How to navigate the evolving foreign investment landscape in key European markets
Published on 17th Jul 2023
What strategies should potential US investors consider in the UK, Germany, France, Belgium and the Netherlands?
As foreign direct investment (FDI) control measures become increasingly stringent in the European Union and the UK, it is crucial for US investors who are considering investment opportunities in Europe to conduct a thorough assessment of the FDI control regimes of their target countries.
National security controls
EU Member States are moving up a gear to filter FDI to protect their national security interests. New FDI screening regimes have come into force recently in various European countries and the regimes in different jurisdictions are becoming more complex. Governments have varying levels of scope for intervention, moreover – and there is greater government discretion and less legal certainty regarding outcomes.
The UK regime
The UK's National Security and Investment Act (NSIA) was implemented on 4 January 2022. This filtering mechanism triggers a mandatory notification obligation on the foreign investor when acquiring 25%, 50% or 75% or more of voting rights or shares in an UK entity active in 17 widely defined "sensitive" sectors, such as advanced materials, defence, AI, data or energy infrastructure. Other transactions (for example, asset sales, IP licensing or collaboration agreements) can be voluntarily notified and called-in for review if not notified.
The NSIA regime allows for retrospective review of transactions completed on or after November 12, 2020. Most reviews will complete within 30 working days of formal notification. In complex cases, where a full national security assessment is needed, the procedure can be prolonged to 30 working days, extendable by a further 45 working days.
Non-compliance with the new regime can result in significant sanctions, including fines and criminal liability. In 2022, more than 1000 transactions were notified, from which the vast majority (95%) were unconditionally cleared in the initial screening phase. Only a minority (5%) were subject to in-depth scrutiny, and most of those ultimately got approved unconditionally.
The German regime
The German FDI regime is based on the Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance.
The German FDI regime creates a mandatory and suspensory filing obligation with the direct acquirer when acquiring a significant interest in the voting rights of a German company operating in critical infrastructures (for example, energy, IT, telecommunications, transportation, health) or specified sectors (defence or IT security), or acquires a substantial interest in the voting rights of any other German company (excluding greenfield investments). Depending on the target's sector and the nationality of the investor (non-Germany, non-EU or non-European Economic Area (EEA)), notification thresholds range between 10%, 20% or 25% of the target company's voting rights.
In exceptionally complex cases, the review process timeline can last up to nine months (10 months if the investment is defence related). Non-compliance with FDI screening rules can result in criminal penalties, fines, or imprisonment.
In 2022, the Federal Ministry for Economic Affairs and Climate Action of Germany (BMWK) received notifications for 306 transactions, with the vast majority (98%) being unconditionally cleared during the initial screening phase. Only a small portion (2%) of those notified to the BMWK faced restrictive measures. Clearances for cases without national security concerns are typically processed quickly, while defence-related and technology industry cases often require more time. Sensitive sectors like semiconductors, high-tech products, and critical infrastructure are subject to heightened scrutiny. Investors considering opportunities in Germany in these sensitive sectors should carefully assess potential FDI restrictions early in the process.
The French regime
In 2005, French legislation returned to a broader foreign investment control procedure with Decree no. 2005-1739 of December 30, 2005. Henceforth, following legislative developments, the French FDI regime is governed by articles R. 151-1 to R. 151-17 of the French Monetary and Financial Code and the decree no. 2019-1590 of 31 December 2019.
The French FDI screening rules create a mandatory notification and a voluntary notification (request for opinion) upon the foreign investor (non-French) acquiring a controlling interest in a French entity or all or part of a French business line or upon a non-EU or non-EEA investor acquiring over 25 % (or 10 % in listed companies) of the voting rights in a French entity (decreased to 10% until 31 December 2023). FDI review is triggered only where the investment is made in one of the sectors specifically listed by the regulation (which include defense and dual tech, public health and artificial intelligence) and likely to jeopardize public order, public security or national defense interests.
The review process generally spans approximately two to three months. Non-compliance with FDI screening rules may lead to precautionary measures, financial sanctions and/or criminal repercussions.
In 2022, transactions related to public health, food security, and early-stage R&D activities have received increased attention. Investments in defence-related activities and strategically impormatn French industries such as nuclear power are closely monitored. While prohibitions are rare, it is advisable for foreign investors to anticipate and address foreign investment control issues and engage in preliminary contacts with French authorities.
The Dutch regime
On 1 June 2023, the Dutch Law on Security Screening of Investments, Mergers and Acquisitions (Wet Vifo) came into effect, introducing an ex ante screening mechanism of FDIs in the Netherlands.
The Wet Vifo screening mechanism creates a mandatory and suspensory notification obligation upon any investor (that is, country neutral or purely domestic) acquiring control or significant influence (10%, 20% or 25% or more of voting rights) in a Dutch company designated as vital providers, business campus operators, and providers of designated (very) sensitive technologies. In contrast with other European countries, no turnover thresholds apply.
The reporting obligation applies retroactively from September 8, 2020, if the target is active as or in a critical provider, dual-use products requiring export license, or military goods (excluding investments in business campus operators).
The review procedure can lapse maximum 10 months (the extensions included) (13 months if EU extension). Non-compliance with FDI screening rules may lead inter alia to the nullity of the transaction and financial sanctions.
The Belgian regime
On 1 July 2023, the Belgian Cooperation Agreement introducing an ex ante screening mechanism for foreign investors from non-EU countries came into force into Belgium.
The mechanism creates a mandatory and suspensory notification obligation upon a foreign investor (non-EU) making an investment (excluding greenfield investments) in a Belgian entity active in a strategic sector or a sector likely to affect security of public order, such as critical infrastructure, essential technologies, access to or control of sensitive information, energy, digital infrastructure, biotech, and others. The investment needs to be notified provided that it exceeds specific turnover (€25 million or €100 million) or voting power thresholds (10% or 25%).
The review procedure can lapse several months (an estimated three months in most cases). Investors cannot proceed with the transaction without the approval, at risk of incurring hefty fines.
Osborne Clarke comment
As FDI control measures continue to strengthen across the EU, it is essential for US investors considering European investment opportunities to carefully assess target countries' FDI control regimes, engage with relevant authorities, and ensure compliance with evolving regulations.
Proactively evaluating and addressing factors such as FDI and competition merger control filings during the planning phase can effectively manage the increasing complexities of regulatory requirements, minimizing risks related to timing and execution in the EU, UK, and other jurisdictions.