Cross-border acquisitions and mergers may soon have an extra hurdle to cross before receiving the green light. In the EU, the development of FDI screening mechanisms has gained speed after COVID-19. Member States are steering away from a liberal investment policy and instead opting for mechanisms to protect companies from foreign takeover. Also in the Netherlands, broader investment screening is on its way. Companies should take account of these developments when contemplating M&A deals.
Throughout the EU, liberal thinking is making way for stronger initiatives to protect European companies. Various mechanisms screening Foreign Direct Investment (FDI) have recently been put in place or reinforced. If anything, COVID-19 has strengthened the view in Europe that FDI needs to be reviewed thoroughly. This review will be carried out at Member State level, with encouragement and coordination from the European Commission.
The EU FDI Regulation will come into full application as of 11 October 2020 and creates a regime for coordinating national screening of FDI at EU level. The Regulation does not introduce an overarching EU FDI screening mechanism, nor does it require Member States themselves to have a screening mechanism in place. However, with companies more vulnerable to takeovers – including from abroad – due to the financial impact of COVID-19, the European Commission has strongly encouraged Member States to create an FDI screening regime, and has published guidance on this.
Aiming to increase transparency, the Regulation requires that those Member States that do have a mechanism in place must ensure such mechanisms meet a number of requirements. The Regulation also introduces a framework facilitating coordination between the Member States and the European Commission. We note that there is no direct engagement between the European Commission and the parties to a transaction. The EU FDI ‘regime’ is not like the EU merger control regime.
This raises questions; what type of investments are subject to screening, and which ‘foreignness’ deserves scrutiny? It is for the Member States to determine the F, the D and the I, although the European Commission may also issue additional guidance. It cannot be excluded that there may eventually be a push for a more aligned and centralised regime, as buyers are currently confronted with diverging regimes per Member State.
Even the Netherlands, a country that has excelled at free trade, is preparing regimes allowing for more government intervention in FDI (on top of the existing (limited) investment screening in the gas and electricity sector). While the legislative proposal implementing the Regulation does not entail the introduction of an overall FDI screening mechanism (this legislation merely deals with certain procedural requirements laid down in the Regulation), future legislation will introduce broader FDI screening.
Investment screening in the telecom sector
On 19 May 2020, the Senate passed a draft bill giving the Minister of Economic Affairs and Climate Affairs the power to prohibit the acquisition of undesirable control in telecommunications for reasons of national security and public order. The legislation will introduce a mandatory pre-closing filing to the Minister. COVID-19 may have helped in getting the bill through by unanimous consent, not even requiring a vote. The new regime is expected to enter into force later this year.
Vital sectors and broader investment screening
With high priority, the Dutch government is preparing a draft bill introducing a screening mechanism for certain essential vital sectors and companies active in sensitive technology, providing protection of national security. To avoid undesired (foreign) investment against the background of the COVID-19 outbreak, the draft bill will allow for an ex post screening mechanism. On 2 June 2020, the Dutch government indicated it wants to introduce the new regime with retroactive effect from that date. The government aims to submit a draft bill to the Senate in the fourth quarter of this year.
Other Member States
In many other Member States, FDI regimes have recently been created or reinforced. In the last two to three months, Germany, France, Spain and Italy have proposed or introduced (stricter) FDI regimes, whether accelerated by COVID-19 or not.
Whilst many procedural and substantive aspects still remain to take shape once the Regulation is in full force, companies are advised to account for FDI screening aspects from the very beginning of an M&A process. It is advisable to map out (potential) FDI filings, research the political environment, think of other stakeholders and conduct a risk assessment before signing up to a transaction.
This article was published in the Competition Newsletter of June 2020. Other articles in this newsletter: