The COVID-19 crisis, and resulting increased global demand for medical equipment and supplies, has shone a light on the fragility of many critical supply chains. This has led to a broad strengthening of foreign investment review (“FIR“) rules, as countries seek to safeguard such critical supply chains against perceived hostile foreign takeovers, resulting in increased regulatory hurdles for companies in strategically important sectors.
National FIR rules allow governments to review and potentially to prohibit investors acquiring control over domestic entities or assets, due to national security, industrial policy or other considerations. The precise nature of regimes, and types of transactions and sectors covered, vary between jurisdictions, although generally these rules apply to industries of strategic importance in which governments wish to retain a degree of discretion or control. There is also currently an emphasis in certain countries on scrutiny of Chinese acquirers, although most regimes do not formally distinguish between prospective purchasers on grounds of nationality.
Prior to the COVID-19 pandemic, there had already been a trend of greater scrutiny of inbound investment, in the context of economic populism and increased mistrust of foreign State actors. The COVID-19 crisis has served to accelerate these existing trends, as many countries have experienced delays and obstacles in procuring essential medical equipment and supplies. Some smaller jurisdictions in particular have also felt outmuscled by larger counterparts in international tender and sale processes for such supplies. This in turn has led to a broad strengthening of FIR rules, as countries seek to safeguard critical domestic supply chains against perceived hostile foreign takeovers.
Listed below are some examples of countries that have tightened, or are considering tightening, their FIR regimes in light of the COVID-19 crisis.
- On 29 March 2020, Australia reduced to zero its monetary threshold trigger for foreign investments (i.e. meaning that in principle all foreign acquisitions are currently reviewable in Australia).
- On 1 May 2020, Japan introduced changes to its FIR system in order to scrutinise transactions in the medical sector.
- On 19 June 2020, Poland introduced new powers to screen investments in strategic sectors.
- In 21 June 2020, the UK announced a new investment review ground safeguarding the UK Government’s ability to combat public health emergencies.
The impact of these developments is that FIR rules are likely to be triggered on a more frequent basis for a greater number of transactions and in a greater number of sectors, including those in the healthcare sector or that provide goods or services essential to pandemic responses. There are likely to be more cases in such sectors where it will be necessary to give commitments as the price for getting a deal through, while there may also be more outright prohibitions of deals on FIR grounds. The potential delay to timetables resulting from increased FIR scrutiny underlines the need to consider FIR upfront in deal assessments, and to factor this multi-jurisdictional assessment proactively in to companies’ strategic analysis.