Mario Draghi’s recent report on the future of European competitiveness underscores the need for substantial investment in Europe to drive economic transformation. Yet, figures released in October by the European Commission in its fourth annual report on the screening of FDI into the EU showed a worrying trend: net FDI inflows to the EU27 in 2023 remained negative and overall transaction numbers (M&A and greenfield) also declined by 25% compared to 2022, says Jonathon Gunn, associate, Faegre Drinker Biddle & Reath LLP.
The FDI report suggests that increased costs of capital due to restrictive monetary policy and continuing geopolitical tensions are the explanation, rather than FDI restrictions. Nevertheless, this complex backdrop presents a challenge to European policymakers seeking to navigate between the pressing need for investment in Europe and the importance of maintaining national and economic security.
Foreign investment restrictions across Europe are a national patchwork. There is no pan-European framework governing and unifying the screening of European foreign investment. National FDI screening frameworks operate with varied scopes (in terms of trigger events and sector application), timelines, procedural requirements, and criteria of assessment.
Earlier this month, Sanofi announced that it had entered exclusive negotiations with a US private equity firm for the sale of a 50% stake in the consumer business, valuing it at €16bn. However, news of talks with the New York-based firm has prompted fears about French jobs and the loss of control to a foreign company. As a result, restriction guarantees were placed on the deal - Opella would have to pay a €40m penalty if it were to stop production in its factories in northern France.
In Spain, an acquisition of a 10% (or in certain cases, 5%) stake can trigger screening, whereas in Poland it stands at 20%. A phase 1 FDI review in Germany can take two months, whereas in Italy it is generally limited to 15 business days. This multiplicity of frameworks creates complexity and uncertainty for investors, and exacerbates the challenges inherent in any overseas investment.
Carve-out deals highlight another challenge posed by investment restrictions. These transactions usually require intra-group reorganizations to be carried out prior to closing. Depending on how such transactions are structured and implemented, intra-group reorganizations can trigger FDI screening obligations in addition to screening requirements triggered by the wider transaction. Screening frameworks differ on whether exemptions exist for intragroup reorganizations, underlining the difficulties posed by fragmentation.
Overreporting remains another significant issue for the market. While the picture varies across jurisdictions, a high proportion of notified transactions are cleared or authorized without conditions. This is welcome, but suggests that more transactions are being subjected to FDI screening than is necessary.
This is driven partly by uncertainty around the precise scope and application of screening frameworks and by investor caution given the potential consequences for a transaction of not filing when required or of authorities investigating post-closing. Whether necessary or precautionary, excessive reporting extends deal timelines and unavoidably impacts deal certainty, raising execution risk for both buyers and sellers. This leads to more negotiation (and thus greater transaction costs) which plays out in deal documentation and bid processes.
To navigate these issues, specific FDI-related clauses are becoming standard in deal documentation. Acquirers are often legally responsible for FDI filings but sellers or the target typically possess better knowledge of the possible activities which bring a target within scope of investment screening.
This information asymmetry results in extensive cooperation and information obligations in agreements, and in certain cases to specific warranties and representations in transaction documentation. Suspensory filing requirements also make FDI clearance a key condition to the closing of any affected transaction.
This leads to significant negotiation around how far an acquirer or investor must go to obtain FDI screening clearance. This can range from a ‘hell or high water’ approach, where an acquirer must do everything it can to obtain clearance, regardless of the conditions which may be imposed, to a more limited reasonable efforts commitment.
The ability to close around a particular jurisdiction – that is, whether a deal can complete globally but with the jurisdiction subject to FDI screening clearance carved out – can also be a negotiation item. Risk appetite, bargaining strength, and the number of jurisdictions in which clearance is necessary, shape the scope of what is appropriate regarding these commitments.
The European Commission announced proposals in January to update the EU FDI screening framework to promote greater harmonization and establish a minimum sectoral scope. This initiative aligns with the Draghi report’s recommendation to strengthen EU investment screening mechanisms.
A more coordinated and unified approach to FDI screening across Europe, simplifying procedures and unifying timelines, would promote European investment and make Europe more attractive for investors. Nevertheless, there is a limit to how much harmonization can realistically be achieved. FDI screening will remain a national competence under EU rules and member states may still exceed minimum requirements by ‘gold-plating’ relevant legislation.
The call to strengthen EU investment screening forms part of a broader European industrial and trade strategy. While procedural simplification and greater EU-wide coordination would benefit investors, these gains could easily be offset by a more interventionist or protectionist approach. Given these trends, navigating the Europe’s evolving tapestry of FDI restrictions will remain a challenge for investors for the foreseeable future.
By Jonathon Gunn, associate, Faegre Drinker Biddle & Reath LLP
