Global Trend Towards Tighter FDI Screening Continues

Many developed countries, including Germany and the European Union, have tightened their policies on inward foreign direct investments ("FDI"). This is not only our experience as FDI practitioners but also confirmed in a recent OECD report. The report covers 62 economies in the period between 16 October 2020 and 15 October 2021. It finds an all-time high of policy changes in the area of investment-related measures (with the exception of 2009, when governments responded to the global financial crisis of 2008/2009). The Covid-19 pandemic is singled out as an important factor explaining the increase of relevant policy making at the beginning of 2020.

Focus of policy making: Essential security interests

The report confirms a high sensitivity towards threats associated with inward foreign investment. According to the report, most policy attention in this area is concentrated on acquisition- and ownership-related policies, in particular investment screening mechanisms to safeguard essential security interests:

• Twelve countries brought into effect new acquisition- and ownership-related policies (Australia, P.R. China, Czech Republic, Denmark, Japan, Lithuania, New Zealand, Saudi Arabia, Slovakia, South Africa, Sweden, United Kingdom);
  
  
• At least ten countries introduced reforms to their existing mechanisms (Canada, France, Germany, Italy, Japan, Latvia, Lithuania, Poland, Russian Federation, Spain);
  
  
• Several other countries are considering the introduction of such policies (incl. Belgium, Brazil, Chile, Estonia, Ireland, Luxembourg, Romania, Slovakia, Sweden, Switzerland, Ukraine).

Circumstances related to the COVID-19 pandemic led to a spike in policy changes in early and mid-2020. Since December 2020, however, governments have no longer referred to the specific conditions of the pandemic when introducing new mechanisms or changes to existing ones.

In addition, the report finds signs that the outward flows of capital, technology or know how towards countries which are not considered allies may increasingly be addressed by policy makers with the intention to safeguard essential security interests. Likewise, there is more attention towards the security implications of international research cooperation and research funding.

Germany: Multiple recent policy changes

Germany serves as an example for multiple changes in its FDI screening provisions within a short period of time:

• On 10 July 2020, the German Foreign Trade and Payments Act ("AWG") was amended with a view to implement requirements of the European Union FDI Screening Regulation. One of the most significant changes was the introduction of a standstill obligation for foreign investments that are subject to a mandatory notification requirement.
  
  
• On 29 October 2020, the 16th amendment to the German Foreign Trade and Payments Ordinance ("AWV") came into effect. The amendment further implemented the requirements of the EU FDI Screening Regulation.
  
  
• Finally, on 1 May of 2021, the 17th amendment to the Foreign Trade and Payments Ordinance came into force. It significantly expanded the list of sectors and activities covered by mandatory notification requirements, and it introduced additional notification triggers for acquisitions by foreign investors in certain sectors (the lowest trigger is a shareholding of 10% of the voting rights in a domestic company). In particular, the amendment confirmed the need for an additional notification and government approval if the foreign investor's shareholding meets or exceeds a higher threshold (20%, 25%, 40%, 50% or 75%).

Noerr’s comments: Investors need to pay attention

The OECD report highlights once more the importance of FDI screening procedures for cross-border M&A transactions. Foreign investors need to pay close attention towards the policies in force, especially when their target companies have assets or operations in several countries. Multi-jurisdictional filings are increasingly a common feature in M&A processes. As a result, buyers and sellers in M&A transactions need to make the necessary assessments, include appropriate terms in their transaction agreements to account for such filings, build in the required timeline for obtaining regulatory approvals and any applicable standstill obligations in their overall transaction timing. As policies in this area change frequently, extra care is needed to stay in line with applicable laws and regulations.