The Rapidly Changing Landscape of Security Reviews of Foreign Direct Investment in the U.S. and EU

Transcription

1 The Rapidly Changing Landscape of Security Reviews of Foreign Direct Investment in the U.S. and EU 25 January 2018 Presented by Drinker, Biddle & Reath LLP and TaylorWessing Nate Bolin Andreas Haak Barbara Thiemann This publication is intended for general guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing's international offices operate as one firm but are established as distinct legal entities. For further information about DrinkerBiddle and TaylorWessing, see and

2 Presenters

3 States) taylorwessing.com Key areas of expertise Competition, EU and Trade Trade Compliance Languages German, English Andreas Haak Partner, Head of Competition, EU and Trade Dusseldorf/Brussels Germany +49 (0) 211 / a.haak@taylorwessing.com Key areas of expertise Competition, EU and Trade Trade Compliance Languages German, English Dr. Barbara Thiemann, LL.M. Associate Dusseldorf/Brussels Germany +49 (0) 211 / b.thiemann@taylorwessing.com Andreas Haak and Dr. Barbara Thiemann 3

4 Areas of focus: Nate Bolin Partner Drinker Biddle & Reath LLP 1500 K Street N.W. Washington, D.C (202) Nate.Bolin@dbr.com Committee on Foreign Investment in the United States International Traffic in Arms Regulations Export Controls OFAC Sanctions U.S. National Security and Trade Policy 4

5 Agenda 1. Status and prospects for U.S. reviews of foreign investment under CFIUS 2. Proposed new CFIUS legislation and its likely impact on markets and investments 3. Prospects for 2018 and key takeaways 4. Changing political climate for foreign takeovers in the EU 5. Recent reform in Germany 6. Expectations for 2018 and beyond 7. Takeaways

6 1. Status and prospects for U.S. reviews of foreign investment 6

7 The Committee on Foreign Investment in the United States (CFIUS) CFIUS is an interagency committee that investigates U.S. national security risks arising from foreign investments in U.S. businesses Can enter into mitigation agreements with parties or, if necessary, block or unwind transactions Acts by consensus of 9 voting executive branch agencies Chaired by the Department of the Treasury Other voting agencies: Departments of State, Defense, Justice, Homeland Security, Commerce, Energy, U.S. Trade Representative, and the Office of Science and Technology Policy Ex Officio members: The Office of the Director of National Intelligence, Department of Labor Observers: OMB, Council of Economic Advisors, and the Assistants to the President for National Security Affairs, Economic Policy, and Homeland Security and Counterterrorism

8 Scope of CFIUS Jurisdiction Transactions that result in foreign control of a U.S. business (including U.S. operations of non-u.s. companies) - Excludes greenfield investments and acquisitions of non-operating assets - Exclusions for these investments and acquisitions are narrowly drawn CFIUS reviews and investigations normally take place before the closing of a M&A transaction CFIUS is also authorized to review transactions after closing of the transaction 8

9 The CFIUS Process 1. Informal Review Proposed investments screened by CFIUS for potential issues (no deadline) 2.A. Formal Review National Security Review (30 days) Determine if no other laws apply, investment threatens to impair national security, critical infrastructure, homeland security, presence of state ownership/control Lead agency chosen, based on the investment s industry and activity Risk assessment based on threat, vulnerabilities, consequences Parties can withdraw and resubmit a notification at any point in the process (increasingly common) Review by the Director of National Intelligence (20 days) If no risks or risks are resolved: No further CFIUS action If risks are not resolved: National Security Investigation

10 The CFIUS Process (continued) 2.B. Formal Review: National Security Investigation (45 days) CFIUS must resolve identified national security risks arising from a transaction CFIUS relies as much as possible on other legal authorities to mitigate identified risks National Industrial Security Program (NISP) U.S. export control and sanctions laws If other legal authorities are inadequate, CFIUS may seek to impose a mitigation agreement A mitigation agreement may limit the foreign acquirer s access to information, employees, and facilities deemed sensitive by the government Mitigation agreements often include corporate governance requirements (e.g., recusal policies or limited authority of the foreign investor s board representatives) If CFIUS decides mitigation is not appropriate or practicable, it will recommend that the transaction be blocked or that a previously acquired U.S. business be divested 3. Presidential Determination (15 days) The president must have credible evidence that the foreign investment will impair national security to block a deal, but is not required to follow the recommendations of CFIUS

11 CFIUS Filing Considerations CFIUS has broad jurisdiction over transactions that result or could result in the control of a U.S. business by a foreign person Control is not a bright-line test - Any ability, direct or indirect, to determine or decide material corporate actions of the target The threshold for control is less than 50% ownership - Highly-fact specific - Investments larger than 15% of the total outstanding voting equity of the target can be found to constitute control - Investments at lower thresholds may also be found to constitute control if they include a management role/board membership rights The most significant threat to transactions is often opposition outside the CFIUS process - Criticism by politicians and the press - Competitors who may feel threatened by the proposed transaction

12 Navigating CFIUS Reviews The vast majority of transactions reviewed by CFIUS are successful CFIUS focuses on actual risk to U.S. national security and prefers to mitigate risks whenever possible Pre-sale / pre-investment planning is key - Develop a risk profile for the target and acquiring entity - Consider possible pre-sign or pre-closing mitigation independent of the CFIUS process - Engage with CFIUS stakeholders as early as possible Do not sidestep the CFIUS process - Failure to complete process before closing can limit CFIUS risk mitigation options and even force divestiture - Failure to file a thorough notice and provide timely, complete, and accurate responses to CFIUS questions can delay completion of CFIUS review or worse Anticipate opposition and develop government and public relations strategies Be prepared for unexpected delays

13 Advance Planning is Critical Fully understand the proposed acquirer s background and activities - Complete chain of ownership/control through to ultimate beneficial owner(s) - Relationships with non-u.s. governments and security services (including China and other countries) - Dealings with countries and companies subject to U.S. economic and trade sanctions or with strained relations with the United States - Alleged or confirmed violations of anti-bribery and similar laws Catalogue the national security touch points of the target business - Facilities and personnel with U.S. security clearances - Prime and subcontractor relationships with the U.S. government - Access to or information about U.S. government facilities - Products and technology subject to export controls, nonproliferation regimes, or economic and trade sanctions - Role in establishment or operation of critical U.S. infrastructure

14 Foreign Government Control Acquisitions by foreign government-controlled entities face greater CFIUS scrutiny - By law, most foreign government-controlled acquisitions are subject to a 45-day second-stage investigation by CFIUS Foreign government control can be found in a wide range of circumstances - Commercially-operated Chinese companies may be viewed as foreign government-controlled - Financing by the central or provincial government (including loans, minority equity stakes) - Direct and indirect subsidies from the central or a provincial government - Ability of government to influence companies through legal and social mechanisms Foreign government control mitigation is more extensive and complex - Proxy boards - Voting trusts - Firewalls of covered operations Deal planners should take careful account of the impact of such potential mitigation arrangements at the earliest possible stages of a deal

15 Transaction Strategy Address CFIUS issues in the purchase agreement (and possibly other pre-signing deal documents, like the term sheet) and when determining any breakup fees Consider how the parties will respond to CFIUS questions and allocate costs of CFIUS review Plan ahead for mitigation One transaction may result in multiple mitigation mechanisms - Defense Security Service Foreign Ownership Control and Influence (FOCI) mitigation instruments - Export control licenses and agreement requirements under the International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR) - Other U.S. government agencies (such as Department of Energy) may impose their own requirements - CFIUS-developed controls The purchase agreement can be used to define what mitigation measures will be acceptable: - Any limitation or restriction proposed by CFIUS or other U.S. government agencies in connection with U.S. national security reviews ( hell or high water ). - Only reasonable limitations or restrictions proposed by U.S. government - Hybrid: (e.g., accept all DSS mitigation but only reasonable CFIUS mitigation requirements)

16 Notable CFIUS Actions Canyon Bridge Capital Partners Inc./Lattice Semiconductor Corporation (blocked 2017) Canyon based in California but backed by Chinese investors Group of 22 House members submitted letter objecting to the deal on grounds it would disrupt the U.S. military supply chain and lead to reliance on foreign-sourced technologies for DoD programs The parties refiled with CFIUS multiple times in CFIUS recommended blocking the deal and President Trump agreed, issuing an Executive Order Fujian Grand Chip Investment Fund LP/Aixtron SE (blocked 2016) Chinese fund sought to acquire German semiconductor equipment supplier with operations in California Example of CFIUS review of transaction between two non-u.s. companies Deal eventually blocked in December 2016 by President Obama Ant Financial Services Group/MoneyGram (abandoned 2018) Acquisition by affiliate of Alibaba Group (China) of U.S. based financial services firm Deal abandoned when the parties were unable to address CFIUS concerns through mitigation measures ChemChina/Syngenta (approved 2016) CFIUS jurisdiction was based on U.S. facilities of Switzerland-based Syngenta Senators raised concerns over impact of deal on U.S. food security Review was extended through refiling to allow time for the parties and CFIUS to develop mitigation plan Anbang Insurance/Fidelity Guaranty & Life (approved 2016) Acquisition of underwriter of life insurance and annuity policies Illustrates increasing number of CFIUS reviews of insurance industry M&A transactions

17 2. Proposed new CFIUS legislation and its likely impact on markets and investments 17

18 New CFIUS Legislation on the Horizon Foreign Investment Risk Review Modernization Act (FIRRMA), introduced on November 8, 2017 Introduced by leading Senators with strong bipartisan support after development in concert with the Trump administration Currently under consideration by the Senate Banking Committee House and Senate leadership have forecast passage of a new CFIUS bill by August

19 Key Aspects of FIRRMA Tasks CFIUS with identifying critical technologies, materials, and infrastructure and countries of special concern that would be focus of expanded reviews Expands CFIUS jurisdiction - Joint ventures (wherever located) - Minority position investments of any size in U.S. companies - Real estate in close proximity to sensitive U.S. government facilities - Transactions arising from bankruptcy and defaults on debt CFIUS would be given authority to exempt transactions that do not implicate national security concerns - Potentially easier process for investors from close U.S. allies - Some purely passive investments Requires filings of mandatory declarations for all transactions where a foreign investor with at least 25% foreign government ownership acquires 25% or more of a U.S. company or certain critical technologies, materials, or infrastructure Imposes a filing fee of 1% of the value of the transaction or $300,000, whichever is less 19

20 Prospects for FIRRMA Passage Strong support within the Trump administration and many members of Congress Some industry groups are concerned about the potential chilling effect on new investment and too-broad mandate - CFIUS as a substitute for export controls - Lack of agency bandwidth to review a slew of new investments - Shift of innovation capital offshore to avoid being subject to CFIUS reviews and U.S. regulations Companies and groups that have come out in favor of FIRRMA include Ericsson, Trinity Industries, the Greenbrier Companies, Oracle, the American Iron and Steel Institute, and the Railway Supply Institute 20

21 Why FIRRMA, Why Now? Concern over China s trade and investment policies 21

22 What are the specific U.S. concerns about China? The Trump Administration has highlighted a number of issues in the U.S. trade relationship with China: - Forced technology transfers through China s indigenous innovation policies and the Made in China 2025 plan - Cases of theft of U.S. intellectual property - Limited market access for U.S. companies and investors in China - State-led and directed investments and the dominant position of the Chinese state sector The administration is looking at all available policy tools to address these concerns 22

23 3. Prospects for 2018 and key takeaways 23

24 U.S. FDI forecast: the next three years Expect deals involving China and Chinese-backed funds to receive increasing CFIUS scrutiny The U.S. may also separately implement an investment reciprocity regime that would limit Chinese investment that exceeds comparable opportunities available to U.S. investors in China - The measures would be implemented under the U.S. International Emergency Economic Powers Act (IEEPA) Shifting U.S. national security strategy and prospects of shortform CFIUS clearance for close U.S. allies lower barriers and create opportunities for EU-based investors 24

25 4 Changing political climate for foreign takeovers in the EU Growing political trend since 2016 to push back on the wave of foreign takeovers of key industries and critical infrastructure

26 States) Political climate in Germany 2016 In the past, foreign investors benefitted from a liberal investment climate. In 2016, a shift in Germany s traditionally open investment posture was discernible. Growing trend by the competent authority, the Federal Ministry of Economic Affairs, to scrutinize transactions more closely, especially in the tech industries. Andreas Haak and Dr. Barbara Thiemann 26

27 States) Political climate in the EU 2016 / 2017 In 2016, the flow of Chinese foreign direct investments ( FDI ) into EU hit record levels, in sharp contrast to the continued decline of EU acquisition flows in the opposite direction. A number of high-profile cases have brought attention to the issue of politically sensitive FDI: Take-over of the Airbus Defence Electronics Unit by American hedge fund KKR State-owned ChemChina's $43 billion purchase of Swiss group Syngenta Purchase of German robotics maker Kuka by Chinese company Midea China s Fujian Grand Chip Investment Fund made a bid for Aixtron, a German technology company Hinkley Point C project partly financed by the Chinese company CGN Takeover battle of Kraft Heinz to win over the Anglo-Dutch giant Unilever PPG Industries Inc. s unsolicited $22.1 billion bid for Dutch paint company Akzo Nobel Andreas Haak and Dr. Barbara Thiemann 27

28 States) Political climate in the EU 2016 / 2017 Debate as to whether the mechanisms in EU Member States are adequate regulatory tools. A patchwork of different mechanisms in place in nearly half of the EU Member States: Some Member States only review transactions in the defence sector, others in a number of sectors, and again others don t have any screening regime at all. The Netherlands has no formal FDI screening mechanisms, but reform is underway. FDI may therefore be treated differently among the Member States. Some argue that Member States' diverging approaches should be upgraded, better coordinated or even replaced by a new consistent investment screening mechanism at EU level. Andreas Haak and Dr. Barbara Thiemann 28

29 States) Political climate in the EU 2017 In February, Franco-German-Italian alliance was formed aims at an EU mechanism to vet and potentially block unwanted takeovers from non-eu companies, especially from China. In April, several EU MEPs have introduced a proposal for a Union law calling on the EU Commission to develop a detailed proposal to address this imbalance. Key argument: Reciprocity In June, leaders at the EU summit agreed to a watered-down version: Call on the EU Commission and the Council of Ministers to deepen and move the debate forward on how to enhance reciprocity in the fields of investment. Meanwhile, Germany has taken the matter into its own hands. In July, the German government has approved new rules to tighten its FDI screening mechanism. Andreas Haak and Dr. Barbara Thiemann 29

30 5 Recent reform in Germany FDI screening mechanism has two pillars Overview of recent changes Implications for M&A processes

31 States) Legal basis Review body: Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie the Ministry / BMWi ) Already prior to the reform, the German FDI screening mechanism had two pillars: Cross-sector investment review: Whether the respective acquisition poses a threat to the public order or security of the Federal Republic of Germany? Sector-specific investment review : Special rules apply to the acquisitions of certain defence and IT security companies (protection of essential security interests). Separate from merger control regulation, embedded in German Foreign Trade and Payments Act (Außenwirtschaftsgesetz AWG ) and German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung AWV ) Course of proceedings two stages of review: First phase (whether or not to open in-depth review proceedings) Second phase (in-depth review) Andreas Haak and Dr. Barbara Thiemann 31

32 States) Cross-sector investment review Continues to be applicable irrespective of the industry sector the target operates in. Basically every takeover of a German company by an investor with its seat outside the EU or the European Free Trade Association ( EFTA ) falls within the scope of the cross-sector review. After the acquisition, the direct or indirect share of voting rights of the foreign investor in the domestic company must reach or exceed 25 percent of the voting rights. Screening criterion protection of public order and security, which is understood as actual and material endangerment of fundamental interests of the German state. Andreas Haak and Dr. Barbara Thiemann 32

33 States) Cross-sector investment review New AWV specifies in which cases an endangerment for the public order or security of Germany exists. Non-exhaustive list in Sec. 55 para. 1 AWV: operators of critical infrastructure businesses which develop key IT applications for critical infrastructure companies which are entrusted with monitoring activities according to Sec. 110 of the Telecommunications Act (Telekommunikationsgesetz TKG) and which offer cloud computer services or key companies for telematics infrastructure products Due to the changed security circumstances in the field of civil security-related technologies, critical infrastructure and software companies serving critical infrastructures are in focus. Andreas Haak and Dr. Barbara Thiemann 33

34 States) Cross-sector investment review Reference to German IT security legal framework Critical infrastructure operators: facilities which are of high importance because their impairment would cause significant supply shortfalls or endanger public security Energy: Operators of supply facilities in the sectors electricity, gas, fuel, heating oil, and district heating, to the extent that more than 500,000 citizens are sustained Information Technology and Telecommunications: Operators of facilities in the sectors voice and data transmission, data storage and processing to the extent that more than 500,000 citizens are sustained Water: Operators of facilities in the sectors of drinking water and waste water, to the extent that more than 500,000 citizens are sustained Food: Operators of facilities in the sectors of production, processing and trade, to the extent that more than 500,000 citizens are sustained Andreas Haak and Dr. Barbara Thiemann 34

35 States) Cross-sector investment review Transport and traffic: Operators and facilities in the sectors of aviation, rail transport, sea and inland navigation, road transport, public local transport, logistics, weather forecast and satellite navigation, to the extent that more than 500,000 citizens are sustained Health: Hospitals, the supply of vital medical products, prescription drugs and blood and plasma concentrates, to the extent that more than 500,000 citizens are sustained, except for hospitals, where only 30,000 citizens have to be sustained Finance and Insurance: Operators and facilities in the sectors of cash supply, cardbased payment transactions, conventional payment systems, clearing and settlement of securities and derivative transactions and insurance services, to the extent that more than 500,000 citizens are sustained Not just the acquisition of operators, but also of software companies which develop or modify sector-specific software that serve critical infrastructure are rendered to potentially endanger public order and security. Ministry still has to decide on a case-by case basis. The new rules clarify that EU acquisition vehicles cannot be used to circumvent the review procedure. Andreas Haak and Dr. Barbara Thiemann 35

36 States) Cross-sector investment review German government introduces notification obligation for listed companies: Upon signing of the purchase agreement (schuldrechtlicher Vertrag) Obligation of direct acquirer Remedy to lack of information of the Ministry in the past: Outside the defence and security sector, investors were not required to notify any investment. BMWi was dependent upon information-sharing by other public authorities; in particular Federal Cartel office. Old regime: BMWi could only deal with an acquisition if it initiated a formal examination within three months after the signing of the purchase agreement. Now: Three-month period only starts after the BMWi gains positive knowledge of the acquisition. BMWi may, under the new rules, retroactively start an examination for up to five years after the transaction (signing). Only then, BMWi is precluded from reviewing or prohibiting the transaction. Andreas Haak and Dr. Barbara Thiemann 36

37 States) Cross-sector investment review With a view to the increasing number and complexity of the acquisition processes, review periods have also been extended. After initiating a formal investigation into an acquisition (second phase): BMWi now has four months instead of two after the receipt of all relevant documentation to prohibit the transaction or issue orders to ensure security interests of Germany. During review period, the legal transaction on which the investment is based shall be effective. However, the acquisition shall be subject to the resolutive condition of the acquisition being prohibited. Given the extended review period of up to five years, in cases of doubt, investors should apply for a so-called clearance certificate (Unbedenklichkeitsbescheinigung) under Sec. 58 AWV. Formal confirmation of the Ministry that the acquisition does not raise any security concerns. Application for a clearance certificate shall cite the acquisition, the acquirer and the domestic company to be acquired as well as the basic features of the fields of business of the acquirer and of the domestic company to be acquired (Sec. 58 para. 1 AWV). In order to speed up the process, it is advisable to provide BMWi with as much information as possible. After filing the application, BMWi has to decide within two months (previously one month) whether it launches an in-depth review (second phase of the procedure) of the transaction, or whether it issues the requested certificate. In case the BMWi does not react within these two months, there is a legal fiction that the Ministry does not object to the acquisition. Andreas Haak and Dr. Barbara Thiemann 37

38 States) Sector-specific investment review Special rules continue to apply for the acquisition of companies that operate in sensitive security areas (Sec. 60 to 63 AWV). Screening criterion: essential national security interests Applies to EU and non-eu investors So far: Companies that manufacture or develop goods within the meaning of Part B of the War Weapons List or specially constructed engines or transmissions to power battle tanks or other armored military tracked vehicles were covered. Further key defence technologies added: Companies that develop or manufacture sensor technology or technology for electronic warfare goods subject to list positions 0005, 0011, 0014, 0015, 0017 of Part I Section A of the German Export List (Ausfuhrliste; Annex 1 to the AWV), including, inter alia, fire control instruments, weapon sights, detection and identification devices, sensor integration equipment, space vehicles, specialized equipment for military education, imaging and countermeasure equipment, diving devices, robots, nuclear energy production equipment or laser equipment, each specially designed for military use; goods subject to list position 0018 of Part I Section A of the German Export List which are specially designed for the manufacturing, certification, qualification or testing of the goods listed above Notification obligation continues to apply Legal transaction on which the acquisition is based is provisionally ineffective until Ministry grants its express or implied approval. Andreas Haak and Dr. Barbara Thiemann 38

39 States) Implications for M&A processes Important aspect in international transactions both in terms of contractual provisions and timing. As for merger control, clear understanding of the notification requirements and potential review by BMWi important. Product portfolio of the target sensitivity of the business to be checked whether the target falls within one of the sectors in which an investment review is likely Defence (Sec. 60 para. 1 AWV) Civil security-related technologies (Sec. 55 para. 1 AWV): in particular critical infrastructure and IT companies which have sector-specific software that serves critical infrastructure in their product portfolio Defence sector: Responsibilities of investors should be clearly defined In general, undertaking of the investor to notify the transaction strongly recommended. Approval of BMWi / non-objection as closing condition Andreas Haak and Dr. Barbara Thiemann 39

40 States) Implications for M&A processes Civil sector In case product portfolio of target is specifically addressed in the catalogue of Sec. 55 AWV: Parties that do not notify BMWi of an acquisition must be aware that BMWi can initiate a review anytime during a five-year period after the signing of an acquisition agreement as long as it acts within three months of gaining knowledge of the transaction. Acquisition agreement should include appropriate undertakings of the investor to notify. Approval of BMWi / non-objection as closing condition Civil sector In cases of doubt: Appropriate undertakings of the investor to apply for a clearance certificate (if not applied yet) Approval of BMWi / non-objection as closing condition Civil sector relatively low risk of review: Depending on the risk level: Buyer should still apply for a clearance certificate. Acquisition agreement should include procedure in case of non-issuance of clearance certificate. Andreas Haak and Dr. Barbara Thiemann 40

41 6 Expectations for 2018 and beyond EU-level: Framework for screening FDI in sight UK: Plans to upgrade FDI screening mechanism The Netherlands: Plans to introduce FDI screening mechanism

42 States) EU-level: Framework for screening FDI in sight No investment screening mechanism as such in place Merger control: Scrutiny of mergers under EU competition rules, so as to ensure fair and undistorted competition in the EU's internal market. Non-economic public interests are carved out of the EU Merger Regulation, and have no place in the procedure led by the EU Commission. Previously, CFIUS-style mechanism at EUlevel referenced as gold standard. EU Commission presented a draft regulation in September 2017 which foresees an EU framework for FDI screening. Andreas Haak and Dr. Barbara Thiemann 42

43 States) EU-level: Framework for screening FDI in sight The specific objectives to be achieved are the following: provide a framework for the Member States, and in certain cases the EU Commission, to screen FDI on grounds of security or public order; facilitate close and systematic cooperation among Member States and between Member States and the EU Commission, including strengthened exchange of information; prevent circumvention of national FDI screening mechanisms. The proposed Regulation does not require Member States to adopt or maintain a screening mechanism for FDI. Instead, the objective is to ensure that any such screening mechanism meets some basic requirements, such as the possibility of a judicial redress of decisions, non-discrimination between different third countries and transparency. With its explicit focus on critical infrastructure, the EU Commission endorses the approach taken by the German Government. Message that EU will use security screening as a tool to fight for trade reciprocity is less pronounced. Andreas Haak and Dr. Barbara Thiemann 43

44 States) EU-level: Framework for screening FDI in sight The EU Commission proposes in particular a non-exhaustive list of factors that may be taken into consideration in the screening process; these factors next to critical infrastructure, critical technologies, etc. include whether the foreign investor is controlled by the government of a third country, including through significant funding ; a new EU Commission competence to screen FDI and issue a non-binding opinion if FDI in a Member State may affect the security or public order of projects or programmes of Union interest in the areas of research, space, transport, energy and telecommunications; the respective Member State would be required to take utmost account of the Commission s opinion and provide an explanation to the Commission in case its opinion is not followed ; FDI in a Member State may affect the security or public order of another/other Member State/s; the latter may submit its/their respective comments and the EU Commission may subsequently issue a non-binding opinion; in these cases the respective Member State would be obliged to give due consideration to the EU Commission s opinion and the comments of other Member State/s; the creation of a cooperation mechanism between Member States and the EU Commission which aims, among others, to enhance the coordination of any screening decision made by the Member State/s concerned; new transparency and information requirements for Member States linked to this new cooperation mechanism. Andreas Haak and Dr. Barbara Thiemann 44

45 States) EU-level: Framework for screening FDI in sight EU Commission is seeking to enlarge its powers, but the proposed rules would not grant it such a broad mandate and significant authority CFIUS enjoys. Actually, Member States would not gain new powers; although official reactions suggest otherwise. However, the concept of public order and security would be more clearly defined. EU Commission proposal kicks of legislative process. Approval needed by both EU Parliament the Council of Ministers (i.e. the Member States). President Juncker seems to be determinant to get certain things done before the end of the current term of the EU Commission (i.e. mid 2019). We doubt speedy agreement on the initiative. When French president Macron raised the topic at the EU summit in June, he got a lukewarm reaction from his colleagues. Nordic countries, Hungary and Greece are among those to have raised concerns; need FDI to develop their economies. Paris, Berlin and Rome have to search for allies to push the plans forward. Andreas Haak and Dr. Barbara Thiemann 45

46 States) UK: Plans to upgrade FDI screening mechanism Today: UK addresses national security concerns stemming from FDI through two mechanisms: 1. Government holds golden shares in a small number of UK companies active in the defence sector: e.g. Rolls Royce 2. Through its antitrust scrutiny mechanism, which is governed by the Enterprise Act of 2002, the UK may make determinations based on harm to public interest, including national security. Public interest concerns: specifically, issues of national security; media quality and financial stability Powers to veto a deal Andreas Haak and Dr. Barbara Thiemann 46

47 States) UK: Plans to upgrade FDI screening mechanism UK welcoming to Chinese investors, even in sensitive sectors, in the past. Appears to be a cross-party consensus that some sectors are strategic and deserve special attention and / or support. Broader rethinking of Chinese investment in the UK related to the concerns about Hinkley Point C project partly financed by the Chinese company CGN. UK to tighten foreign investment reviews? Queen s Speech of 21 June 2017: My government will bring forward proposals to ensure that critical national infrastructure is protected to safeguard national security. In October 2017, the UK Government published a Green Paper for consultation: In the short term, any transaction involving a party active in the manufacture or design of products for military use or in the advanced technology sector could face review on public interest grounds, where the target s UK turnover exceeded 1 million. In the longer term, an even wider set of transactions could be scrutinized on national security grounds and be subject to mandatory notification to the UK Government before being allowed to proceed. Andreas Haak and Dr. Barbara Thiemann 47

48 States) UK: Plans to upgrade FDI screening framework Risks of creating economic uncertainty in a fragile Brexit environment and of dissuading FDI in UK infrastructure and the UK economy as a whole! Ability of UK government to intervene in cross-border mergers to protect domestic strategic interests is currently constrained by the EU treaties guarding the free movement of capital and freedom of establishment. The extent to which this would change post-brexit will depend on the model of Brexit adopted. Post-Brexit, UK may have a free hand to introduce a more extensive FDI regime if the UK exits both the EU and the European Economic Area (EEA). Even after Brexit, UK would still be constrained by other international trade rules, including WTO rules, free trade agreements, bilateral investment treaties, which usually prohibit discrimination against foreign investors. Andreas Haak and Dr. Barbara Thiemann 48

49 States) The Netherlands: Plans to introduce FDI screening mechanism Lack of formal FDI screening mechanism Concern over the great Dutch sellout Foreign attempts to buy out Dutch crown jewels like Unilever and AkzoNobel prompted calls to protect companies of vital importance for national security. General elections were held in the Netherlands in March Coalition agreement concluded on 10 October 2017, indicates Vital sectors will receive special protection. After careful analysis of the risks to national security, selected companies working in vital sectors will only be eligible for takeover following explicit approval (subject to conditions if necessary) or will be protected by laying down other, suitable guarantees. In addition, measures aiming to push back the influence that certain activist investors, defined as being mainly focused on short term gain instead of long term value, are planned. Andreas Haak and Dr. Barbara Thiemann 49

50 7 Takeaways EU remains open to FDI Trend towards greater scrutiny of FDI; underpinning narrative protecting key critical infrastructure and a sense of national integrity Foreign investors need to rethink their strategy

51 States) Takeaways As we experience on a day-to-day basis, the trend towards expanding reviews of FDI does not seem to be going away anytime soon. A convergence is currently taking place across the Atlantic with efforts to expand the available toolbox for screening FDI. In Germany, the Netherlands, the UK, but also in France and Italy, foreign investors have to expect a more rigid approach by authorities compared to the past. More deals draw scrutiny Large data volumes and critical infrastructure draw closer look We have seen in our recent dealings with the Ministry here in Germany that foreign investors will have to pay much more attention and devote more resources to the clearance process. There is no doubt: the new rules increase deal uncertainty. Thus, securing a clearance certificate has become even more important under the new regime since it will provide legal certainty for the foreign investor and the seller. Further legal developments will be critical for foreign investors with interests in the EU and EU business owners seeking to sell their companies to follow. Andreas Haak and Dr. Barbara Thiemann 51

52 Questions?