FI Monitor Issue 6, 2023
As foreign investment regimes mature across Europe, several trends in specific jurisdictions have emerged. For example, many EU member states took measures against Russia following the conflict in Ukraine. China, too, faces significant scrutiny, with many EU states taking an increasingly cautious and conservative attitude to investments coming from China, especially those involving state-owned enterprises. Similar trends can be seen in the UK, which now has just over a year’s experience of its new national security screening regime.
But what about the United States? The US is seen as a friendly power and even a close ally by most countries in Europe, so investments by American firms, as a general matter, are not subject to the most stringent controls and scrutiny. However, some clear differences between jurisdictions remain in terms of how they treat US investments.
FDI authorities tend not to treat US investors differently compared to the vast majority of countries that are considered non-hostile, with most concern reserved for investors from China, Russia, Iran and Belarus. “Any deal is always more sensitive with a Chinese investor than with a US investor, irrespective of what the target is doing,” says Düsseldorf-based Dispute Resolution Partner Juliane Hilf. While there are exceptions in certain jurisdictions, national authorities tend to “make no real distinction between EU and non-EU investors,” remarks Paris-based Antitrust, Competition and Trade Partner Jérôme Philippe. “Obviously the US is a long-standing ally and is a state which is viewed as friendly.” Rather, the analysis is transaction-specific and depends on the nature of the target, the target’s relationship with the government, and the sensitivity of its contracts or informational capabilities.
Recent outcomes for US investors – prohibitions are rare, but mitigation remedies are quite common
The posture toward US investors is typically friendly across national authorities in Europe, and prohibitions of US investments are exceedingly rare. However, mitigation remedies are relatively common. Italy is a case in point: of the transactions prohibited since the creation of the Italian regime, all but one concerned China or Russia and none involved a US investor. Some transactions carried out by US investors have faced mitigation, although details of the measures imposed are not made public. Similarly, in Germany, despite no prohibitions of transactions by US investors, some have faced mitigation such as requirements dealing with access to information and specific data. As Juliane explains, “For example, it might be that only German citizens should have access, or that classified data should not be transferred.”
Although prohibition by European authorities of US investments is very rare, it has occurred in exceptional cases. For example, among hundreds of cases in France, there has been one publicly announced prohibition of a transaction by a US investor, but that was in the context of a highly sensitive defense-related target.
The picture is similar in the UK. “For deals involving targets active in particularly sensitive sectors, such as defense, critical infrastructure and dual-use technologies or targets with sensitive government contracts, I wouldn’t say there’s any different treatment for US investors as compared to other non-UK investors,” explains London-based Antitrust, Competition and Trade Counsel Sarah Jensen.
Sarah highlights that under the previous public interest regime, the UK government intervened in 16 deals on national security grounds over an 18-year period, eight of those deals involved US bidders. “None were prohibited, but all involved mitigations to protect information or strategic capabilities in defense or other sensitive sectors,” says Sarah.
Under the current UK regime, the UK government has imposed final orders (mitigations or prohibitions) in 15 deals since January 2022, of which three have involved US bidders. “Again, no deals involving US acquirers have so far been blocked, but conditions have been imposed to protect sensitive information in defense or critical infrastructure-related businesses,” says Sarah, “as well as continuity of supply in Ministry of Defence and government programs, and maintaining strategic capabilities and R&D in the UK.” In terms of mitigation, UK regulators might require that UK citizens be on the board of particularly sensitive targets, Sarah says. “I think the same would apply to US bidders as anyone else.”
In Spain, “It is possible that the Spanish authorities approve a transaction, requiring the investor to commit to comply with labor laws, previous investment levels or other prudential regulations to protect national interest which is a very simple but effective condition,” says Madrid-based Antitrust, Competition and Trade Counsel Enrique Carrera. Many authorities have required that the target should stay in its home country or requested commitments to retain local R&D capabilities or even the entire local business. They may also require that management remain in the home country but, as Juliane explains, this depends on the sensitivity of the target with little regard to the investor’s country of origin: the more sensitive the target business, the more obligations.
Disparity of outcome between European states?
While US investors will generally be viewed favorably across European jurisdictions, outcomes may still vary from jurisdiction to jurisdiction even on the same transaction.
In the EU, the Screening Mechanism has led to greater convergence between national authorities’ theories of harm. But, as Juliane explains, decisions don’t always come out the same way. Outcomes can vary widely, but “there might be good reasons for that” as a matter of both jurisdiction and substantive national security risk.
“Often there is a very valid reason why the outcome is different in different countries, typically that the target’s activities are different,” agrees Milan-based Antitrust, Competition and Trade Partner Ermelinda Spinelli. “For instance, when a US private equity buyer of an Italian engineering company notified the transaction, the Italian Prime Minister’s Office actually declined jurisdiction even though remedies were imposed in France. But in France the target was a supplier to the public railway and in Italy it wasn’t.”
Such seemingly uneven treatment can also be due in part to the evolving nature of cooperation across EU countries, says Jérôme Philippe. “Member states don’t necessarily have the tools to fix issues that emerge in another member state. And some deals that are notifiable in one country may not be notifiable in another country or may be declared ‘out-of-scope.’ Outcomes vary depending on the situation across various countries.”
National interests as a driver of scrutiny
In addition to national security, economic independence and national interest are explicit or implicit considerations for FDI regimes in most European countries. These issues are often agnostic to the origin of the investor; they tend to be specific to the target itself, its industry, or even its workforce alone, all within its home country. When large players in high-scrutiny industries are American, increased consideration of national interest factors may disproportionately affect US firms. But, as Juliane points out, defining “national interest” and differentiating it from a purely economic interest can be difficult. “Being economically independent can also be seen as a national security interest, as we've seen during the war in Ukraine.”
In Italy, for example, “there is increasing attention on the need to preserve employment levels and keep R&D and patents in the national territory, as shown by a very recent case where the Italian FDI authority imposed remedies in the white goods sector based precisely on such concerns,” Ermelinda explains.
To take another example, Italy, Spain and many other European jurisdictions expanded the scope of their FDI regimes during the Covid pandemic. “The Italian regime is very broad and the Italian FDI authority enjoys a wide margin of discretion. General market practice is to be quite conservative and submit filings in case of uncertainty, or at least formally consult the authority,” says Ermelinda. For its part, in 2020 Spain began to apply its rules for ex-EU investors to EU investors in response to low valuations of Spanish listed companies as an “anti-takeover shield” as defined by the Spanish media. “The idea was to stop foreign investors from acquiring Spain’s ‘crown jewels,’” Enrique says. But Spain is traditionally open to foreign investment and US investors are ‘traditional customers’ of Spain’s FDI authorities.”
In Germany, “there are trends as to which types of businesses the government focuses on,” says Juliane. “During the pandemic, it was the health sector, then robotics was something they were very interested in, now it’s more artificial intelligence, semiconductors, crypto and emerging digital areas. This might be more relevant for US investors because the big players are often US multinationals.”
Treatment of financial investors
Financial investors from the United States should no longer expect their investments to fly under the radar of FDI authorities in Europe. Although they may not be treated differently from investors in other countries, scrutiny has increased across the board. For example, Germany tends to apply the same scrutiny to financial as to strategic investors, Juliane says, with authorities focusing on whether an investor is reliable, with concerns prompting further investigations into the ultimate beneficial owner. “Financial investors investing in a number of businesses can already be known to the authorities so actually raise fewer issues.”
In the UK, financial investors should also expect similar treatment to other buyers. “Although some antitrust agencies are paying more attention to financial investors in merger reviews, the focus in national security reviews remains whether concerns can be mitigated through appropriate conditions which are tailored to the sensitivity or strategic nature of the target business,” Sarah says. “Financial investors have been subject to mitigations under the previous and current UK regimes, but we haven’t really seen any different treatment yet.”
US financial investors should be prepared for authorities to look up through ownership chains to identify all players who may have influence over targets. Details required in filings differ between countries but powers to request further information can be extensive. For example, in the UK, details of passive interests held by limited partners (LPs) are not typically required upfront. “But we have seen cases where that type of information has been asked for,” Sarah says.
There is no general rule requiring PE firms to disclose their LPs in Italy, but the authority “technically has the power to ask for very, very detailed information”, Ermelinda says.
Meanwhile, in France, all private equity firms, not just those from the US, should be expected to have to disclose their LPs if they reach thresholds, in large part due to concerns over changes in ownership.
Outlook and strategy
Few US investors are surprised at the scrutiny of US investment in Europe, especially given the often-strict stance taken by the Committee on Foreign Investment in the United States to investments coming in the opposite direction. Nevertheless, the environment is changing, so investors should take careful note of recent and upcoming developments.
With increased levels of scrutiny under rapidly developing regimes, it is even more important to seek advice early to identify potential filings and concerns, and ensure that notification and review processes are as efficient and streamlined as possible. “It’s about identifying where filings are needed or advisable, anticipating the issues that are likely to arise in each country, providing the necessary contractual protections for parties and implementing proactive strategies that bridge commercial rationales with national security concerns,” says Sarah. Staying close to the authorities and understanding the trends and developments which are driving reviews remain key to deal certainty.
With thanks to Freshfields’ Juliane Hilf, Jérôme Philippe, Ermelinda Spinelli, Enrique Carrera, Sarah Jensen and Petya Katsarska for their contributions to this update.