently introduced or further developed regimes related to national security reviews of foreign direct investment (FDI), such as those conducted by the Committee on Foreign Investment in the United States (CFIUS). This expansive authority can potentially disrupt deals, including after they have closed.
- Now more than ever, dealmakers should evaluate FDI screening risks early in the transaction process, carefully consider risks posed by investors and targets, and develop a strategy to manage FDI-related risks.
- Read our report to understand these changes and how to address them.
Executive Summary
The global national security and foreign direct investment (“FDI”) review landscape continues to evolve. New FDI regimes continue to be implemented, and FDI regimes implemented in recent years are maturing. The United States and its allies are coordinating with respect to FDI strategy. Further, a number of countries are considering implementing outbound investment screening regimes. Dealmakers should monitor these developments as they may meaningfully impact the ability to deploy capital and close transactions. Now more than ever before, dealmakers would be wise to evaluate FDI screening risks early in the transaction process, giving careful consideration to the risks and threats posed by investors and targets, and to deploy strategies to manage potential risks. In the following sections, we contextualize current trends in a focused set of jurisdictions to assist cross-border dealmakers with understanding the headwinds and assessing how best to manage FDI-related considerations from the start of the transaction process so as to avoid impediments to closing.
As dealmaking normalizes to pre-pandemic levels, the investment community must navigate new and maturing FDI regimes all around the world. There are more than 50 investment screening regimes, and over 100 jurisdictions now have some form of investment screening rules.
A wide range of countries, featuring both developed and developing economies, are exploring and deploying FDI regimes. In 2022, the Philippines established a new FDI regime, while Switzerland issued an initial draft of an FDI law that is currently under revision. In the European Union, seven countries are considering, planning, or in the process of adopting an FDI screening mechanism. Belgium, Ireland, and Estonia all have FDI regimes that are expected to come into effect in 2023, and all but two European Union member states now have or are in the process of establishing FDI regimes.
As FDI regimes proliferate and mature around the globe, countries are taking an ever more expansive view of the concept of “national security,” to include more than military and defense interests. In many cases, “national security” now extends to advanced technology, data, critical infrastructure, and communications assets as well as critical supply chains and public assets such as hospitals and airports. Thresholds for triggering FDI reviews are being reduced, while the definitions of investment and control that may prompt review are being broadened.
Countries including the United States and its allies increasingly are cooperating to restrict certain types of investment, such as Chinese investment in critical technology and investments that would impact critical supply chains, including with respect to semiconductor chips and technologies. In the final months of 2022, the UK ordered the unwinding of the takeover of a significant chipmaker, and Germany blocked the sale of a chip factory; both of these transactions involved acquisitions by Chinese-owned companies. Evidence of increased alignment among allies can be seen in the activities of the U.S.-E.U. Trade and Technology Council, which met in December 2022 and announced deeper cooperation on investment screening, including with respect to sensitive technologies and critical infrastructure. In addition, the United States hopes that its G-7 partners will endorse investment restrictions for high-tech industries.
Additionally, countries are engaging in “friend-shoring,” making supply chains more resilient by moving production to friendly countries – with the added consequence that foreign investment of this sort will be less likely to raise concern among local regulators.
In addition to inbound investment screening, dealmakers must also be aware of the rise of outbound investment screening. The United States appears to be moving full steam ahead with respect to establishing an outbound investment review mechanism, which would review and potentially mitigate or block certain investments by U.S. investors to protect U.S. national security and safeguard U.S. supply chains from certain countries such as Russia and China. Although China, Taiwan, and South Korea have forms of outbound investment review mechanisms, if established in the United States, such a mechanism would be the first of its kind to be adopted by a major Western economy and could have potential ripple effects with other governments considering similar mechanisms. In addition, the United States is actively lobbying others, including the European Union and EU members states like Germany and France, to develop outbound investment review mechanisms, particularly in light of Russia’s war with Ukraine and commonly-held security concerns with respect to China.
FDI regulations often cast a wide net: there are multiple FDI regimes that feature a broad jurisdictional nexus, such that even relatively small transactions may be captured as well as investments involving limited governance and control rights. As regimes expand in scope, outcomes are becoming increasingly uncertain. Both buyers and sellers can undertake due diligence to evaluate potential national security regimes that are implicated by proposed transactions and take steps to mitigate potential risks voluntarily before presenting transactions to regulators. Such steps can help parties obtain regulatory approvals and clearances on their preferred timeline and reduce the risk that their transactions become cautionary tales.
Dechert regularly advises foreign and domestic entities through the FDI review process, helping them determine if they should bring a transaction before regulators, consider the political and policy considerations that may arise, assemble the required information for a filing, and then (as necessary) negotiate with the review body in a manner that minimizes both delay and the imposition of conditions that might threaten the transaction. Dechert lawyers are closely monitoring the status of outbound investment reviews and stand ready to assist clients with such reviews once they are implemented.
