Given the volatility in asset prices caused by the COVID-19 crisis, various sectors across Europe have become attractive targets for foreign investors.  In response, the European Commission has issued guidance to Member States on foreign investment and various Member States have enhanced their Foreign Direct Investment (“FDI”) regimes.

The European Commission’s guidance calls on Member States to make “full use” of their existing regimes to limit FDI impacting COVID-19 related critical sectors. Certain Member States have also responded quickly to the crisis by introducing pre-clearance requirements for FDI in additional sectors, which may affect foreign investors’ ability to acquire or otherwise invest in impacted sectors. Various EU countries, including the United Kingdom, have opened investigations into FDI, citing COVID-19 related reasons for their actions.

Overview of Commission’s Guidance

The European Commission’s guidance counsels strongly against opportunistic FDI, warning that: “vigilance is required to ensure that any such FDI does not have a harmful impact on the EU’s capacity to cover the health needs of its citizens”.  The guidance makes clear that Member States are entitled to use their respective FDI screening mechanisms, so-called “golden shares” or other nationalization measures to prohibit or otherwise inhibit (e.g., imposing conditions, reporting requirements, investment limits, etc.) foreign investment in strategically important assets on the grounds of national security and/or public policy.  The guidance also provides that Members States may effectively “step in” and act as market participants to prevent predatory takeovers where national security / public policy concerns are present. In its guidance, the EC suggests that investments which do not confer effective influence over management or control of a company are less problematic. Given this, foreign investors may want to closely review their governance rights and reserved matters.

Responses from Member States

Various Member States have expanded the scope of their FDI laws in response to the challenges posed by the COVID-19 crisis.

By way of example:

  • The Spanish government now requires prior governmental authorization for FDI where: (i) non-EU investors wish to acquire 10 percent or more of, or acquire management rights in or control of, Spanish companies in key sectors (including those connected with tackling or otherwise responding to the crisis); or (ii) an investor is directly or indirectly controlled by the government of another country.
  • Similarly, the Italian government has expanded the scope of its pre-clearance FDI regime to include the financial, credit, insurance, food and media sectors.
  • In the UK, the government has sought to challenge the change of control, and alleged relocation of technology, of a U.K. supplier of security technology and high-end semiconductors by a Chinese company. At the same time, the UK Parliament’s Foreign Affairs Committee has launched an inquiry into the UK Foreign & Commonwealth Office’s ability to block or otherwise impede asset-stripping of UK companies by foreign investors, particularly where alleged national security risks may be present.

Impact on Foreign Investors

The result of Members States’ new FDI-related measures will likely impact deal timetabling of transactions caught by applicable domestic FDI rules and will likely require foreign investors to engage directly with the applicable Member State about the scope of their proposed investment. When agreeing transaction documents, foreign investors should ensure that long stop dates and regulatory clearance closing conditions take into account the expected delays caused by the new rules, along with reviewing closely their governance rights and reserved matters.