Foreign investment reviews in 2023 could upstage merger regulatory process globally

04 January 2023 21:03 by Flavia Fortes

Foreign investment reviews

The global rise of foreign investment reviews, amplified by protectionism, is creating a broader concept of national security and stricter foreign investment controls based on more extensive screening considerations.

In these developing regulatory regimes, the scope of national interest has become more vague and less transparent, and is not always direcly based on laws. The evolving process could increasingly upstage competition-based merger reviews in 2023.

Governments in recent years have introduced or expanded their foreign investment regimes, citing national security and public interest. As of September 2022, there were more than 50 foreign direct investment regimes around the world, according to International Comparative Legal Guides, a global platform for legal reference.

Several jurisdictions that already have foreign investment scrutiny in place saw their regimes broadened to include new sectors, including manufacturing and technology. These changes threaten legal certainty, transparency and predictability, and such challenges to deals are only likely to increase.

In the US, President Joe Biden issued a directive defining additional national security factors to be considered by the Committee on Foreign Investment in the United States, or CFIUS. The executive order directs the committee to consider the effect of foreign investments on the resilience of critical supply chains with potential national security implications, including those outside the defense industrial base.

UK changes

Last year, a more expansive regime came into force in the UK, with a new law introducing a mandatory investment screening regime for companies seeking to acquire businesses or assets in 17 “sensitive areas” of the economy that could harm the UK's national security, including defense, energy, communications, robotics, and AI.

Since the entry into force of the National Security and Investment Act 2021 on Jan. 4, 2022, five transactions* have been blocked by the government: i) Beijing Infinite Vision Technology Co.’s acquisition of intellectual property through a license agreement with the University of Manchester relating to certain vision-sensing technology; ii) Hong Kong-based Super Orange HK Holding Limited’s acquisition of Pulsic Ltd., a maker of electronic design automation products; iii) the acquisition of Newport Wafer Fab by Chinese-owned semiconductor manufacturer Nexperia — a Netherlands-based company owned by Wingtech, a Shanghai-listed company whose shareholders include those with links to the Chinese government; iv) SiLight (Shanghai) Semiconductor’s acquisition of HiLight Research; and v) the acquisition of Upp, a regional broadband provider owned by L1T FM Holdings UK, which includes parent company LetterOne Core Investment, an investment company backed by Russian oligarchs.

The Newport-Nexperia transaction was completed in July 2021 and called in for review in May 2022. The final order by the UK regulator published Nov. 16 required Nexperia to divest itself of at least 86 percent of its holdings in Newport.

Last June, the European Union agreed on a new regulation, expected to enter into effect by mid-2023, that will allow the European Commission to control non-EU government subsidies given to businesses active in the EU. Such a regulation would set mandatory notification regimes for businesses that have received financial contributions from a non-EU government and are involved in public tenders or large transactions.

OECD view

According to the Organization for Economic Cooperation and Development, or OECD, the EU regulation also broadened the scope of sectors for which individual member states extend their screening regime to semiconductors, pharmaceuticals, food supply and energy storage. The OECD said that, similar to the US, the current foreign investment legislation doesn’t define national security in many European jurisdictions.

A handful of countries, including Australia, Canada and France, have chosen a wider “public interest” consideration for government enforcement in foreign investment.

Australia saw most of its significant changes to the foreign investment regime introduced in 2021, but changes in the first half of last year saw the expansion of the scope of what constitutes a national security business, including in the classification of certain infrastructure assets.

Last month, Canada proposed overhauling its foreign investment rules to amend the Investment Canada Act from 2009. The minister of innovation, science and industry, Francois-Philippe Champagne, said the proposed changes will ensure that foreign investments in Canada are not only to the net benefit of Canadians, but aren't detrimental to the country’s national security. In November, Canada ordered three Chinese companies to divest their investments in Canadian critical minerals, citing national security.

Germany blocks two

Germany's two blocked transactions in 2022 followed a number of amendments and a broadened scope, since 2020, of German foreign investment rules that aim to align its review with the EU screening regulation.

The two deals involved Chinese investments in German semiconductor facilities: the acquisition by Swedish Silex Microsystems, a subsidiary of Chinese Sai Microelectronics, of Dortmund-based Elmos Semiconductor SE; and Chinese investment in ERS Electronic, a Bavarian thermal solutions technology company.

The deal between Taiwan's GlobalWafers and Germany's Siltronic was also scuttled after the companies failed to receive approval from the German foreign investment regulator in time. But Germany blamed China’s competition regulator for being unable to review the transaction by its Jan. 31 deadline. China’s State Administration for Market Regulation, SAMR, decided only in late January to clear the deal with remedies. The case shows the increasingly complex regulatory issues raised by cross-border merger reviews that involve concerns about foreign investment.

Foreign investment reviews can be a source of significant delays and risk for transactions, so companies need to factor into their planning the different review timelines, the broadened scope of the analyses and the potential regulatory consequences.

*Corrected on Jan. 6, 2023 at 15:45 GMT: The original version incorrectly omitted two transactions.

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