Summary

While the impact of Brexit on merger control in the EU and UK has generally been well-publicised, its impact on merger-control’s younger, fast-growing sibling – foreign investment control – has received comparatively less attention.

As part of the EU-UK Trade and Co-operation Agreement (TCA) signed on Christmas Eve 2020, the European Union and UK Government enshrined the principle of equal treatment of investors into their relationship. This might, on the face of it, suggest that UK investors will be treated on a similar footing as other EU/EFTA investors. It is clear, however, that this will not apply to foreign investment screening rules – EU Member States look set to subject UK investors to the same degree of scrutiny as any other third country investors.

Brexit: the treatment of UK investors under foreign investment rules in EU Member States

Brexit has occurred against a backdrop in which many EU Member States are strengthening their foreign investment screening rules or are introducing new regimes, either in response to the EU FDI Screening Regulation (which took effect in October 2020, see here for the latest developments under the Regulation) or as a result of the impact of Covid-19.

The foreign investment jurisdictional thresholds in a number of EU Member States differentiate clearly between EU/EFTA based investors and those from third countries. In certain countries, this is reflected in the more expansive scope of the sectors subject to screening for third country investors. For example, in Germany acquisitions by third country investors will trigger mandatory foreign investment reviews across a wider range of sectors compared to EU/EFTA investors, for whom foreign investment screening rules are only relevant in the wider military and IT security sector. Similarly, other EU Member States such as France employ lower thresholds for the level of minority shareholdings that are subject to review for third country investors. All else equal, acquisitions by third country investors are therefore more likely to be subject to scrutiny under foreign investment rules in EU Member States.

While the EU-UK TCA provides for equal treatment of investors, it also allows the UK and the EU to apply regulations that serve to protect public security and public order. This exception may be invoked only in case of a genuine and sufficiently serious threat to one of the fundamental interests of society, and must not be applied in a manner which would constitute arbitrary or unjustifiable discrimination. But it is clear that EU Member States regard foreign investment rules as an important measure to safeguard public security and public order in those countries as well as certain EU programmes, and are therefore intending to rely on this qualification in the TCA to treat UK investors as they would any other third country investor.

This is the case for instance in Germany, where the Federal Ministry of Economics and Technology has confirmed that UK investors will be treated like third country investors – and will be subject to the cross-sectoral examination under the German regime, which applies to transactions in a broader range of economic sectors. Similarly, in France, UK investors will also now be considered as third country investors. As such, the foreign investment rules will cover acquisitions by UK investors of 25% of in-scope companies (as well as the 10% threshold for listed companies). And UK investors will be treated like third country investors under the foreign investment regimes in other major EU Member States (e.g. Italy and Spain).

Implications for UK investors

The treatment of UK investors on an equal footing to other third country investors should not imply that UK investors will necessarily be considered as higher risk acquirers from a substantive assessment perspective. After all, the foreign investment rules in many Member States enshrine the principle of equal treatment of investors.

However, given that a wider range of transactions involving UK investors will now be subject to foreign investment rules in EU Member States compared to pre-Brexit, this will add unwelcome regulatory complexity for UK investors into the EU. This has the potential to place UK investors at a competitive disadvantage compared to their EU/EFTA counterparts in competitive auction scenarios and, in complex cases, it might impact on deal economics.

In this context, it is notable that the proposed National Security and Investment (NSI) Bill in the UK does not give preferential treatment to domestic investors – UK investors in the 17 most sensitive economic sectors specified under the NSI Bill will be subject to the mandatory notification requirement in exactly the same way as any overseas investor.