Governmental controls on M&A and investments on national security grounds have moved up the political agenda across the world with many jurisdictions strengthening or introducing regimes for the first time. Navigating this intersection between politics, international trade, corporate finance and law is now essential for any business doing cross-border deals – especially those in the advanced tech, defence and critical infrastructure sectors.
At a recent seminar, chaired by Nick Thody, experts from Osborne Clarke and Lowenstein Sandler discussed changes to the national security review regimes in the USA and Europe - particularly Germany and the UK. We looked at the most affected sectors, the impact on deals and what market participants can do to mitigate their risks.
Recent developments in the USA and Europe
Doreen Edelman, Chair of Global Trade and Policy at Lowenstein Sandler, spoke of reforms in the USA to the long standing Committee on Foreign Investment in the US (CFIUS). Changes are being made under the Foreign Investment Risk Review Modernization Act (FIRMA) – which amongst other things introduces mandatory filing obligations if the target is involved in critical technology for a wide range of target industries.
Dr Christoph Torwegge and Theresa Gutsche from Osborne Clarke spoke about detailed investment review procedures which have been introduced in Germany. These apply on a cross sector basis to all acquisitions of German entities by a non-EU/EEA acquirer above a 25% threshold. This drops to 10% if the target is operating critical infrastructure or services of particular relevance to security. Stricter rules apply to acquisitions by non-German entities in the specific sectors of defence and encryption technologies where failure to get clearance will invalidate the deal. The sting in the tail for UK acquirers is that they will be treated as a non-EU/EEA acquirer on a hard/no-deal Brexit.
Dipika Keen from Osborne Clarke explained how in the UK national security reviews currently piggy back off merger control rules. Recent changes mean that any deal with a target in the advanced tech, military/dual-use or quantum computing sectors with UK turnover above £1million are within scope of a national security review. Following consultations over the last 2 years, the UK is now poised to significantly broaden the scope of national security reviews by introducing a standalone process.
Marc Shrimpling from Osborne Clarke explained how, at European level, a new process for screening FDI into the EU will apply from October 2020. The new regulation doesn't replace national measures, which will continue to apply, but sets some common standards. Member states will have to give other members states and the European Commission the opportunity to comment on proposed deals – however final right of approval will stay with the government of the original member state. Will this be the first step towards more powers being exercised over FDI at EU level?
There are important differences between how national security reviews are conducted within each jurisdiction and it is clear that expert advice is needed to negotiate the particularities of each country's process. Nevertheless, there are some common themes:
- Sectors in focus: Although each jurisdiction approached their targeted sectors in slightly different ways, broadly speaking, critical infrastructure (transport, energy, communications) and critical suppliers to those industries as well as defence and advanced tech were the sectors which carried the greatest risk of investigation.
- China: National security concerns are inevitably tied up with politics. So at the moment any Chinese involvement in an acquisition will raise a red flag.
- Impact on deals: Deal teams need to make sure they have understood the risk profile of their transactions. Do you have all the information you need to make your assessment? Can you, should you, get pre-clearance? Parties need to be realistic about timelines and price in the risk of a review.
- Authorities are flexing their muscles: The decision-making authorities are still under resourced but they are using their new powers. Co-operation and patience is key.
National security reviews are a live concern for cross-border deals. Expert and experienced advice at an early stage is essential to minimise transaction risk and to successfully navigate a review process.
Please contact any of our experts for further information.