Prohibitions of foreign investments used to be dealt with quietly, with authorities typically asking the investor to withdraw its application. Recent media focus on prohibitions has highlighted a new trend – formal prohibitions are no longer off the table and may become more common. But how likely is a prohibition? An increasing number of elements need to be taken into account to assess this.

Prohibitions are few in number…

In practical terms, authorities are more likely to impose conditions on – or require mitigation measures for – an investment, rather than reject it completely.

In our experience, the number of transactions blocked or opposed is extremely limited, even though it is hard to get a clear picture as to the numbers. This is because the cases in which the parties withdraw their investment (such as Aerostar/ Mettis Aerospace in the UK) are not counted as formal prohibitions and foreign investment proceedings are often strictly confidential. For instance, in Germany details of these proceedings are not usually in the public domain, unless the parties decide to publish this information.

…but the trend is clear

Recent announcements and leaks around prohibitions are widely understood to be a sign that governments are more likely to block certain kinds of investments in the future. 

A number of EU Members States have signalled their willingness to block foreign investments posing threats to essential national interests. For instance, Italian Prime Minister Mario Draghi recently commented that that the rules “must be used when necessary”, revealing that his Government had blocked the acquisition by a Chinese company of an Italian semiconductor company. 

What are the key factors making a prohibition more likely?

The likelihood of a prohibition primarily hinges on the sensitivity of the activities at stake. The second important ingredient is the nationality, identity and (perceived) motives of the investor.

It is striking to note how the lists of sensitive sectors has grown continuously in every jurisdiction that has implemented a foreign investment control regime. These lists were initially limited to “core” sensitive activities (such as national defence and military issues) and any deals with a military nexus were – and still are – likely to be scrutinised closely and could be blocked. 

Relevant examples are (i) the German IMST decision, (ii) the German prohibition of the proposed takeover of toolmaker Leifeld Metal Spinning by Chinese Yanthai Group in 2019 – in both cases the target’s products included (potential) military uses – and (iii) the Italian decision blocking the acquisition by French group Altran of Next AST in light of certain strategic activities of the target in the Italian defence sector.

But many countries’ lists of sensitive sectors have been expanded very significantly, and now typically include activities such as water, insurance, food, raw materials, and so-called “critical technologies”, in an effort to capture as many investments as possible. For example, Germany very recently added 16 new sectors to the 11 pre-existing sectors for which a mandatory and suspensory filing requirement applies – including artificial intelligence, automated and autonomous driving, critical raw materials and smart meter gateways. 

And belonging to a country traditionally considered as “friendly” is not necessarily a bar to a prohibition either, as demonstrated recently by the contemplated friendly alliance between the French food distribution group Carrefour and the Canadian company Couche-Tard. The French Minister for the Economy publicly stated that he was “not in favour, in principle, of an acquisition by a foreign competing company” of “France’s leading private employer, a vital link in the food security of the French population, in food sovereignty”. Similarly, the first prohibition in Italy (in 2017) related to the proposed acquisition of an Italian business by another EU company, the French group Altran.

Other important factors

But recent prohibition cases also show that the factors listed above are not the only relevant elements in assessing the likelihood of a prohibition. These cases may also feature a number of other factors. 

• State-controlled investors may be subject to specific scrutiny. In December 2020, Germany blocked the takeover of satellite and radar technology firm IMST by a subsidiary of state-controlled missile maker China Aerospace and Industry Group (CASIC) due to national security concerns. 
• The level of influence acquired by the foreign investor needs to be taken into account. Whether the foreign investor acquires full control or just a minority shareholding will be a key factor in relation to a potential prohibition as well as the investor’s (perceived) motive for the investment. For example, in the German IMST prohibition decision, extensive reference is made to the military programmes supported by CASIC in China.
• Finally, another factor is the possible application of foreign export control procedures. An example was the planned acquisition of Photonis, a high-tech French company, by the US company Teledyne, which was blocked by the French Minister for the Economy in March 2020. The issue at stake for the French government was to have equipment which was not covered by the International Traffic in Arms Regulations. The takeover of a French company by an American company would have posed a serious risk to the exports of the French defence industry. Another example is the IMST case in Germany, where the German government also took into account that IMST products were subject to certain export licenses.

Above all, recent prohibitions show that – notwithstanding any legal arguments that may be raised about proportionality – political intervention plays a decisive role, especially in the defence sector where States enjoy a wide margin of discretion.

While the overwhelming majority of foreign investment cases are still being resolved behind closed doors with no information leaking into the public sphere, the above examples illustrate that in exceptional instances – sometimes driven by political considerations – cases may leak or otherwise be made public to send a clear signal to the market not to take foreign investment control lightly.