Expanded reviews and more resources: The view from 2021
Foreign direct investment (FDI) reviews have become an increasingly critical issue in cross-border M&A transactions. Although many countries continue to encourage inbound investment, Taiwanese businesses and investors should carefully consider and prepare for FDI regulatory scrutiny early in their deal processes.
We are seeing views converging across the United States, Europe, and other countries in agreement that so-called "sensitive" sectors need protection from what is described in the US as "adversarial capital." This trend is displayed through both lower thresholds that trigger FDI reviews and an expanded understanding of what qualifies as a "sensitive" sector for purposes of FDI reviews, export controls, and international trade compliance.
The current focus areas for FDI agencies now often fall squarely within the range of business activities for many Taiwanese companies. Sensitive sectors are no longer limited to the traditional areas associated with high-level national security, such as defense, energy, and telecommunications. Instead, FDI regulatory scrutiny is expanding to encompass biotechnologies, high technologies, new critical technologies such as artificial intelligence or 3D printings, and other data-driven activities.
Moreover, the COVID-19 pandemic brought FDI into sharper focus and accelerated movement on a national level across Europe and elsewhere around the world. Governments were concerned about the potential for foreign investors to take opportunistic advantage of companies in distress, and more generally about the resilience of supply chains. Naturally, the global pandemic also led many governments worldwide to add the healthcare sector to those considered sensitive industries.
New screening regimes in Europe
Today, 18 out of 27 Member States of the European Union (EU) have an FDI screening regime. Some of them adopted a new regime after the EU Screening Regulation was published or entered into full effect. Additional Member States have also announced the planned introduction or expansion of an FDI review regime.
While the EU Screening Regulation does not require 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 newer ones increasingly based on the EU Screening Regulation and the more mature ones increasingly brought in line with the EU Screening Regulation.
For example, Germany revised its FDI rules in 2020, including broadening the review scope for COVID-19-related reasons, lowering the mandatory review threshold to 10 percent, introducing a standstill obligation outside defense deals, and establishing criminal sanctions for 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 cast a wider net for mandatory FDI reviews. The revised regime includes 16 new "critical activities" in addition to the list of 11 target activities that previously triggered a filing requirement and standstill obligation under the cross-sectoral review.
In the UK, a new investment screening regime will enter into force in January 2022 and include a mandatory pre-screening mechanism for specifically designated sectors.
There is also increasing coordination on FDI review within the EU.
The EU Screening Regulation has been in full operation since October 2020. National screening authorities now must notify all deals they screen to the European Commission (EC) and the other Member States, which can then ask questions and provide comments or opinions—which they actively do in deals of interest. The EU Screening Regulation does not delegate veto or enforcement rights to the EC. This means that individual Member States continue to control FDI reviews for their jurisdictions. At the same time, each reviewing Member State must take into account the observations of the EC and the other Member States.
Additionally, 5G technology has become a source of particular concern for certain Member States, which have issued specific rules to ensure FDI screening of deals involving 5G networks and equipment. In Italy, the government's "Golden Power" pre-clearance process is mandatory for contracts or agreements with non-EU persons relating to the supply of 5G technology infrastructure, components, and services. France introduced a specific ad hoc authorization process for operating 5G technology within French territory. In Germany, the Federal Network Agency has published a security catalog for telecommunications and data processing, highlighting the critical nature of 5G networks. Germany's federal government is also contemplating supplementing the technical security check for 5G networks with a political review process.