Foreign investment regulation
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FI Monitor Issue 5, 2022
In this snapshot, we summarize our recent experience in some key jurisdictions on prohibitions and transactions called in for review in light of new/changing regimes.
An unprecedented – and unusual – number of transactions were prohibited or abandoned in 2022 due to concerns related to foreign direct investment (FDI). Foreign investment reviews by the German Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz) (the Ministry) are confidential, with no public record of the number of transactions called in by the Ministry. However, that number is thought to be relatively low because foreign investors, who tend to take a more cautious approach in Germany, are likely to notify their transactions to maximize deal certainty.
The increase in prohibitions and abandonments does not necessarily stem from a tightened legal framework but is arguably a result of new leadership at the Ministry, now headed by Robert Habeck of the Green Party.
In light of the partial prohibition of the planned acquisition of a 35 percent interest in a seaport terminal in Hamburg by China’s COSCO Shipping Ports Limited, the Green and Liberal Parties have pushed for even tighter controls. It was also Green and Liberal Party-led ministries that wanted to prohibit the acquisition altogether, while only the Social Democratic-led Chancellery was in favor of the deal. To avoid clearance by tacit approval, the different ministries involved agreed to partially prohibit the acquisition, allowing COSCO to buy a stake of only 24.9 percent in the terminal and strictly excluding the acquisition of any further rights.
Earlier this year, the acquisition of Heyer Medical AG, a manufacturer of breathing ventilators, by Chinese Oricare (HK) Ltd. was prohibited due to security concerns. The acquisition was not notifiable as it signed before the list of critical activities in the relevant law was expanded following COVID-19. Given Heyer’s small market share in Germany, a prohibition would have been unlikely pre-pandemic. Similarly, the planned acquisition of German wafer producer Siltronic AG by Taiwanese firm GlobalWafers was not cleared before the long stop date because the Ministry claimed it did not have sufficient time to review the remedies conceded to the Chinese merger control authority in order to obtain clearance—only a week prior to the long stop date.
The heightened scrutiny is also evidenced by the recent prohibition of the proposed acquisition of Elmos Semiconductor SE’s wafer production to China’s Silex Microsystems AB. Even though the deal seemed to be on track for clearance as it related to outdated technology, the transaction was ultimately prohibited. According to media coverage, the planned acquisition of high-precision thermal solutions for semiconductor testing and packaging provider ERS Electronic by an unknown Chinese investor was prohibited at the same time.
These five prohibited and failed transactions mark only the recent culmination of the Ministry’s heightened scrutiny of Chinese investors in sensitive sectors such as critical infrastructure and critical technologies. Meanwhile, the Ministry is focused not only on China but also on investors from other countries, which are now also facing more rigorous reviews for geopolitical reasons.
The Italian FDI rules currently do not include a mechanism enabling the regulator, the Italian Prime Minister’s Office (PMO), to call in transactions that have already been completed and were not notifiable (under the previous FDI rules, or otherwise), but which would be notifiable under the current FDI rules. The core Italian legal principle of non-retroactivity would apply. More specifically, certain precedents suggest that jurisdiction must be assessed at the time of signing of the relevant agreement or adoption of the relevant resolution(s).
Currently, under Italian FDI rules, we are aware of two cases where the PMO opened ex officio proceedings for “failure to notify” transactions. In both instances, the relevant moment in time for establishing jurisdiction (either signing or closing) was irrelevant given that the outcome would not have been different either way.
In 2021 the Italian PMO opened ex officio proceedings in relation to the failure to notify the 2018 sale to state-controlled Chinese investors of a 75 percent stake in Alpi Aviation S.r.l., a manufacturer of high-tech drones for the armed forces. In relation to this transaction, the Italian PMO exercised its veto right and ordered the transaction to be unwound – three years after closing. In parallel, with reference to this transaction, an investigation was opened for violation of regulations on the handling of military material.
Further, the Italian PMO used its powers primarily to counter perceived Chinese and Russian attempts to expand their presence and influence over the eurozone’s economy. We are aware of six prohibitions in the last 12 months, five of which were in relation to the acquisition by Chinese companies of a robotics company, a dronemaker, two semiconductor firms and a company active in the agritech sector (which was confirmed by the administrative courts and is now subject to further appeal). The sixth prohibition came against a Russian acquirer, in relation to the acquisition of a company active in the design and production of cylinders and systems for the storage of high-pressure gas. We are also aware of at least two transactions involving Chinese and Russian acquirers that were abandoned in light of concerns that they might be vetoed by the Italian authorities.
The Japanese FDI rules currently do not contain a mechanism enabling the regulator to review transactions that would have been notifiable on the basis of new provisions. There is a call-in power, but that is applied only to transactions which were incorrectly not notified (i.e. where a mandatory pre-closing filing was required) under designated business sector rules. The call-in power is not applied to sectors for which no pre-closing filings are required.
However, in recent years, regulators have shifted slightly and carried out ex post facto interventions, monitoring transactions despite there being no obligation to make pre-transaction filings.
In March 2021, Chinese technology conglomerate Tencent acquired a 3.6 percent stake in Rakuten, the Japanese e-commerce operator and wireless carrier, without pre-transaction regulatory review – with Tencent becoming the major shareholder holding 3.65 percent of Rakuten shares. Tencent’s capital tie-up with Rakuten qualified under the regular exemption from pre-transaction filings, having been considered a straightforward equity investment without material involvement in management decisions. However, the investment drew the interest of the government in the United States, where a 2021 executive order by President Trump prohibiting transactions with Tencent related to WeChat highlighted concerns over Chinese access to US person data. (President Biden subsequently would revoke and replace the Trump Order with an executive order requiring a review of apps from adversary countries.) Immediately after Rakuten's announcement, the National Security Service (NSS) and other relevant departments of the Japanese government were reportedly informed of the concerns by President Biden’s administration. The Japanese government decided to continue monitoring Tencent’s conduct as an investor to ensure its compliance with terms of the exemption, particularly those involving access to Rakuten’s customer data.
The UK government has broad powers to call in for national security review deals closed before the new regime came into force and deals that fall outside the mandatory notification thresholds.
Firstly, the UK government is able to exercise retrospective call-in powers to review certain transactions that closed during the period between 12 November 2020 (when the draft legislation was first laid before the UK parliament) and 4 January 2022 (when the new regime came into force), provided the transaction was not reviewed under the previous public interest regime.
If the Secretary of State for Business was aware of the transaction before 4 January, the government was able to exercise its call-in powers up to 6 months from the regime coming into force (by 4 July 2022). If the Secretary of State was not aware of the transaction before 4 January, the government is able to exercise its powers up to 6 months from when the Secretary of State became aware (up to a maximum of 5 years from 4 January 2022).
The government has used these powers in a number of cases, including the high-profile acquisition by Chinese-owned Nexperia of Newport Wafer Fab (the UK’s largest semiconductor manufacturer), which completed in July 2021 and was called-in for a national security review in May 2022. Following a lengthy and extended review, the government announced on November 16, 2022 that Nexperia must sell the 86 percent stake it acquired in July 2021. The government decided that the sale is necessary and proportionate to remedy a risk to national security relating to the potential reintroduction of compound semiconductor activities at the Newport site (which could undermine UK capabilities) and the potential impact on industries in the region (the South Wales Cluster) being engaged in future projects relevant to national security. On the same day, Nexperia announced that it will appeal the government’s decision. This deal could prove to be the first test case for the regime.
The government also has broad powers to call in for review transactions that fall outside the mandatory notification requirements – and it has exercised these powers and imposed remedies in several cases so far. For an overview of prohibition and remedy decisions announced by the UK government over the last few months and the key trends emerging, please see The UK's national security and investment regime - key trends article.
The Committee on Foreign Investment in the United States (CFIUS) has broad jurisdiction with respect to acquisitions of control of US businesses by foreign persons. Its jurisdiction was expanded further in 2018 to include not only controlling but also non-controlling transactions. The CFIUS regime however remains largely voluntary, with a filing being mandated in only a subset of transactions.
CFIUS has always had the authority to call-in so-called “non-notified transactions,” but historically had limited resources dedicated to doing so, relying mostly on parties self-notifying transactions. Parties are incentivized to notify transactions to CFIUS because any transaction subject to CFIUS jurisdiction that has not previously been notified to, and cleared by, CFIUS remains indefinitely subject to CFIUS remedial action. Any such remedial action is based on the nature of the US business and national security considerations at the time of the CFIUS review, even if the review takes place many years after closing.
CFIUS was allocated additional resources to identify non-notified transactions in connection with CFIUS reform legislation that was passed in 2018. Such efforts are directed at both identifying potential non-compliance with the mandatory regime and seeking to review transactions that might raise national security concerns that have not been mitigated. We are now seeing the impact of that increase in resources. CFIUS reported in its annual report that in 2021 (the last year for which data is available) it reached out to the parties to 135 transactions and requested that the parties submit a filing in connection with 8 of them. If parties do not agree, CFIUS can initiate its own review.
CFIUS non-notified resources have focused mostly, although not exclusively, on Chinese and Russian investment. Several transactions involving Chinese purchasers have been called in by CFIUS post-closing and resulted in the foreign person being subject to a divestment order, including the acquisitions of dating app Grindr, hotel property management software provider StayNTouch, and video app TikTok. However, in the case of TikTok, it appears that the app’s owner, ByteDance, could eventually reach a deal with CFIUS to allow it continue ownership of TikTok in some form, but with very onerous mitigation. Within the past year, CFIUS also forced a fund run by a Ukranian-born investor to divest its interest in space launch company Firefly Aerospace. More recently, CFIUS took action with respect to a nearly 10-year-old transaction, ordering China’s UniStrong Science & Technology to divest satellite technology company Hemisphere GNSS, which it had acquired in 2013. Many of the post-closing actions with respect to Chinese purchasers involve US businesses that have critical technologies or sensitive personal data. However, it is not just Chinese and Russian transactions that are subject to CFIUS’ call-in authorities; European companies have also received requests for information with respect to non-notified transactions, and in some cases post-closing mitigation has been imposed.
Only the US President can prohibit a pending transaction or force divestment of a completed transaction, and that action (unlike actions taken by CFIUS itself) is public. While there are some high-profile examples, there have only been seven Presidential orders since Congress gave the President this authority in 1988. However, the number of transactions that have been abandoned in light of CFIUS opposition is actually much higher, as parties generally take the option to voluntarily abandon a transaction or divest before the matter is referred by CFIUS to the President with a negative recommendation. In each of 2021 and 2020, seven transactions were abandoned pre-closing for failure to reach a resolution. These included Wise Road Capital’s proposed acquisition of semiconductor company Magnachip and Asymchem’s proposed acquisition of chemical technology company Snapdragon Chemistry, both involving Chinese acquirers.
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