Regulation of Foreign Direct Investment
Our lawyers help clients get cross-border deals done.
Using a seamless global approach, our international trade and antitrust teams identify potential regulatory hurdles for foreign investment opportunities in the United States and other areas, including Europe and Asia.
We have a wealth of experience advising on Foreign Direct Investment (FDI) screening in many major jurisdictions and can counsel investors as well as targets on transactional implications of multiple FDI approvals and coordinate global FDI reviews. We offer a one-stop-shop for M&A transactions requiring FDI, regulatory and merger control filings across the globe.
What is FDI?
FDI encompasses cross-border investments by companies or individuals. The types of cross-border investments triggering FDI controls vary between jurisdictions.
Foreign Direct Investment Controls: Globalization in Reverse?
May 28, 2020
Dechert and the Brunswick Group discuss the impact of the new EU FDI Regulation on foreign investment control in Europe, a comparative perspective from CFIUS, and how the upswing in foreign investment control affects international investments and acquisitions.
The Committee on Foreign Investment in the United States (CFIUS or the Committee) has broad powers to review foreign investments in the U.S. and acquisitions of U.S. businesses to determine the potential impact on the country's national security. CFIUS has the authority to impose a variety of restrictions on foreign investment in the United States, including taking mitigation measures, suspending transactions and, where appropriate, recommending that the president block or unwind transactions.
Dechert has represented many clients through the CFIUS review process, including major players in the energy, telecommunications, high technology, defense and infrastructure industries. Our lawyers help clients determine whether a CFIUS filing is required or a voluntary filing is advisable, assemble the required information and materials for a filing and, as necessary, negotiate national security agreements and other forms of mitigation with CFIUS to minimize both delay and the imposition of conditions that might threaten the transaction.
What triggers CFIUS review?
The Foreign Investment Risk Review Modernization Act (FIRRMA), with respect to which CFIUS finalized two sets of regulations in early 2020, has expanded the Committee’s jurisdiction to cover:
- Mergers, acquisitions and takeovers that could result in a non-U.S. person acquiring control over a U.S. business
- Certain non-controlling investments by non-U.S. persons in U.S. businesses associated with critical technology, critical infrastructure and sensitive personal data
- Transactions involving the purchase or lease by, or concession to, a non-U.S. person of certain U.S. real estate that might raise national security concerns
The new regulations include a number of exceptions that could result in an otherwise-covered transaction being considered outside of the Committee’s jurisdiction. For example, investments by non-U.S. investors acting as limited partners in U.S. private equity funds are not subject to CFIUS’ jurisdiction if certain conditions are met. At the same time, under certain circumstances, investments by state-owned entities (including sovereign wealth funds) are subject to more stringent review, including mandatory filing requirements.
The new regulations also, for the first time, set forth “Excepted Foreign Countries,” which include Australia, Canada and the UK. Certain investors from Excepted Foreign Countries may receive preferential treatment, including exemption from CFIUS review. The criteria for qualification as an Excepted Foreign Country include establishment of a robust foreign investment review process and coordination with the U.S on matters of investment security.
The EU FDI Regulation, in force from October 11 2020, creates a mechanism for coordinating national screening of inward investments by foreign buyers for national FDI reviews, while giving the European Commission an important new central advisory role.
What does the FDI screening regulation mean for EU Member States?
Fourteen of the 27 EU Member States have FDI screening regulations in place. The existing Member States’ systems vary widely in their scope and level of enforcement, and countries do not coordinate their approaches, even where a given investment might affect multiple countries. The new EU FDI Regulation tries to address this patchwork by specifying a number of characteristics which existing and new screening regulations and mechanisms must meet.
Although the FDI Regulation itself does not require Member States to introduce a screening mechanism, the European Commission encourages Member States to set up such mechanisms and make use of the existing systems, in particular to impede opportunistic buy-outs of strategic European assets in the difficult economic circumstances resulting from the COVID-19 pandemic.
Investments that trigger the European Commission’s oversight of national FDI screening
Although most Member States specify minimum levels of investment that trigger a national screening, the definition of foreign direct investment is very broad under the EU FDI Regulation and not subject to any such investment thresholds. The European Commission may require information about transactions which technically would not fall under a Member State’s jurisdiction based on its national FDI screening mechanism, and so too may other Member States. Our team can help companies navigate these potential controversies.
While Member States must take account — and in certain circumstances the “utmost account” — of the European Commission’s opinion, it's possible that different Member States could adopt inconsistent decisions when screening a single transaction. Dechert can help companies manage these multiple FDI reviews in the same way as our antitrust team successfully assists clients in managing the challenges of multi-jurisdictional merger control.
Significant developments in some Member States
France recently enhanced its FDI rules. Broader definitions of relevant buyers and lower investment thresholds are meant to capture more deals. Applicable sanctions and restrictions that may be requested have also been significantly increased. The review process mirrors the two-step approach of the U.S. CFIUS system. Companies and investors may clear their eligibility through prior consultation with the French administration. For the latest news on French FDI review, read our OnPoints about global developments and France in the Related Knowledge section at the bottom of this page.
Germany has tightened its FDI rules twice in the past and is planning further amendments to enlarge the scope of its FDI powers ahead of the full entry into force of the EU FDI screening regulation. For the latest news on German FDI review, read our updates in the Related Knowledge section at the bottom of this page.
Significant developments in other European countries
The UK can review foreign direct investments when they amount to a merger situation under the Enterprise Act; the Act provides for lower notification thresholds in sensitive sectors (public interest cases) and enables the Secretary of State to intervene in non-notifiable mergers in special public interest cases. The Secretary of State can also intervene in acquisitions of important manufacturing entities under the Industry Act, although there is no public record of this provision having ever been used to block an acquisition.
The UK has made a number of changes to strengthen its FDI screening powers and more changes are expected to increase the UK’s intervention options. The notification system is likely to remain voluntary but, in the same way as with merger control, the UK would be able to call in transactions for FDI review. Deals are reviewed by the UK’s Competition and Markets Authority at the request of the Secretary of State.
Read more insights on European FDI. Download European FDI Regulation Report: What You Need To Know.
Foreign direct investment in China is prohibited or restricted into the industries listed on the Market Access by Foreign Investors Special Administrative Measures (Negative List). But the rules were relaxed for certain industries, where registration of the foreign investment is sufficient and no prior approval is required.
United Arab Emirates
UAE took a step to encourage foreign investment by adopting a Positive List Resolution, a list of sectors and economic activities where foreign investors can acquire a shareholding without a need to go through a screening process. The resolution sets out 122 economic activities across the agriculture, manufacturing and services sectors (including, amongst others, certain healthcare, education, construction and hospitality activities). Companies in the UAE that are or become wholly-owned by a foreign investor will have to meet minimum share capital requirements and any other specific condition or requirement set out in the resolution for the relevant activity.