The Evolving Global Foreign Direct Investment and National Security Review Landscape

Key Takeaways

• Global dealmaking has surged in recent years, while major economies have become more focused on safeguarding national security by maintaining economic and technological sovereignty.

• This has resulted in an expansion of authority for existing national security review regimes and an ever-expanding list of sectors that are subject to scrutiny.

• The proliferation of FDI regimes is adding to regulatory complexity. However, both buyers and sellers can undertake due diligence to evaluate potential national security concerns in 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.

Executive Summary

The national security and FDI review landscape around the world is evolving rapidly. A pre-pandemic trend of active FDI reviews in countries around the world has gained momentum and resulted in the emergence of new FDI regimes. Not only have new FDI regimes proliferated, but also there has been a tightening of existing regimes with an ever-growing number of market sectors viewed as strategically important and thus subject to heightened scrutiny. These trendlines have converged with a surge in global dealmaking, adding to regulatory complexity and resulting in a growing list of deals that need to navigate potential FDI and national security concerns. It is thus more important than ever to evaluate FDI screening risks early in the due diligence process, giving careful consideration to the risks and threats posed by buyers, investors and targets and to potential substantive (mitigation conditions) and procedural (timing) implications.

Global deal flows broke recent records in 2021, surpassing the USD 5 trillion mark. Data from the United Nations Conference on Trade and Development indicates global FDI has exceeded pre-pandemic levels, up 77% in 2021 to approximately USD 1.65 trillion. This occurred in a climate of protectionist sentiment complicated further by new and increasingly complex FDI review regimes around the world. The COVID-19 pandemic, too, has disrupted global supply chains and devastated international trade, even as the need to raise capital remains high.

Major economies have become more focused on safeguarding national security by maintaining economic and technological sovereignty; this has resulted in an expansion of authority for existing national security review regimes and an ever-expanding list of sectors that are subject to scrutiny. The Committee on Foreign Investment in the United States expanded its already broad review authorities in a number of areas, including transactions that involve U.S. sophisticated technology, personal data, and infrastructure. The French Ministry of Economy and Finance, in charge of approving foreign direct investments into strategic sectors, recently issued its first guidelines, intended to make the process of FDI in France more transparent. Other countries including Australia are taking steps to expand their review processes or are considering doing so. Globally, FDI regimes are increasingly scrutinizing sensitive sectors like the semiconductor industry and are looking closely at the vulnerabilities of supply chains.

In this climate, and with the encouragement of the United States, the EU and many of its Member States have developed or enhanced approaches to screening FDI. China, too, has developed an FDI review framework, possibly in response to increased scrutiny of Chinese investors under U.S. and European regimes. And Russia has drastically altered its approach to FDI in response to economic sanctions and export control restrictions imposed on Russia in view of the situation in Ukraine.
The rise in FDI regimes coupled with the recent rebound in FDI volume means that cross-border transactions are increasingly complex from a regulatory perspective. FDI screening may be impeding deals and constraining the ability of some investors to put capital to work. In 2021, withdrawn global M&A deal volumes reached approximately USD 700 billion, surpassing 2020, 2019, and the five-year average, likely due to regulatory headwinds.

FDI is facing an increasingly complex regulatory landscape as screening regimes proliferate. These regulations often cast a wide net: there are multiple FDI regimes which feature a broad jurisdictional nexus which means that even relatively small transactions may be captured as well as investments involving limited governance and control rights. 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 the review body, 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.