FDI Regimes Continue to Expand and Increase Scrutiny of Transactions Worldwide
China has increased its efforts to scrutinize global transactions that may implicate national security concerns using its foreign investment security review ("FISR") process. On December 19, 2020, China's National Development and Reform Commission ("NDRC") and China's Ministry of Commerce jointly issued the Measures on Security Review of Foreign Investment ("FISR Measures") aiming to monitor foreign investment in sensitive industrial sectors. These "sensitive sectors" include defense- and security-related sectors and sectors related to, among others, important agricultural products, energy, and resources. While the number of transactions being reviewed under FISR has increased, public disclosure of details has been limited to date. Compared with other regulatory procedures, FISR is characterized by broader jurisdiction, greater regulator discretion, and less visibility and predictability. As a result, parties to a transaction subject to FISR are likely to face increased deal uncertainty where such approval is a closing condition to the deal. We generally recommend that parties conduct a preliminary FISR assessment in the early stage of the transaction to understand the potential impact to the closing.
Australia's foreign investment approval regime can capture a very broad range of transactions (including foreign-to-foreign transactions and internal reorganizations). It remains critical that foreign investors carefully assess all transactions involving the direct or indirect acquisition of interests in Australian entities, assets, or land to confirm whether Foreign Investment Review Board ("FIRB") approval should be sought on a mandatory or voluntary basis. Major reforms came into effect on January 1, 2021, which have further expanded FIRB's reach. These reforms include new mandatory FIRB approval requirements for investments concerning a "national security business" or certain real estate designated as "national security land." In addition, the Australian Treasurer can now, for up to 10 years following closing, "call in" transactions for review and potential orders (including divestment orders); relatedly, a new voluntary FIRB approval regime has been introduced to mitigate this risk. Further, the reforms include exemptions and carve-outs for certain private fund vehicles and foreign lenders, significant changes to the FIRB application fee regime, and increased penalties for noncompliance with the FIRB regime.
The Committee on Foreign Investment in the United States ("CFIUS") continued to take a robust approach to its recently expanded regulatory mandate. There are several notable trends from recent years that are poised to continue into 2022. Transaction parties have increasingly opted to file CFIUS Declarations (short-form filings), and CFIUS appears to have to be more willing to clear deals based on CFIUS Declarations. CFIUS has demonstrated a continued focus on negotiating measures to mitigate national security concerns and monitoring post-closing compliance with these measures. CFIUS appears to have increased scrutiny of non-notified transactions, reporting in its most recent annual report that it considered 117 transactions in 2020 that had not been notified by the transaction parties.
CFIUS also appears to be expanding the range of industries where it has reviewed information or requested filings, including for transactions involving educational services, publishing, health care, pharmaceutical and medicine manufacturing, data processing and hosting, financial services, transportation, utilities, and other professional and technical services. In addition, CFIUS is currently evaluating whether to expand the list of "excepted" countries that are afforded preferential treatment under the CFIUS regulations, although any expansion will likely be slow.
The triggers for a mandatory CFIUS filing (or for a potential CFIUS expectation or request for a voluntary filing) are not always intuitive. They can require detailed examination of a U.S. business's products, services, and assets, as well as the ultimate ownership and control of the investor. With CFIUS wielding new authorities, additional staff, and a broad bipartisan mandate for action, attention to these factors early in the diligence and deal-design process can help parties identify and apportion risks and secure a smooth path to closing.
Dealmakers must also navigate the increasingly complex investment control landscape in Europe, with many jurisdictions either introducing new investment control regimes or expanding the scope of existing regimes. This is in addition to increased levels of cooperation and information-sharing between jurisdictions as a result of the EU FDI Screening Regulation that went into effect last year. There are also a number of significant developments on the horizon with new regulatory clearance requirements in the United Kingdom, Netherlands, Belgium, and Ireland (among others) expected to be introduced in 2022.
Investors are experiencing increasingly aggressive enforcement by governments across a wide range of sectors and are experiencing concerns being raised about investors from a larger pool of different countries. For example, an amendment to Germany's FDI regulations starting in 2022 will expand the definition of critical infrastructure investments subject to mandatory pre-closing review to include a broader variety of activities in traditional covered sectors such as energy, telecommunications, and transportation, as well as in new sectors such as software, finance, insurance, and health. Prohibitions or conditions on investment have also been imposed on investors from the United States, Canada, and Australia, in addition to jurisdictions that are traditionally expected to attract greater scrutiny such as China.