Expanded Reviews and Additional Resources: A 2021 Perspective
Foreign direct investment (FDI) reviews have become an increasingly critical issue in cross-border M&A transactions. Although many countries continue to encourage inward investment, Taiwanese companies and investors should carefully consider and prepare for the regulatory review of FDI early in their transaction processes.
We see views converging across the United States, Europe and other countries to agree that so-called “sensitive” sectors need to be protected from what is described in the United States. United as “antagonistic capital”. This trend manifests itself both in lower thresholds that trigger FDI reviews and in a better understanding of what is considered a “sensitive” sector for the purposes of FDI reviews, export controls and more. international trade compliance.
The current areas of intervention of FDI agencies now fall within the range of business activities of many Taiwanese companies. Sensitive sectors are no longer limited to traditional areas associated with high level national security, such as defense, energy and telecommunications. Instead, regulatory oversight of FDI is expanding to encompass biotechnology, high tech, critical new technologies such as artificial intelligence or 3D printing, and other data-driven activities.
Additionally, the COVID-19 pandemic has put FDI in a more precise perspective and accelerated the nationwide movement across Europe and elsewhere in the world. Governments were concerned about the possibility for foreign investors to opportunistically take advantage of struggling companies, and more generally the resilience of supply chains. Naturally, the global pandemic has also led many governments around the world to add the health sector to those considered sensitive industries.
New screening regimes in Europe
Today, 18 of the 27 Member States of the European Union (EU) have a screening regime for FDI. Some of them adopted a new regime after the publication or entry into force of the EU filtering regulation. Other Member States have also announced the introduction or planned extension of a review regime for FDI.
Although the EU screening regulation does not oblige EU member states to introduce a national FDI review process, it is to be expected that all EU member states will soon have FDI regimes, with the most recent increasingly based on the EU screening regulation and the more mature ones increasingly aligned with the EU screening regulation.
For example, Germany revised its FDI rules in 2020, including expanding the scope of the review for COVID-19 reasons, lowering the mandatory review threshold to 10%, introducing a standstill obligation outside of defense agreements and by establishing criminal sanctions in the event of non-compliance. In addition, the 17th Amendment to the German Foreign Trade and Payments Ordinance (AWV) aligned the scope of review more closely with the EU screening regulation and widened the net for mandatory examinations of FDI. . The revised regime includes 16 new “critical activities” in addition to the list of 11 target activities that previously triggered a filing requirement and a standstill obligation as part of the cross-sector review.
In the UK, a new investment screening regime will come into effect in January 2022 and will include a mandatory prequalification mechanism for specific designated sectors.
The review of FDI is also increasingly coordinated within the EU.
The EU screening regulation has been fully operational since October 2020. National screening authorities must now notify all transactions they screen to the European Commission (EC) and other Member States, who can then ask questions and provide comments or opinions they do in the business of interest. The EU filtering regulation does not delegate veto or enforcement rights to the EC. This means that individual member states continue to monitor examinations of UIDs for their jurisdictions. At the same time, each reviewing Member State must take into account the comments of the EC and other Member States.
In addition, 5G technology has become of particular concern to some Member States, which have enacted specific rules to ensure FDI filtering of transactions involving 5G networks and equipment. In Italy, the “Golden Power” government prior authorization process is mandatory for contracts or agreements with non-EU persons regarding the provision of 5G technology infrastructure, components and services. France has set up a specific ad hoc authorization process for the use of 5G technology on French territory. In Germany, the Federal Network Agency has published a security catalog for telecommunications and data processing, highlighting the criticality of 5G networks. The German Federal Government is also considering supplementing the technical security oversight of 5G networks with a political review process.
Extensive resources in the United States
In the United States, the Committee on Foreign Investment in the United States (CFIUS) review process remains strong and is a key consideration for transactions. CFIUS is making full use of its increased resources under the Foreign Investment Risk Review Modernization Act, 2018 (FIRRMA). This is reflected in a consistently high number of annual reviews, including through a new abbreviated filing process, called declaration, which was introduced under FIRRMA and has allowed parties to benefit from shorter and cheaper filings in certain cases. The CFIUS is also actively pursuing the review of unreported transactions falling within its jurisdiction, including those that may have been closed for a long time.
FIRRMA introduced the concept of sensitive sectors into the CFIUS process by granting the CFIUS additional powers, including expanded jurisdiction and certain mandatory filing requirements, to review foreign investments in “US TID companies”, which are certain US companies involved in critical technologies (certain technologies, items and services subject to export controls to the United States), certain identified critical infrastructure or sensitive personal data of United States citizens.
Despite these expanded powers, the competence and interest of CFIUS are not limited to American TID companies or to specific sectors. In other words, it remains essential that parties to a proposed transaction carefully assess all the potential implications of CFIUS as part of their transaction planning for any cross-border transaction where the target is, or includes, a US business.
Just as there is increased coordination among EU member states, CFIUS actively coordinates with other countries with respect to national security reviews of FDI.
Although the CFIUS process is highly confidential, the FIRRMA included specific provisions allowing for the sharing of information between governments and requiring that processes be in place to allow CFIUS to consult with other governments. Collaboration among Allied governments on FDI reviews is likely to continue to intensify as countries around the world strengthen their FDI regimes.
Impact for Taiwanese companies and investors
The good news for Taiwanese investors is that most countries around the world encourage inbound investment. The EU has stated unequivocally that it wants to remain an attractive place for foreign investment. As the EU cooperation mechanism is in full swing, many testing agencies learn quickly and become more pragmatic. Likewise, the United States actively encourages foreign investment, and the vast majority of transactions reviewed by CFIUS are approved without mitigation.
Yet the direction of change is clear. EU member states, the United States and others are modernizing and strengthening their FDI regimes, while placing more emphasis on industrial policy and concerns about the resilience of global supply chains after the pandemic.
Wider geopolitical dynamics can also impact FDI reviews. For example, continuing tensions between the United States and mainland China have led to heightened sensitivity by CFIUS regarding Chinese investments in the United States. This has been correlated with a sharp drop in Chinese investment in the United States in recent years. CFIUS is also actively using its enhanced FIRRMA resources to find unreported interest transactions, which are often Chinese transactions, and call them for review, sometimes impacting transactions that closed years ago.
Another key area CFIUS focuses on is’ third country risk ‘, where a foreign investor’s ties to sensitive countries can impact CFIUS’ view of the investor’s threat profile. and, therefore, on the potential risks presented by the transaction. So even for transactions involving non-Chinese investors, the investor’s business transactions in mainland China – including manufacturing, other operations, joint ventures, sales and licensing agreements – and potential technology transfers to China. mainland China are likely to be taken into account in the context of the CFIUS analysis. .
Many areas of intervention of FDI authorities coincide closely with the business activities of a range of Taiwanese firms. Semiconductors have long been a sensitive area, and the shortage of automotive chips and the rise of 5G have only accentuated this trend. For example, the German regime defines semiconductor products as “micro- or nano-electronic circuits (optical and non-optical, integrated and discrete) comprising all relevant production and processing equipment (including crystal pulling, lithography, epitaxy, grinding, cutting, etching, doping, testing, etc.), but not the input material more generally. ” Several ongoing cross-border M&A deals in this sector are under intense FDI scrutiny in the UK, EU and US.
The main consequence as countries develop and strengthen their FDI regimes is that FDI has become a key regulatory consideration for multinational agreements. This means that Taiwanese parties to cross-border transactions must take into account the FDI issues in each relevant jurisdiction from the start, so that they can effectively manage all risk, timing and review processes.
It is more important than ever to get clarification on all of the target’s activities and an overall FDI risk assessment early in the transaction process, to develop a clear strategy to address issues that may present challenges. and to allow sufficient time and resources for the review of FDI in the transaction schedule.