Growing economic nationalism is threatening to impact M&A across Europe, as governments and regulators take an increasing interest in “foreign” acquisitions of nationally important companies. Deal teams have previously focused on established national security review regimes, including the Committee on Foreign Investment in the US (CFIUS) and the Foreign Investment Review Board in Australia. Now legislative changes in Germany, proposed changes and heightened government interest in the UK and recent statements from the European Commission (EC) indicate a more interventionist approach to acquisitions.
Germany Increases Powers to Scrutinise and Block Sensitive Deals
Recently implemented changes to the German Foreign Trade and Payments Ordinance (FTPO) regime allow the German government to scrutinise and block direct and indirect acquisitions by non-EU bidders of German companies active in security-sensitive areas. The affected industry sectors subject to potential review are broad and include energy, water, nutrition, information technology, healthcare, financial services and insurance, transport and traffic, and software. The changes will affect German inbound deals, which we anticipate will be subject to a greater number of investigations and a stricter approach from the regulator.
UK Government Demonstrates Interventionist Approach
While details of the UK government’s plans to implement an enhanced “industrial strategy” remain under ongoing review and consultation, the government’s intention to scrutinise foreign deals more closely under existing legislation is apparent. The UK government has indicated that it will propose a framework for review of foreign investment in companies within the UK’s “critical infrastructure”. The current position in the UK, after a series of transactions where the UK government has made public pronouncements on transactions in the technology sector, gives the appearance of the hand of politics in free market driven M&A deal-making — the sooner the detailed terms of the UK government’s proposals are crystallised and soundings taken from a wide stakeholder base, the better, in order to demonstrate the transparency global markets expect in the UK’s processes.
EC Proposes EU-Wide Takeover Screening Process
The EC has announced its intention to proceed with an EU-wide framework for the screening of foreign direct investment in the EU on grounds of public order and security. This is in addition to requiring improved coordination between pre-existing country-based national security review systems, and would give governments the right to seek an opinion from the EC if they felt a takeover raised cross-border concerns. While the opinion would be non-binding, governments would be expected to comply or state their reasons for non-compliance. However, it remains to be seen how quickly the EC will introduce an EU-wide system, given existing differences between EU members’ takeover screening systems, including the lack of any monitoring system in just under half of EU countries.
Defining “Foreign” Deals
Determining which international deals European regimes will classify as “foreign” is challenging. While the German regime and the EC proposals focus on non-EU acquirers, the UK regime is broader and allows ministerial discretion. Many jurisdictions have raised concerns about the increasing role of Chinese buyers (particularly in the context of technology companies and know-how), but it is noteworthy that the UK government has cited controversial deals such as US-based Kraft’s 2009 takeover of UK-based Cadbury as grounds for reconsidering the scope of UK foreign investment review.
In our view, M&A teams should not limit their consideration of national security issues to Chinese-backed deals. European regimes grant governments and regulators the power to look through the acquisition structure to the ultimate controller of the buyer, and may require deal teams to disclose and explain corporate ownership structures for a wide range of nationalities.
What About Deals That Have Already Completed?
Government rhetoric may cause successful buyers to look again at recently acquired companies. The FTPO allows the German Federal Ministry for Economic Affairs and Energy to review investments within three months of becoming aware of the deal, and includes powers to require divestiture. In the UK, currently government ministers can intervene post-completion if the Competition and Markets Authority has jurisdiction over the transaction. While European authorities are unlikely to require the unwinding of a deal on national security grounds (by completion, the buyer is likely to have obtained sensitive information already), for deals which are sensitive for other reasons, post-completion intervention, while rare, is possible, emphasising the importance of addressing issues upfront.
Can Overseas Bidders Guard Against M&A Risks in an Increasingly Economically Nationalist Europe?
Unwanted government intervention can disrupt the timeline of an M&A deal and create barriers to completion. In our view, dealmakers should analyse each target to assess whether it might be viewed as a key strategic asset, and if necessary engage with authorities at the earliest stages of a possible transaction. Further, parties need to examine deal documents to ensure agreements allow both the flexibility to engage with relevant authorities and appropriate conditionality to ensure that parties are not obliged to complete a deal amid ongoing government scrutiny. In this way, dealmakers will give themselves the best chance of navigating an increasingly complex and nationalist regulatory environment in Europe.
For additional information on the recent changes in Germany, please refer to New German Foreign Investment Rules Threaten Deal Timetables.
For additional information on UK Government’s Industrial Strategy, please refer to UK Government expected to take a more interventionist approach to takeovers and critical infrastructure projects.
For additional information on the proposed European Commission changes, please refer to European Commission Proposes Framework to Screen Certain Foreign Direct Investments.