Foreign Investment Control: Trade Protectionism Or Reasonable Control Over A Nation's Industries

Author:Shearman & Sterling LLP
Profession:Shearman & Sterling LLP

In China, where foreign investments used to be subject to a case-by-case evaluation, the screening process for acquisitions of local businesses by foreign investors is being simplified and becoming more industry-focused. This article provides a summary of the recent foreign investment control developments and analyzes the trends that could affect transactions in 2018.

European Union

On September 13, 2017 Jean-Claude Juncker, president of the European Commission (EC), announced the EC's intention to introduce a foreign investment screening regime. This proposal was supported by Germany, France and Italy but faced opposition from the Netherlands, Portugal and Spain. Currently, there is no harmonized foreign investment control regime at EU level, and just under half of the Member States have some sort of foreign investment control review mechanisms in place. If a merger meets the turnover thresholds of the EU Merger Regulation, Member States' ability to exercise foreign investment control is more limited. They can only take 'appropriate measures to protect legitimate interests' in public security, media plurality and financial prudential rules.

The new EU-wide foreign investment proposals would apply to transactions that cause 'security and public order' concerns, which would include investments in: (i) critical infrastructure; (ii) critical technologies; (iii) the supply of critical inputs; and (iv) companies with  access to sensitive information or the ability to control sensitive information. With this legislative proposal, the EC attempts to achieve the objectives set out below.

First, Member States that already have a foreign investment control regime will be required to notify the EC of their review mechanisms and submit annual reports providing: (i) an overview of the application of the regime; (ii) information about the transactions reviewed or under review; (iii) whether the Member State ultimately blocked or approved the transactions, and if the approvals were subject to conditions; and (iv) the sectors, origin and value of the foreign investments screened and undergoing screening.

Second, the proposal introduces a cooperation mechanism whereby Member States reviewing a transaction must share information about the transaction with the EC and other Member States and allow them to provide their views on the transaction. If implemented as currently drafted, this particular section could have a significant effect on transaction timetables. After the Member States receive the information regarding the transaction under review, there is a 25-working-day period for Member States to submit their observations. The EC will have an additional period of 25 working days to decide whether to issue an opinion.

Third, foreign investments that could have an impact on projects or programs of EU interest will be subject to a security review by the Commission, which may issue an opinion to the relevant Member State. If the EC issues an opinion, the Member State is required to 'take utmost account of the EC's opinion and provide an explanation to the EC' if it decides not to follow the recommendations in the opinion.

The lack of ambition of these proposals is telling. The EC has not proposed that it be given the executive authority to review foreign investment - to try to re-create the 'one stop shop' that exists for merger control. The EC's role is limited to coordinating the activity of Member States and issuing an opinion if there is a direct impact on progams or projects of EU interest.

Even though these proposals have faced criticism from several Member States, it remains to be seen whether they will be implemented in 2018.

Although U.K. investors will be characterized as foreign investors once the U.K. formally leaves the EU, it is very unlikely that the U.K. or indeed other Western investors are the target of this initiative.


Germany was the first European country to introduce reforms to its foreign investment control regime in 2017. The reform was a response to Midea's acquisition of German industrial robotics manufacturer Kuka for €4.5 billion and Fujian Grand Chip Investment's proposed acquisition of German chip equipment marker Aixtron. These transactions were viewed as a sell-off of strategic German technology to companies that advance China's industrial policy objectives.

The German government has powers to review the acquisition of 25% or more of the voting shares of a German company by a foreign investor if Germany considers that the acquisition poses a threat to public order or national security. The revised regime introduced: (i) a mandatory notification for acquisitions of targets active in the military sector and sensitive civil sectors; (ii) an extension of the review period to four months; and (iii) a non-exhaustive list of business areas in the civil sector which will be considered...

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