Growth of foreign direct investment (FDI) and national security regimes

Why the expansion of FDI/national security regimes?

Many countries are continuing to introduce and strengthen their FDI and national security regimes, due to an evolving appreciation of what is a risk to national security and lines being blurred with economic stability. There is also much greater focus on new technologies and the risks potentially posed by these (especially if dual-use, i.e. with military and civilian uses). And the COVID-19 pandemic has put greater emphasis on medical equipment/vaccines, and supply chains generally.

The new UK national security regime

2022 saw the UK’s new national security regime commence. Hundreds, if not thousands, of transactions will be reviewed each year, with mandatory notifications for certain acquisitions of entities in 17 “sensitive” sectors, plus voluntary notifications for other types of transactions. Deals may also be called-in if not notified. 

Other notable features of the new UK regime include that relatively limited UK nexus is required for a review, and a mandatory notification can be needed even if an acquirer is from the UK or a deal is intra-group. There are also significant civil and criminal penalties for non-compliance. 

Despite the new regime’s broad scope (capturing not only M&A deals and minority acquisitions but also, e.g. IP transfers), few transactions have raised serious concerns so far. As at March 15, 2023, only five transactions had been prohibited (mostly with acquirers linked to China), plus ten cleared with remedies. To learn more about how the NSI regime is being applied, see our briefing on the first year of the regime here.

What is happening in the EU?

The EU FDI Regulation, setting out minimum requirements for EU Member State regimes and a mechanism for coordinating EU reviews, has now been in force for two years – and has contributed to a significant increase in Member State regimes. In 2019, 11 EU Member States had FDI regimes, and nine Member States introduced or amended their FDI regimes in 2021.  By 2022, 25 (of 27) Member States had or were introducing FDI regimes.

As mentioned in our discussion of merger control and jurisdictional creep, the EU’s new FSR regime introduces new tools in 2023 for the European Commission to combat distortions of competition on the EU internal market caused by foreign subsidies. Intended to address a perceived gap between merger control and FDI, this includes a new mandatory notification requirement for concentrations meeting thresholds based on parties’ EU turnover and financial contributions from non-EU states, as well as enabling the Commission to review below threshold deals (see our briefing here to learn more).

The US and Canada

The US CFIUS regime is well-established but continues to evolve. Monitoring and enforcement is increasing, and towards the end of 2022 an Executive Order from President Biden highlighted five risk factors, and the first ever enforcement and penalties guidelines were issued (see further here).

Canada also has an established FDI regime, but its national security regime continues to evolve. This includes a new focus on the critical minerals sector. In 2022, a voluntary filing regime was introduced for investments not subject to mandatory notification, while reforms proposed in late 2022 include mandatory notification for investments in sensitive sectors before implementation, possible interim conditions and fines of up to C$0.5 million for non-compliance. See our briefings here and here to learn more about the Canadian reforms.

Asia-Pacific

The position in Asia-Pacific remains relatively stable, but FDI regimes were subject to reform in the aftermath of COVID-19. Australia notably introduced significant FDI reforms in 2021, including a new national security aspect and dramatically higher penalties. Australia’s regime has many similarities with the new UK regime. However, many Asian countries have not changed their approach, often simply prohibiting foreign investment in a number of sectors.

Africa

National security remains a relatively novel concept in most of Africa. In 2019, an amendment was introduced in South Africa to require notification of mergers involving a foreign acquirer and an adverse impact on South Africa’s national security interests. However, it remains unclear when these provisions will enter into force.