Europe

Regulation

COVID 19 – Control Regime Increase on Foreign Direct Investments in Europe

Part I

25 mai 2020 - Vu : 1849

The European Union (EU) Regulation 2019/452 dated March 19, 2019 regarding foreign direct investment (« FDI ») screening Regulation introduces a screening of direct investments from non-EU countries and establishes a cooperation mechanism between Member States. Regulation (1) (EU) 2019/452 will enter into force on 11 October 2020 (2).

Dr. Cristelle ALBARIC

Partner - Head of International - Cross Border Transactions

To keep in mind :

Such FDI investments will be put under a closer scrutiny by the European Commission, whose opinions have to be taken into utmost account by the relevant Member States. This screening will apply to all Horizon 2020 research projects launched in response to Covid-19 pandemic (3).

Ahead of the Regulation (EU) 2019/452, and in light of the COVID-19 pandemic crisis, the European Commission published on 25 March 2020 guidelines to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets (4).

In this context, several countries in the European Union, including France, Spain, Germany and Italy, initiated the movement by taking new measures to adapt the foreign investment screening on their domestic market (5).

Background :

The economic crisis, a consequence of the sanitary crisis linked to COVID-19, is weakening businesses, including those that operate in strategic sectors. Added to this is the volatility of the financial markets and the sharp decline in the valuations of a large number of companies making them particularly vulnerable to potential unfriendly transactions.

Therefore, while providing guidelines on the application of Regulation (EU) No 2019/452, the European Commission published on 25 March 2020 guidelines to the Member States concerning (i) foreign direct investment, (ii) free movement of capital from third countries, and (iii) the protection of Europe’s strategic assets.

Thus, some Member States of the EU considering that the current sanitary crisis context effectively requires increased vigilance, decided to strengthen FDI screening in the European Union

In France, the adaptation of FDI screeing procedure in the context of the COVID-19 outbreak is structured around two axes:

(i) the continued inclusion of biotechnology in the list of critical technologies covered by FDI screening, and (ii) the lowering to 10% of the threshold for holding the voting rights of a company triggering the FDI screening, for a limited period, for listed companies, and for investors from third countries.

To go further :

On 25 March 2020, the European Commission published guidelines aimed at ensuring the application of a resolute EU-wide approach to the screening FDI’s, in the context of the current public health crisis and consequently the economic vulnerability resulting thereof.

Spain: As early as 17 March 2020, without even waiting for the EU guidelines, Spain tightened its screening system by means of two royal decrees of respectively 17 March and 31 March 2020 (6).

Non-european investors are subject to prior authorisation for any acquisition of more than 10% of a company’s share capital in strategic sectors such as data processing, energy, or transport.

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(1) EU Regulation n°2019/452 March 19, 2019

(2) https://www.lettredesreseaux.com/P-2963-455-A1-le-nouveau-cadre-des-investissements-directs-etrangers-en-chine-et-dans-l-union-europeenne.html

(3) EU Research and Innovation program: https://www.horizon2020.gouv.fr/

(4) https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158676.pdf

(5) https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157946.pdf

(6) Espagne : Décret Royal n°8 / 2020 du 17 Mars 2020 et Décret Royal n°11 / 2020 du 31 Mars 2020

Germany :Germany, for its part, indicated on 8 April 2020 (7), to strengthen measures to control FDI by non EU investors. With this in mind, on 28 April 2020, the Federal Ministry of Economy and Energy (Bmwi) published a draft amendment to the Ordinance on Foreign Trade and Payments (AWV: Außenwirtschaftsverordnung) (8).

This amendment (which may continue to evolve) focuses on the health sector and includes the following points:

- any acquisition of at least 10 % of German companies that develop, manufacture or produce vaccines, medicines, protective equipment and other medical products for the treatment of infectious diseases are to be reported to Bmwi;

- the new rules clarify the factors which would be taken into account when determining whether a foreign investor may constitute a threat to German national interests ; with the new wording the proposed transaction no longer has to constitute a «threat» but lead to a "probable impairment" of public order or national security. Therefore in order to intervene in a contemplated transaction, german Bmwi would no longer need to identify a concrete and severe risk to public order or security. Rather, an abstract and lower level of risk may suffice to take measures regarding a proposed transaction. This change also allows the Bmwi to take a more forward-looking approach and to use far more discretion in its assessment.

The proposed amendments to the AWV thus serve to protect German national interests in the light of the COVID-19 pandemic and is the third amendment, since 2017, to the FDI control regime in Germany. This draft amendment is the first step in a reform of the FDI control regime in Germany which is expected to be completed over the coming months.

For the time being, under the FDI control regime currently in force in Germany, the Bmwi is examining, for reasons of national security and/or public order, any acquisition by a non-EU investor of at least 25% of the voting rights of a German-based company.

The BMWi may conduct such analysis up to five years after signing of a transaction. In addition, acquisitions of at least 10% of the voting rights in German companies active in certain areas of (i) critical infrastructure and related technology (e.g. energy and transport infrastructure, financial institutions, health, telecoms, datacenters) or (ii) in the area of military and defense, may be subject to a mandatory filing requirement.

As per the existing FDI screening rules, only mandatory filings relating to acquisitions of certain companies active in the area of military and defense have a suspensive effect, i.e. such acquisitions cannot be closed prior to clearance by the Bmwi.

Italy : Italy strengthened its mechanism for controlling FDIs by Decree-Law No. 23 of 8 April 2020 (« Decreto Liquidità ») (9).

Such Decree-Law focuses on the following areas:

critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, and sensitive facilities;
critical technologies and dual use items, including nanotechnologies and biotechnologies;
supply of critical inputs, including energy or raw materials, as well as food security;
access to sensitive information, including personal data, or the ability to control such information.

Obligation to notify the Italian authority for control purposes is among others triggered by :

any acquisition of control by any foreign purchaser (including EU purchaser);
any acquisition by a non-EU purchaser of a 10% share where the value of the investment is above 1 million euro, or of shares exceeding 15%, 20%, 25% and 50% of the contemplated target;

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(7) . https://www.reuters

(8) Germany : AWV amendent draft https://www.bmwi.de/Redaktion/DE/Downloads/F/fuenfzehnte-verordnung-zur-aenderung-der-aussenwirtschaftsverordnung-referentenentwurf.pdf?__blob=publicationFile&v=4

(9) Italy : https://www.gazzettaufficiale.it/eli/gu/2020/04/08/94/sg/pdf

France : France is an attractive country (10) as financial relations between France and aborad are free

By way of exception, in certain limited sectors, affecting national defense or likely to involve public order and activities essential to the protection of the country’s interests, Article L. 151-3 and sub. and R.153-1 and sub. of French Monetary and Financial Code submit foreign investments to a prior control.

A FDI in France must be authorized under the France’s FDI procedure if three conditions are cumulatively fulfilled: a condition relating to the source of the investment; a condition relating to the nature of the contemplated transaction; the nature of the target company’s activity.

On 27 April 2020, the French Minister of Economy and Finance issued a decree (arreté) concerning FDIs in France (in addition to decree (décret) No. 2019-1590 of 31 December 2019 and decree (arrêté) of 31 December 2019 (12) also relating to foreign investments in France, the regime of which fully entered into force on 1 April 2020) (13).

The decree of 27 April 2020 adapts the screening procedure on FDIs in France in order to include biotechnologies in the list of so-called critical technologies falling within the scope of the protected activities listed in article R.151-3 of the French Monetary and Financial Code.

French FDI regulation already protects activities “essential to the protection of public health”. The addition of biotechnologies to this list of critical technologies aims to give French State greater discretion to examine operations in this sector.

In addition, on 29 April 2020, French Minister of the Economy and Finance also announced the temporary lowering of the threshold for acquiring equity stakes in sensitive companies requiring authorization.

Under normal circumstances, any takeover of a sensitive French company by a foreign purchaser must be authorized. France’s FDI screening procedure also ordinarily applies to non-EU investors in relation to any contemplated transaction giving the investor 25% threshold or more of the voting rights in an entity governed by French law. As explained by French government, such 25% threshold will be temporarily lowered to 10% for listed companies « which have sometimes dispersed ownership and for which minority shareholding can be destabilizing if unfriendly ».

In order not to unduly affect the ability of companies to seeking financing on the markets, French Ministry indicates that this reinforced control mechanism shall be exercised as follows:

European investors and European Economic Area investors are exempted;
This exceptional measure should end on 31 December 2020;
It is envisaged that this control shall be implemented according to a special procedure: the investor crossing the 10% threshold will have to notify the French Treasury Department (Direction Générale du Trésor), the French Minister of the Economy and Finance has then 10 days after notification to decide whether the contemplated operation should be subject to further examination, on the basis of a full clearance authorization. Such an examination may result in the foreign investor not being allowed to own more than 10% of the voting rights of the sensitive French company.

Subject to the terms of the decree to be published, this exceptional measure of lowering the threshold to 10% should be applicable until December 31, 2020.
United Kingdom: The United Kingdom is also planning to tighten its rules, which could complicate investment/M&A transactions already impacted by the uncertainties related to BREXIT.

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(10) Attractivity Barometer – June 2019 : https://www.ey.com/fr/fr/services/advisory/ey-barometre-de-l-attractivite-de-la-france-2019

(11) France: Arrêté 27 April 2020 https://www.legifrance.gouv.fr/affichTexte.do;jsessionid=6C5C39D2CA0E9CBA2797A9F33D1A876D.tplgfr24s_1?cidTexte=JORFTEXT000041835304&dateTexte=&oldAction=rechJO&categorieLien=id&idJO=JORFCONT000041835077

(12) France: Decree n° 2019-1590 of 31 December 2019 on FDIs in France https://www.legifrance.gouv.fr/affichTexte.do;jsessionid=C602DF682116EE257C29E4794A1F08F7.tplgfr21s_2?cidTexte=JORFTEXT000039727443&dateTex te=&oldAction=rechJO&categorieLien=id&idJO=JORFCONT000039726311

(13) France : Arrêté of 31 December 2019 https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000039727569&categorieLien=id

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Every crisis brings its share of opportunities. Collateral victims of COVID-19, ailing companies facing financial difficulties or those whose valuations are in turmoil could naturally become potential targets for buyers looking for external growth operations or investments in the European Union.

Non-EU investors have already started shopping around, taking advantage of the slump in stock market valuations such as Saudi Arabia’s sovereign wealth fund (Public Investment Fund - PIF). PIF most recently built up stakes in European firms in the energy sector such as in 4 oil firms (French TOTAL, Italian ENI, DUTCH ROYAL SHELL, and Norwegian EQUINOR ASA (14), and in transportation and hospitality (Bookings, Marriott)

These recent developments in terms of screening and tighter control of foreign direct investments in the European Union are therefore part of a political strategy to protect infrastructures, goods and services in sectors that are more particularly critical (particularly the health sector) in view of the current COVID-19 crisis.

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(14) Les Echos - 19 May 2020: https://www.lesechos.fr/finance-marches/marches-financiers/le-fonds-saoudien-fait-ses-emplettes-sur-les-marches-internationaux-1204059

Bloomberg - 9 April 2020: https://www.bloombergquint.com/business/saudi-wealth-fund-buys-stakes-in-european-energy-companies

Wall Street Journal - 8 April 2020 https://www.wsj.com/articles/saudis-take-big-stakes-european-oil-companies-11586382353

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For more information, some figures on in-bound FDIs