Introduction
In April and May 2024, the scope of the ex-officio procedure was significantly expanded in updated guidelines published by the Belgian FDI authority, whereas the broad interpretation of ex-officio power by the Dutch FDI regulator was limited by a district court ruling. In the UK, the scope of ex-officio powers remains unchanged, but recently updated guidelines clarify in greater detail the cases where it may be applied. This highlights the divergence of approach of FDI rules in Europe, which continue to evolve.
To mitigate the risk of an unexpected call-in of a transaction, it is recommended to proactively engage with FDI authorities and carefully consider domestic particularities, such as whether the scope of the FDI regime has been altered through soft law guidelines or court judgements. Proactive engagement with authorities is recommended in complex transactions and where authorities are likely to ask for commitments. In our January blog we noted how proactively reaching out to the Italian government helped US private equity firm Kohlberg Kravis Roberts & Co (KKR) acquire Telecom Italia (TIM)âs sensitive assets.[1] A similar approach might soon be tested in the UK, where FDI commitments were contractually agreed between Czech billionaire Daniel KĹetĂnskĂ˝ and the parent company of Royal Mail prior to KĹetĂnskĂ˝âs bid to acquire Royal Mail was accepted.
Another deal recently reviewed by the Italian government shows that active engagement with the authorities and willingness to resolve security-related concerns can result in a different outcome. Despite receiving a prohibition decision in November 2023, a French high-tech aerospace company continued dialogue on commitments with the Italian government, and on 6 June 2024 the deal was ultimately approved with conditions.
In addition, on 10 June 2024, the European Commission (Commission) opened its first-ever in-depth investigation related to an M&A deal, reminding legal advisors that, aside of FDI, risks under the EUâs Foreign Subsidies Regulation (FSR) should also be factored into the multi-jurisdictional assessment.
Keep track of expansions of FDI screening regimes in Europe, including through soft law guidelines and court judgements.
The trend of the scope of the expansion of existing FDI regimes has continued during Q2 2024. Two European countries, Belgium and the UK, made refinements to the national FDI screening frameworks, in particular, with regard to ex-officio powers. Whereas, in the Netherlands, the scope of the FDI ex-officio power was narrowed by a ruling of a district court.
Belgium – the guidelines strengthen the authorities ex-officio power
On 4 April 2024, the Interfederal Screening Commission (ISC), the authority responsible for foreign investment oversight in Belgium, published the finalised national FDI guidelines (Guidelines). The Guidelines respond to 81 questions on the regime with the intent to increase predictability and therefore legal certainty for non-EU investors.[2]
At the same time, the Guidelines could be seen as a tool (mis-)used by the ISC to expand the scope of the regime. While this was not mentioned in the initial draft guidelines published in July 2023, the Guidelines now clarify that the ISC can review ex-post not only the notifiable transactions, which were not reported to it,[3] but also the non-notifiable deals that may have an impact on national security, public order or strategic interests. Therefore, legal practitioners and non-EU investors should factor into their analysis a risk of their deal being called in if there is a nexus in Belgium (even if only a local branch office).
Netherlands – a district court limits the authorities ex-officio power
In the same month, the ex-officio procedure was expanded in Belgium, a Dutch court limited the power of the Minister of Economic Affairs and Climate (Minister) to retroactively require an FDI filing. On 25 April 2024, the District Court of Rotterdam satisfied an interim relief request from a micro-optic company and ruled that the Minister cannot call in a transaction which does not constitute an âacquisition activityâ, even if there are reasonable suspicions of national security risks. The Minister cannot shift the burden of proof on the company to prove whether there is an âacquisition activityâ and should itself establish whether the transaction resulted in a change of control or acquisition/increase of significant influence (as defined under the Dutch FDI Act),
While this decision bears no effects for the future transactions, as the power of the Minister expired on 1 February 2024, it may have implications on transactions that were already called in and are still pending FDI review. For more details about the case, please refer to the publication of our Dutch colleagues.
UK – the government further clarifies how the ex-officio power will be applied
On 21 May 2024, following the response to the call for feedback on the national FDI regime, the UK government published an updated statement on how the Secretary of State (SoS) expects to exercise its power to call in transactions which do not trigger mandatory FDI review, but may have impact on national security or public order.
The statement explains three primary risk categories that the SoS considers when deciding whether to call in a transaction:
- Target risk. The SoS will likely call in an acquisition if the target has a sensitive supply relationship with the government in one of sensitive sectors[4] or if an asset acquisition enables the transfer of technology, intellectual property or expertise to the seller or related party. In addition, the SoS may consider calling in acquisitions involving incorporation of a new entity if the incorporation includes a change of control over an existing entity or asset.
- Acquirer risk. On the acquirerâs side, the SoS will consider: (i) the past behaviour of the acquirer and linked parties, (ii) the rationale of the transaction, (iii) the sector of acquirerâs activity, (iv) existing capabilities of the acquirer, (v) cumulative acquisitions across the sector, where the target is active, or related sectors, (vi) ties or allegiance to a state or organisation which may seek to undermine or threaten the national security of the UK, and (vii) existence of obligations toward e.g., foreign intelligence agencies or other form of political, military or state-backed influence, and others.
- Control risk. The SoS will assess whether the amount of acquired share capital enables the acquirer to influence the policy of the target and whether the acquirer gains control through e.g. financial instruments such as loans, debt-to-equity swaps, etc.
Being one of the set of FDI-related changes adopted by the UK government in May 2024,[5] the updated statement demonstrates that the UK government duly considered public concerns about the regimeâs transparency and predictability. While the UK FDI screening regime maintains balance between national security interests and welcoming foreign investments into the UK, it now provides more certainty and practical illustrations of potential scenarios where SoS may utilise the ex-officio power.
Proactively design FDI commitments to assure the seller and streamline the review process.
The trend of proactive approach of the FDI authorities in complex transactions might soon be seen in the UK, where EP Corporate Group (EPCG), 90% owned by Czech billionaire Daniel KĹetĂnskĂ˝, is acquiring Royal Mail from International Distributions Services (IDS).
As announced by IDS on 15 May 2024, EPCG was willing to make contractual commitments to ensure that the proposed takeover of Royal Mail, a key part of the UKâs critical infrastructure, would not raise concerns under the UK FDI regime. The commitments reportedly included (i) maintaining Royal Mailâs brand name, (ii) keeping the company headquartered in the UK and continuing to provide certain services across the UK, and (iii) protecting workersâ rights.
It is worth noting, that the commitments were drawn up and sent to IDS together with the bid and prior to any formal FDI investigation by the SoS. It is likely that the commitments were proposed to IDS to resolve FDI-related concerns of the seller. As the bid was ultimately accepted on 29 May 2024, the buyer is now expected to submit up-front remedies to the SoS in order to mitigate the significant regulatory scrutiny.
As discussed in our post for January 2024, a similar approach of proactive engagement with an FDI regulator was successfully tested by US private equity firm KKR to obtain an Italian national security clearance for the proposed acquisition of TIMâs fixed line network.[6]
Maintain the discussion about FDI commitments despite a negative decision.
On 6 June 2024, a high-tech aerospace, defence and space company in which the French government is the largest shareholder, announced it had secured FDI clearance in Italy for the USD 1.8 billion acquisition of âMicrotecnicaâ, an Italian subsidiary of US company âCollins Aerospaceâ (which is owned by âRTX Corporationâ), a company engaged in aerospace components, such as flight-control systems and engine valves. While it appeared that the deal could not proceed any further after the prohibition decision issued by the Italian government on 16 November 2023, the investor kept engaging with the Italian government and âmade a number of commitments, […] which address the concerns expressed in the initial [prohibition decision] and provide adequate safeguards of the Italian national interestsâ.
This case highlights the complexity of deal planning in view of the current FDI environment, and how the FDI screening process can stretch the deal timeline. At the same time, it is also a good demonstration that investors should be willing to continue a dialogue with the FDI authorities, despite a negative initial outcome, and propose additional remedies in order to get their deal approved.
FSR enforcement trends – first ever in-depth investigation related to an M&A transaction.
On 10 June 2024, the Commission initiated the first ever Phase II investigation into an M&A deal under the FSR. The in-depth investigation relates to the proposed acquisition by the Emirates Telecommunications Group (e&), a UAE-controlled telecommunication operator, of PPF Telecom Group B.V. (PPF), a European telecommunication operator.[7] The investigation demonstrates that the Commission intends to fully utilise its powers under the FSR, and those should be factored into the risk assessment when planning a multi-jurisdictional deal.
During the Phase I investigation, the Commission found that the received foreign subsidies, which included an unlimited guarantee from the UAE and a loan from UAE-controlled banks, directly facilitated the transaction. As these foreign subsidies may have improved e&âs capacity to perform the acquisition as well as the competitive position of the merged entity in the EU in the future, they likely distort the EU internal market. The Commission now has until 15 October 2024 to investigate and make a final decision as to whether the foreign subsidies lead to actual or potential negative effects on the acquisition process and/or in the internal market.
Notably, unlike the previous in-depth investigations and dawn raids conducted by the Commission under the FSR, this case does not involve Chinese companies or subsidies. This shows that the Commission is not concerned with enforcing the FSR against companies linked to specific non-EU jurisdictions, but rather against any company (incl. EU-based) which received foreign financial contributions that may distort the EU internal market.
[1] Please refer to our blog post for January 2024 for more detail.
[2] For example, the Guidelines allow the parties to close the transaction pending review by the ISC by carving out the Belgian part of the deal, and confirm that internal group restructurings may trigger the notification requirement in certain cases.
[3] As prescribed by the primary legislation.
[4] I.e., one of 17 sensitive sectors as defined in the respective Guidance of the UK government.
[5] In addition, on 21 May 2024, the UK government also published updated âMarket Guidanceâ. The amendments included (i) clarifications on calculation and expediting of statutory periods, (ii) tips for completing a notification form, (iii) guidance on how the government will approach investments into higher education and research-intensive sectors, and (iv) elaboration on situations where outward investments may be notifiable under the UK FDI regime.
[6] Given the status of critical infrastructure of TIMâs assets, KKR signed a pre-transaction MoU with the Italian Ministry of Economy and Finance prior to KKR placing an official bid to acquire TIMâs assets. Ultimately, this helped KKR to pre-emptively address security-related concerns over the asset acquisition and obtain FDI clearance.
[7] Please refer to our blog post for January 2024 for another case involving e& where the UK government imposed national security conditions to limit companyâs participation in a British multinational telecommunications company Vodafone.
