As a result of national security concerns, the decision-making of national FDI regimes in the EU is not transparent and there are no obligations for authorities to publish their decision or the reasons behind it.
However, authorities will often publish annual reports which provide a better understanding of national trends and decision-making. Two such reports were published at the end of September/October 2023. In September 2023, the German Federal Ministry for Economic Affairs and Climate Action published its report evaluating the national FDI screening legal framework and exploring options for its revision (German Report). On 19 October 2023, the European Commission also published its third annual report on the screening of FDI in the EU (EU Report).
Otherwise, there is limited public information available in online news articles, which usually report on statements provided by national politicians and the companies under investigation. For example, on 5 October 2023, Flowserve, a US manufacturer of valves, announced on its website that the French government had rejected its proposed acquisition of French subsidiaries of Velan, a manufacturer-supplier of valves for French nuclear submarines and reactors. The case is only the second transaction ever publicly prohibited in France under its FDI screening framework. Both prohibition decisions concerned investors of US origin, which is unusual for EU FDI regimes and should not be seen as a trend. These developments provide two useful insights for companies to consider when assessing transactions from a foreign investment screening perspective:
Highlight to clients the potential uncertainty and broad nature of national FDI screening and how this affects the risk assessment of filings required.
Precautionary Filings are common
National FDI regimes and their current scope of review are currently designed broadly so that companies are often required to make precautionary filings, when notifications may not technically be required under a strict interpretation of the legal test.
The EU Report confirms that there is significant unpredictability on the notifiability of transactions. In 2022, out of 1,444 notifications submitted in the EU, almost half were not formally reviewed because the transaction was not considered to be covered by the FDI regime. A helpful development in this regard is that some jurisdictions, such as France, have begun to issue clarifying guidelines, which may have led to the steady decline in such false positives (80% and 71% in 2020 and 2021, respectively).
Even though there are still false positives with respect to filings, parties do not automatically face a substantive review and sanctions by the investigating authority.
Both the German Report and EU Report demonstrate that prohibitions remain rare (1% of all filings in the EU). And while the risk of remedies imposed is relatively higher (9% of all filings in the EU)), it remains insignificant and is gradually decreasing year by year (in 2021, remedies were imposed in 23% of cases in the EU).
With respect to the review timeline, the German Report provides insight into this aspect. In 2022, Phase I cases took an average of 38 days, which is 22 days shorter than the German statutory deadline of two months. At the same time, Phase II cases averaged 184 calendar days, which is also below the statutory review deadline of eight months for the Phase II FDI investigations in Germany.
Even if the acquirer is not from a high-risk jurisdiction, be cautious if the target company operates in a sensitive sector, with a risk of a third party complainant.
On 5 October 2023, Flowserve announced in an online statement that the French Ministry of Economy had prohibited its USD 245 million acquisition of Velan’s French subsidiaries. It is believed that the prohibition is due to the fact that the subsidiaries operate in a sensitive sector, as the valves are sold to French companies of strategic importance. Flowserve had reportedly offered a package of confidential remedies, but for unknown reasons these were deemed insufficient.
Flowserve is a company from the US, a jurisdiction which does not normally lead to a ban on FDI in the EU. Although the decision is not public, the French government was reportedly concerned that the US government would: (i) prevent the subsidiaries from exporting their equipment overseas; and (ii) require the subsidiaries to provide sensitive information relating to military equipment and nuclear energy.
It is interesting to note that the first French prohibition decision also concerned an acquisition by a US investor. At the time, the French government was concerned that the acquisition by the US company Teledyne of French company Photonis, an exclusive supplier of night vision cameras to France’s armed forces, would undermine France’s economic and industrial defence sovereignty.
When acquiring a target operating in a sensitive sector, companies and advisers should be aware that the transaction may be prohibited regardless of the low-risk nationality of the investor, and should be cooperative and transparent with the relevant authorities. In order to avoid undesirable outcomes, investors should prepare a number of different remedy packages that they can promptly offer to the authority if the lightest of the proposals is not accepted.