The reach of foreign direct investment (FDI) reviews is expanding globally, with countries introducing new regimes or strengthening existing ones.
Over 100 jurisdictions now have investment reviews, with an increasing focus on critical infrastructure and risks potentially posed by investments in these sectors (even where the investor does not acquire a majority stake in the infrastructure target).
We consider some of the key learnings of relevance to infrastructure investors from recent FDI enforcement practice in the UK, US and Germany.
Infrastructure in the spotlight
All three regimes have mandatory filing requirements for qualifying transactions in a variety of infrastructure sectors.
Infrastructure sectors with mandatory filing requirements
Importantly, even transactions in infrastructure (and other) sectors not listed above may still be investigated by the relevant authorities under certain regimes, including in the UK, the US and Germany.
Investors with links to China and Russia face a significantly heightened risk of intervention in all three jurisdictions. However, acquirers from countries typically regarded as more politically and culturally aligned may also be subject to review.
Key learnings from recent UK enforcement practice
While the vast majority of transactions are being cleared unconditionally (with no intervention in the form of remedies), there has nevertheless been a higher-than-expected rate of intervention (the Government had expected around 10 cases involving remedies per year, whereas there were 15 such cases between 1 April 2022 and 31 March 2023).
On average, every fifteenth notified transaction was “called-in” for detailed review following an initial screening assessment. A decision to call-in does not necessarily mean that remedies will be imposed:
- Nearly 80% of deals called in were still cleared unconditionally at the end of the extended review.
- Out of the 15 transactions where intervention occurred between 1 April 2022 and 31 March 2023, 5 were blocked/ordered to be unwound and 10 were subject to conditions (these figures do not account for abandoned transactions, some of which may have resulted as a pre-emptive response to a potential threat of intervention).
Transactions involving targets active in defence-related sectors were called-in most. However, tech, communications and infrastructure (energy) sectors featured heavily when it came to the imposition of remedies.
Most deals benefited from a streamlined review (93% were cleared within the 30-working day deadline for the initial assessment period). However, deals which were called in faced a lengthy review (over six months in some cases).
Key learnings from recent US enforcement practice
The Committee of Foreign Investment in the United States (CFIUS) is continuing to intensify its monitoring and enforcement efforts:
- In approximately a third of cases in which parties filed a declaration (i.e. a streamlined form of a review) in 2022, CFIUS asked for a traditional full ‘notice’ to be made.
- Overall CFIUS’s case volume remained consistent, with 436 total reviews (declarations and notices) in 2021 and 440 in 2022.
- Despite fewer deals being notified from higher-risk countries in 2022, over half of all CFIUS notices still moved to a second-stage investigation.
- Almost one quarter of all transactions filed with CFIUS in 2022 – around 100 transactions – required a ‘mitigation’ remedy in order to obtain clearance of the investment, or were blocked or abandoned.
Mitigation requirements are becoming more complex and burdensome to implement.
The CFIUS review process is trending longer, with matters requiring mitigation regularly taking six-eight months (or longer).
Key learnings from recent German enforcement practice
There is generally a rising number of cases (160 notifications in 2020 and over 300 notifications in 2021 and 2022, albeit significantly lower than in the UK, which received over 800 notifications between 1 April 2022 and 31 March 2023).
Outright prohibitions have so far been rare. So far as is publicly known, there have been three prohibitions since the regime was implemented in 2009 (although the number of abandoned transactions is unknown so this number might mask a higher number of would-be problem transactions).
Remedies (so called ‘security agreements’) have also been relatively rarer than in the UK for example, with an average of 2 to 3 interventions a year since the regime was implemented in 2009 (compared to 10 cases in the UK between 1 April 2022 and 31 March 2023). However, the number of interventions in Germany has generally been rising in recent years.
There are a rising number of procedures arising as a result of the EU cooperation mechanism where EU member states and the European Commission share details of, and prompt each other about, transactions of interest (around 250 in 2022 for Germany).
What does this mean in practice for investors?
Deal timetable: More FDI regimes and more burdensome and rigorous review processes are leading to more filings being triggered and, in some cases, longer mandatory pre-closing review periods.
Disclosure: Authorities often require extensive information over ownership structure, transaction rationale and target activities. Specific disclosure requirements may apply when investing via a consortium vehicle.
Deal certainty: Increased unpredictability as authorities test new areas of security concerns and grapple with political pressure, adding greater risk of intervention, even from “friendly” countries.
Risk of remedies: Authorities may impose remedies/safeguards if they conclude that the investment gives rise to national security concerns (e.g. information ringfencing) and some of those remedies may conflict with business strategy (e.g. forced disposal of strategic assets or restrictions on making changes to board composition, workforce, headquarters, etc. without authorisation).
Freshfields’ Foreign Direct Investment Monitor can be accessed via its website and downloaded from this page.