National security – a Swiss army knife to cover a broad range of activities
While the target of an acquisition may not consider itself particularly ‘critical’, or even relevant for national security considerations, many regimes capture activities which may not be intuitive.
For example in Australia, a ‘national security business’ is defined to include a much broader set of businesses than purely national security businesses, and includes those involved in ‘critical infrastructure’, which is itself a broad concept. In Europe, ‘critical infrastructure’ is commonly expressed as a relevant sector, but each country will likely have a nuanced understanding of what is meant by critical infrastructure. For instance, Germany also requires filings for acquisitions of software companies whose IT solutions are specifically developed for critical infrastructure and companies supplying ‘critical components’ for critical infrastructure. Hence, infrastructure is a term that extends to the digital space and supply chains.
In Spain, in addition to its general screening mechanism, it also has a separate regime for National Defence, arms and cartridges and real estate for diplomatic use by non-EU Member States.
In France, the definition of covered ‘sensitive activities’ is quite broad. Assessing whether a transaction is covered requires considering various criteria, and achieving only limited turnover in a ‘sensitive activity’ is not sufficient to exclude a filing. The French Government has previously blocked the proposed acquisition by a US investor of two French companies, which designed valves for the nuclear, petrochemicals and aeronautical sectors. Despite their small size in France, these companies were seen as having strategic importance due to their activities in a ‘sensitive sector’, and their supply to French strategic entities.
In the UK, some sectors are broadly construed and can lead to possible filing obligations where things are not clear cut – for example, any possible interaction with government needs to be carefully assessed.
The US’s mandatory filing requirements, administered by the Committee on Foreign Investment in the United States (‘CFIUS’ or the ’Committee’) focus on ‘critical technologies’, ‘critical infrastructure’, and ‘sensitive personal data,’ and each of these terms have detailed regulatory definitions. CFIUS also has the authority to review any transaction from a national security standpoint involving a foreign person’s acquisition of ‘control’, which is defined expansively, of a US business. In the course of CFIUS’s review, the Committee can request and scrutinize any information or any topic that it deems relevant to US national security.
In China, although the Negative List subject to foreign investment approval requirements becomes shorter and shorter, the broad national security review scope becomes an increased concern. If the investment involves a business relating to the security of national defence, in areas surrounding military facilities and military industry facilities, or critical to national security (such as critical agricultural products, energy and resources, equipment manufacturing, infrastructure, transport services, cultural products and services, information technology and internet products and services, financial services, and key technologies), a mandatory filing for national security review is required prior to the investment.
Consultation: a potential way to obtain certainty when a transaction raises doubts
There may often be uncertainty around whether or not a mandatory FDI filing is required. The level of uncertainty varies between jurisdictions, but given the nascent nature of many FDI regimes – and severe consequences for getting it wrong – the tendency can commonly be to err on the side of caution and submit a notification.
While a formal consultation mechanism does not exist in all jurisdictions, it is a possibility that provides certainty in cases that raise doubts, in order to avoid a possible sanction or negative consequences for not notifying a transaction subject to control.
In Spain, a voluntary consultation procedure was introduced in 2023, by which investors can receive, within a maximum of 30 working days, a confidential and binding reply as to whether or not a transaction should be subject to authorisation. In contrast, the statutory review period in some jurisdictions is already around 30 working days (e.g., the UK and France) meaning often the view will be to submit a formal notification, rather than seek a consultation, as the timing implications are similar.
In the US, there is no formal consultation process, but parties to a transaction can reach out to CFIUS in order to, for example, present the basis for their determination to forgo submission of a filing to the Committee or to discuss jurisdictional issues. However, CFIUS will not provide advisory opinions.
Timelines: two months or not two months – that is the question
One of the most common mistakes that can happen in FDI procedures is to assume that statutory timelines dictate the duration of FDI reviews. In many jurisdictions, these timelines are rather indicative for a number of reasons.
In some jurisdictions such as the UK, the statutory clock does not start ticking until the Government has formally accepted the filing as complete. Similarly, in the US, CFIUS’s statutory review timeline for a transaction does not begin until formal acceptance of a filing, which may follow the parties’ responses to numerous comments/requests from the Committee. The position is similar in Spain, where it is customary for the clock for the sector-specific defence regime not to start until the filing is accepted. In Austria, the review period does not even start before the EU coordination mechanism has been completed. Many jurisdictions apply the concept of requests for information stopping the clock during the review, e.g., in the Netherlands, France and Spain. The time it takes to gather the requested information also needs to be added to the overall timeline. There are also unofficial extension factors – the summer break or national public holidays may slow down agencies which could even lead to cases being pushed into a phase II review by virtue of timing reasons only. And beware that while the summer break in Europe is in August, in Australia this falls in January.
Conditioning for conditions
Another unforeseen surprise towards the end of the FDI review process is the practice of some authorities’ to issue clearance decisions but only subject to certain conditions. The use of conditions, or remedies, are a well-known instrument in other regulatory procedures such as merger control. Indeed, it is common that the parties are given advance warning of the possibility of conditions and the opportunity to discuss and/or negotiate them with the authority.
From a FDI perspective, some jurisdictions such as France routinely clear almost half of their cases subject to conditions. Likewise, Australia has a long practice of imposing obligations such as tax conditions, data handling conditions or security clearance conditions on investors. In the US, based on CFIUS’s 2023 annual report to the US Congress, the Committee imposed mitigation measures as a condition of clearance in connection with only 18% of notices submitted in 2023. But in some cases, CFIUS will propose conditions toward the end of the review period, leading the parties to withdraw and resubmit their filings to allow more time to negotiate the conditions with CFIUS, potentially delaying closing for months.
Don’t forget the closing
Even after having successfully received an FDI clearance, investors need to be aware of potential traps. For instance, in France, if the investment is authorised with or without conditions by the Minister for the Economy, the investor must file a disclosure within two months from the date on which the investment is made. In Spain, if not specified otherwise, then six months is the relevant timeframe (although it is possible to request an extension of up to six additional months).
In Australia the certificate issued by FIRB clearing a transaction will generally be valid for 12 months from the date of approval. This is sufficient in most cases, but for major global regulatory procedures, where the merger control review may take longer than one year, the parties run a risk of losing the benefit of the clearance if they do not apply for an extension with FIRB or time their application so that it is not submitted too early. In the UK, any changes in the structure or nature of the transaction post-clearance, but pre-closing, could jeopardise the clearance decision.
Penalties: don’t jump the gun or miss filings
Failure to notify before closing (also known as ‘gun-jumping’) is again a familiar concept to investors with experience of merger control. However, this subject is equally relevant, if not more so due to the severity of sanctions, for FDI investments. Failure to notify can result in significant sanctions against the companies involved, as well as for individuals.
For example, gun-jumping in many countries (e.g., Spain, UK and others) means that the transaction is void – at least until it is validated by obtaining retrospective authorisation. Hefty financial penalties fines may also be imposed – in the UK, this can be up to the higher of 5% of global group revenues or £10m. In the US, if parties fail to submit a filing to CFIUS for a transaction when one is legally required, the parties may be subject to civil penalties up to the value of the transaction.
In some jurisdictions, such as Australia, Germany and the UK, gun-jumping, or exercising voting rights pre-clearance, can be also sanctioned with criminal penalties (even imprisonment) both against natural or legal persons.
There is no one size fits all when it comes to FDI. The categories above are just examples of how parties to transactions might be surprised during an FDI review. The Hogan Lovells Global FDI Practice has a team of experts which help clients navigate through these complexities on a daily basis. Our unrivalled in-depth insight and global reach allow us to navigate potential issues before they arise and advise on ways to mitigate the impact on deal timetables. We operate at the intersection of business and government on FDI issues and indeed advise on both. Please do get in touch if you would like to discuss how we can help you.
Authored by Anne Salladin, Falk Schöning, Christopher Peacock, Aline Doussin, Charles Bogle, Lourdes Catrain, Brian Curran, Adrian Emch, Robert Gardener, Sherry Gong, Casto Gonzalez-Paramo, Kamoto Wataru, Eric Paroche, and Stefan Kirwitzke.
