Whilst foreign investment prohibitions in Europe are mostly still decided behind closed doors, they are no longer mythical creatures. Based on the European Commission’s first report on foreign investments approx. 2% of cases were prohibited in 2020. In a blog post last summer, we predicted that prohibitions would likely become more common and highlighted the key factors which increased the likelihood of a prohibition decision. Was our crystal ball-gazing correct? In this post, we follow up with the key trends you need to know about.

Status update

Often, when faced with the possibility of a deal being prohibited, parties may prefer to withdraw their notification rather than be confronted with an official (and potentially public) verdict of a governmental “no”. This rather “noiseless” phasing-out of deals makes it difficult to accurately pinpoint the number of deals subject to foreign investment review that have been blocked in Europe. Case statistics by national authorities are still only available to a limited extent, and withdrawals of deals are not counted as formal prohibitions. While the foreign investment community may have resigned itself to formal decisions not being published, it is irksome that in some countries (e.g. Germany and France) there are still no regularly published statistics on the number of cases filed with the authority or on their outcome (specifically whether the case resulted in phase I or phase II proceedings, with or without concessions being offered by the parties, or ended up being prohibited or withdrawn amid public interest concerns).

Nevertheless, in recent months, there has been an increase in press coverage around foreign investments in Europe being blocked. And, in certain jurisdictions, formal prohibition decisions are indeed becoming more common. For example, in Italy, five foreign investment transactions have been formally blocked under the Golden Power Rules so far – and three of these five decisions were issued in 2021. Similarly, we have recently seen an increased number of foreign investment deals where the regulator engages in informal discussions with the parties to make clear that a prohibition is envisaged unless the filing is withdrawn, or the parties purposefully let the long stop date lapse. In such cases, there is no formal prohibition decision issued and the transaction is abandoned “voluntarily”. By way of example, Israeli defence company Rafael Advanced Defense Systems abandoned its proposed acquisition of German drone manufacturer EMT in May 2021, most likely because the German Defence Ministry had concerns in relation to EMT’s contractual relationships with the German military, as EMT’s technology has been considered a key element in networked communications and military reconnaissance. In the meantime, Rheinmetall, a German company active in the defence industry, has announced its takeover of the main assets of EMT.

Increased focus on high technologies and Chinese investors

The likelihood of a prohibition decision still depends on the sensitivity of the target activities and the identity of the foreign investor. Over the last few years, it has become increasingly clear that prohibitions are also strongly driven by the background of the acquirer. While a sensitive target may raise national security concerns more generally (as can be seen from the EMT case), the nature and nationality of the acquirer will, in most cases, dictate whether any commitments offered provide a suitable solution from the regulator’s perspective. In particular, it is clear that investments from certain countries elicit a higher level of scepticism.

European governments are taking a critical stance towards China and other state-backed investors. We are seeing Chinese investors increasingly becoming the focus of European foreign investment control regimes and subject to heightened scrutiny (unsurprisingly, followed by Russian investors). Chinese investors were involved in four of the five deals blocked in Italy under its foreign investment control regime, and in three of the four vetoes issued in 2021. Similarly, most of the formal and “informal” prohibitions in Germany to date have involved investments by Chinese investors and we do not currently expect to see a change in approach, given the new government’s commitment to a strict “China policy”.

Further, many jurisdictions have expanded the scope of their regimes and the sensitive sectors caught. This has: (i) significantly increased the number of notified cases (and thus also the number of prohibitions), and (ii) shifted the scope of cases resulting in a prohibition. Prohibition decisions are no longer limited to “core” sensitive activities like military businesses - on the contrary, hi-tech and other strategic sectors are increasingly being blocked over national security concerns.

Considering the EU’s efforts to strengthen the semiconductor industry in Europe, it does not come as a surprise that semiconductor businesses have been the focus of a number of recent prohibition decisions. The European Chips Act aims to reduce the continent’s dependence on Asian suppliers of semiconductors. Foreign investment control may be one additional tool to support domestic semiconductor development and production – although it is highly questionable whether such industry policy goals are a legitimate reason for intervention under foreign investment rules.

Press reports suggest that the most recent example is the planned takeover of Siltronic - the last big wafer producer in Europe - by GlobalWafers of Taiwan, which the parties have now aborted. This occurred after the German Ministry of Economic Affairs and Climate Protection failed to grant the requested approval within the long stop date, despite more than 14 months of discussions with the Ministry and Globalwafers offering substantial commitments, including a public law contract with a golden share safeguarding the interests of the German government. The German Ministry of Economic Affairs unilaterally extended the review period and was not in a position to complete all necessary review steps before the long stop date. Likewise, in 2021, the Italian Government blocked the acquisition by a Chinese investor of a controlling stake in LPE, an Italian company active in the semiconductor sector. Given the EU’s current focus on the semiconductor industry, it is expected that the European Commission will also increasingly intervene in transactions related to this industry. This does not necessarily mean that the number of prohibitions in this sector will further increase or that foreign investment deals are not possible in this sector. However, where an important semiconductor player is the target, there is likely to be an increased risk of long-running reviews and commitments being required. These risks need to be factored in by both acquirers and sellers when planning the timetable and break fees for their transactions. 

Key Takeaways

The number of foreign investment transactions that are blocked is still rather small but it is increasing, as is the number of cases where the parties abandon the transaction as a result of an authority’s intention to block a deal. In view of the current political climate in Europe, we expect that the peak of foreign investment prohibitions is not yet in sight. That said, foreign investment in Europe remains possible – as it is in other Western countries (see our blog post on Canada’s recent clearance of a Chinese SOE’s investment). But it is more crucial than ever for investors to consider foreign investment control and plan early on how to steer their deal through choppy regulatory waters.