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Inbound investment
Foreign investment (FI) regimes have been, and are expected to remain, at unprecedented levels. This year, multiple European countries — including Belgium, the Netherlands, and soon Sweden — introduced or strengthened their FI rules. This trend is set to continue into 2024, with all EU member states currently without FI screening tools having announced plans to adopt similar legislation.
In other regions, including Latin America, south-east Asia and the Middle East and north Africa, investment screening mechanisms remain rare. However, given the current geopolitical climate, we expect increased scepticism towards FI. Singapore, for example, has already commenced a legislative process to introduce a FI regime. ‘Early adopters’ will likely create a domino effect, particularly for countries with shared ideologies.
This exponential rise of FI regimes is expected to be paired with targeted reforms and in some cases refinement of existing frameworks. FI regimes have often been designed with flexibility to allow the opportunity to intervene. This requires fundamental building blocks to be kept vague — for example, almost no regime defines “national security”.
However, absent legal certainty and appropriate guidelines, merging parties have sought comfort by making precautionary notifications in respect of transactions that are not necessarily captured by FI regimes. The number of voluntary notifications in the UK, for example, has exceeded mandatory filings almost fourfold.
When finite resources are diverted to ‘no-issue’ filings, and in light of global competition for capital, some governments are starting to consider whether systems remain fit for purpose. The UK government is seeking views on whether notification requirements could be better targeted, and whether certain types of transactions could be excluded altogether, such as internal reorganisations involving no ultimate change of control.
This could result in a softening of the restrictions relating to transactions involving financially distressed companies. Potential UK reforms include exemptions for the appointment of liquidators, receivers, and special administrators from mandatory notification requirements. This would create consistency in the treatment of insolvency practitioners, as administrators are already exempt from mandatory notification requirements.
However, this would not mark a significant change in practice, as transaction documents typically now include restrictions on the exercise of voting rights on enforcement to avoid triggering FI filings. Conversely, transfers of control from a borrower to a lender under automatic enforcement provisions are unlikely to become exempted. Expedited review timetables are also unlikely to be guaranteed either.
Updated Market Guidance issued earlier this year noted that the government would only be prepared to fast-track FI applications in “exceptional circumstances”, where the requisite evidence has been provided.
Reforms to the EU FI regime are likely to focus on extending the regime to transactions where the direct investor is established in the EU but is ultimately controlled by a non-EU investor.
Outbound investment
To date, regimes have focused on inbound investments. However, concerns around geopolitical dependencies and technology and information security are likely to contribute to the emergence of outbound investment screening mechanisms, where these are not sufficiently captured by export control rules.
This summer, the European Commission published a Joint Communication setting out proposals for an outbound investment review mechanism, although such mechanism is likely still some way off.
Across the pond, the anticipated US outbound investment regime will focus on US investments in China. Broader alliance among Western countries is expected to follow. The UK is already reported to be considering its stance.
Unlike inbound screening tools, which (at least on paper) tend to be jurisdiction-agnostic, outbound screening is expected to target investment into countries considered to be higher risk, with a focus on sensitive or emerging technologies — such as AI, semiconductors, and quantum and bio technologies. As in the US, certain passive investments are expected to be excluded.
Merger control and subsidies
Alongside the growing reach of the FI regime, the scope and range of merger control continues to intensify. Regulators are taking an expansive approach to jurisdiction — for example, we’ve seen the European Commission increasingly use its Article 22 powers to call in transactions that fall below its jurisdictional thresholds and we expect this to continue.
Similarly, regulators are more heavily scrutinising transactions, particularly those in high-profile sectors such as technology, healthcare and critical infrastructure. Merger control will continue to be a major factor in dealmakers’ decision-making in 2024 and beyond.
The EU Foreign Subsidies Regulation (FSR) will continue to add an extra layer of regulatory scrutiny to deals where parties have received “financial contributions” from a non-EU country.
As governments seek to incentivise the near-shoring of critical technologies, the FSR regime will become increasingly relevant for investors, and we would expect 2024 to bring the first cases subject to remedies. Investment partners will need to be selected carefully.
Final remarks
Statistics show that M&A activity involving UK companies during the second quarter of 2023 decreased by 15.5% in number compared to the same period in 2022. Likewise, M&A volume in Europe was 45% lower in the first nine months of 2023 than the corresponding period in 2022. The decrease appears attributable to broader economic and political factors, such as high interest rates and the invasion of Ukraine, rather than micro factors like increasing regulatory burden.
Investment and merger control screening tools will continue to be at the forefront of transaction timetables, and for the most complex deals, will be determinative of deal certainty. Transaction documents need to properly reflect regulatory risks. Even high-volume, repeat M&A investors will need to keep abreast of the ever-shifting regulatory landscape.
Nicole Kar is global head of antitrust and foreign investment, and Sofia Platzer and Tom Clare are managing associates in the antitrust & foreign investment department at law firm Linklaters.
