8 marzo 2021 Christoph Barth  - Mark Daniel -  Aoife Monaghan ForeignInvestmentLinks

Foreign Investment and Minority Shareholdings: How low can they go?

The recent expansion of foreign investment regimes beyond traditionally sensitive sectors has been well documented. But equally important has been the lowering of transaction type thresholds to capture acquisitions of non-controlling shareholdings. Since the outbreak of the Covid-19 crisis, governments have moved fast to protect sensitive sectors such as healthcare and prevent undervalued companies from becoming targets for opportunistic foreign takeovers. As a result, in many cases even very small minority shareholdings can now trigger a - potentially mandatory and suspensory - foreign investment filing.

A well-trodden path…

Several jurisdictions have, for some time, had foreign investment rules in place which can be triggered by the acquisition of minority shareholdings, for example:

  • In the U.S. CFIUS interprets the concept of control fairly broadly and has found control when an investor has sought a less than 20% voting interest coupled with only one board representative. For example, CFIUS in 2017 reviewed the proposed 10% joint investment by NavInfo, Tencent Holdings and GIC Pte in HERE International. The investment was ultimately abandoned as a result of CFIUS opposition. Since the enactment and interpretation of 2018 reform legislation, CFIUS has also had jurisdiction over noncontrolling investments in U.S. businesses that develop or produce critical technology; produce, own, or operate critical infrastructure; or collect or maintain sensitive information of U.S. citizens.
  • Minority shareholdings in a German company can be caught by foreign investment review, with the threshold for sensitive sectors having been lowered from 25% to 10% in December 2018, in response to an attempt by China’s State Grid to buy a 20% stake in German transmission grid operator 50Hertz which, at the time, escaped scrutiny. Coupled with the German particularity of analysing acquisition structures layer by layer, the effective shareholding in a relevant company may in practice be much smaller than the filing threshold would suggest. Further, where an investor already holds a shareholding at or above the relevant filing threshold, under the current legal framework any increase in that shareholding (even buying one single additional share) triggers a further foreign investment filing - an area which we hope will be addressed by the reform proposals currently in the pipeline.
  • And in Australia, shareholdings as low as 5% and 10% may require foreign investment review in certain circumstances.
… heightened by Covid-19…

Other jurisdictions have more recently lowered filing thresholds to include minority shareholdings, as a result of the pandemic. A few illustrative examples being:

  • France, Italy and Spain: Recent reforms have lowered the thresholds for non-EEA / EU investors making investments of 10% or more of the share capital of Italian and Spanish companies active in certain strategic sectors / listed companies in France. In relation to Spain, this threshold has been extended to EEA / EU investors on a temporary basis (until 30 June 2021) for cases where, in addition to being active in strategic sectors, the target company is listed in Spain or the transaction value exceeds 500 million euros).
  • Japan has lowered the threshold at which pre-closing approval is required for any direct investment by a foreign investor in a Japanese listed company active in a sensitive sector from 10% to 1%. There is no threshold for Japanese non-listed companies active in a sensitive sector - so a mandatory pre-closing notification would be required in all such cases. 
… which is here to stay.

Other jurisdictions are following suit. For example, the National Security and Investment Bill, which is currently going through Parliament in the UK, will provide for the review of acquisitions involving “material influence” in certain circumstances. This is a familiar concept from the UK merger control context and can be triggered by acquisitions of shareholdings as low as 10-15%.

What does this mean?
  • Structuring deals will only get harder. It is difficult to take a “broad-brush” approach or to structure transactions to benefit from a safe harbour at low levels of minority shareholdings. Filings may in some cases be triggered at 10% (or lower) and may depend on the precise governance rights being acquired as well as the exact acquisition structure.
  • Loopholes may not remain open for long. We have seen instances (for example in Germany) in which governments have reacted very quickly to attempts to circumvent foreign investment control by structuring a transaction to remain below thresholds and have closed relevant loopholes. Political will seems to be leaning towards comprehensive and thorough reviews.
  • Early planning is essential. The risk and uncertainty created by this “race to the bottom” means early and thorough foreign investment assessment is recommended, for all transactions.
  • The rules are here to stay! While many of the changes noted above have been accelerated as a result of Covid-19, in many instances they are not transitory in nature.