Foreign investment takeaways from the tech sovereignty battleground

In the past couple of years, we have seen a torrent of reforms introducing, broadening or strengthening foreign investment regimes. The desire for stronger foreign investment controls has been reflective of the global political climate, with Governments seeking to protect critical tech input and national capabilities in the battle for tech sovereignty, as they recognise the importance of this technology to their economies and national security.

As a result, we have seen a broadening of the sectors covered, leading to a higher number of tech sector investments being screened, in more jurisdictions, and with lower investment thresholds.

This post looks at some of the recent developments and decisions, and what these mean for foreign investment in technology.

Evolving geo-political concerns

As global concerns evolve, regulators have had to grapple with new, potential harms to national security, including:

• The outflow of tech knowhow to countries perceived to raise geo-political concerns. A key question for regulators to consider is whether the technology being invested in is already available at the same quality level in the investor’s country of origin. In cases where the answer is yes, there will be a lower threat to national security resulting from the transaction since there is no new, technical knowledge to be gained by that country. This concern highlights that a priority for governments is to protect novel and innovative tech – and that there isn’t a blanket approach taken for all kinds of tech.
• Lack of business continuity. Regulators have employed remedies to safeguard business continuity to secure the manufacture of niche products for sensitive users, such as the military. For example, a remedy might force parties to sign a licensing agreement with an external party so that if the investors were to close the business post-clearance, the other party would carry on making the product.

UK

Heated debate surrounds the takeover of the UK’s largest silicon wafer manufacturer, Newport Wafer Fab (NWF) by China-backed Nexperia. Nine months of relative silence from the government, followed by inaccurate reports that the government had decided not to intervene, resulted in the Foreign Affairs Committee calling on the government to review the takeover under the UK’s radically overhauled foreign investment screening regime, the NSIA. In the latest twist to this saga, nine members of US Congress (who are part of the US China Task Force) wrote to President Biden to urge him to “employ all necessary tools” to prevent the sale of NWF to Nexperia, including “engaging in direct diplomacy with the UK government” and even reconsidering the UK’s “whitelist” status as an excepted foreign state by CFIUS.

This controversy comes hot on the heels of US chipmaker NVIDIA’s decision to abandon its proposed acquisition of ARM in February 2022 because of “significant regulatory challenges” when the deal became the first-ever transaction to be referred by the CMA to Phase 2 on both competition and national security grounds. 

• Takeaway: New and emerging tech is a key focus for foreign investment control. The debate around NWF highlights the significance of semiconductors and other essential components of electronic devices in the battle for tech sovereignty and national security – particularly against the backdrop of global shortages. It would be prudent to expect this type of tech to be a focal point for foreign investment review going forward. 

US

CFIUS recently cleared transactions involving Chinese investors in video gaming (Tencent) and personal data (Spigot Inc). 

• Takeaway: CFIUS review is not fatal for Chinese investors – though rules could tighten. For a number of years, CFIUS has forced Chinese investors to divest their interests in US companies that have had access to personal data. The recent Tencent and Spigot decisions offer a ray of hope to investors from China. However, rules proposed by the US Department of Commerce at the end of 2021 could see targeting of foreign apps, with the Biden administration facing pressure to take a tougher stance on data protection.

EU

The EU’s FDI Screening Mechanism strengthens EU investment screening while allowing each Member State to retain authority over screening foreign investment based on security and public order grounds. Interestingly, we’ve seen significantly more coordination between Members in tech cases than in other areas, reflecting the importance of this sector across the EU. 

The screening mechanism does not appear, however, to have had a chilling effect on investment in and of itself – so far, only about 20% of inbound investments have required scrutiny by the EU, and only 2% have led to prohibitions. 

However, the new rules have incentivised Member States to update their screening mechanisms. To-date, 18 Member States have screening mechanisms in place, with Germany and others overhauling their foreign investment rules. The result has been enhanced scrutiny at a Member State level – particularly where national security and public order grounds are concerned – and provides useful guidance for future deals. For example:

Germany

The merger between Taiwan-based Global Wafers and Siltronic collapsed after the ministry failed to complete the foreign investment review before the merger agreement expired (see our post on EU prohibitions). This highlights that the risk of foreign investment reviews goes beyond the stringent nature of a regulator’s decision – the time required for review can itself impact a transaction.

• Takeaway: Prepare for longer review times for tech acquisitions. As foreign investment regimes become more stringent, and as an increasing number of tech mergers are reviewed, ensuring transactions can withstand these time delays will become increasingly important. Also, geo-political developments during a long-lasting review – as well as changes in national governments as a result of elections – can have a significant timeline impact that may not always be predictable at the start of a review process.

Italy

The Italian government recently approved changes to its “golden power” foreign investment rules to give it more oversight over deals involving 5G and cloud tech. This comes after a significant increase in the use of the golden power rules: since the law was introduced in 2012, the Italian government has only used it to block six deals, but four of these prohibitions have occurred since February 2021. Earlier this year, the government ordered the unwinding of the purchase of drone maker Alpi Aviation by state-owned Chinese investors – the first time the golden power rules had been used in this manner.

• Takeaway: Prepare for old rules to be used in new ways. As governments lean towards stricter reviews of tech mergers, expect to see existing (previously little-used) rules being relied on more than before.

France

At the end of 2020, ministers blocked the US-Teledyne’s proposed acquisition of Photonis, a supplier of night-vision goggles to the French military. This was the first time a foreign takeover had been prohibited under France’s national foreign investment regime. 

• Takeaway: It’s not just Chinese investors that are facing tough scrutiny. Even investors with close ties to EU Member States are seeing their transactions being scrutinised more closely.