FDI regulation is a matter of national competence, including within the European Union (EU), and, accordingly, there is no universal definition of FDI. In common, however, FDI screening powers are typically targeted towards investments that create a lasting interest between a foreign investor and an asset or economic activity in the host country and through which the investor gains, directly or indirectly, rights to participate in the management or control of the asset. Relevant interests may arise at low-levels, such as the acquisition of 10% interest in shares or voting rights of an entity, and sometimes as low as 3% or 5% interests, including if combined with other management rights or special economic rights. Some FDI regimes apply other criteria in connection with the application of FDI rules and filing requirements – such as thresholds based on turnover or investment value – to exclude de-minimis investments from regulatory scrutiny. However, in most regimes, a broad scope of regulatory oversight is maintained on the basis that national security (and other) risks may arise from a range of assets and activities, regardless of their value or scale.
Whether an investor is classified as “foreign” may be a fairly self-evident matter in many jurisdictions. Generally, ultimate beneficial ownership tests apply, but these tests may have differ in scope and application and some jurisdictions also take account of the place of registration of intermediate entities in the chain of control. A handful of FDI measures apply exemptions (full or partial) for investors from certain countries – for example, Poland exempts investors from within the OECD (for some aspects of its FDI laws), Canada raises the financial threshold for WTO investors and the Committee on Foreign Investments in the United States (“CFIUS”) grants country-specific exemptions from time to time. The EU FDI Regulation refers to “third countries” and treats investors from non-EU/non-EEA/non-EFTA countries as foreign. However, investments into the most sensitive sectors, such as defense, can often trigger an FDI review for all non-national (and even national) investors. In addition, countries such as France and Italy have extended the application of their FDI regimes to all non-national investors acquiring control of assets in certain sectors.
It is more unusual for FDI laws to target only particular groups of investors. One example is the, so-called, “Press Note 3” regulation introduced by India in 2020, pursuant to which FDI filings are required by all investors from countries bordering India and regardless of the sector of investment. In some other jurisdictions, FDI filing requirements apply on a stricter basis for state-backed investors, including state-owned enterprises, sovereign wealth funds and state pension funds. In accordance with Article 4(2) of the EU FDI Regulation, most EU Member States assess whether an investor is controlled by a foreign government or has been involved in activities detrimental to national security during the substantive review process.
The vulnerabilities of a target company and its specific activities are key factors within the substantive assessment of foreign investments. Most FDI regimes, in some manner, identify those activities or sectors that are regarded as most susceptible to foreign investment risks. For example, Article 4(1) of the EU FDI Regulation provides a non-exhaustive list of sensitive sectors that are prone to trigger FDI review. Most EU Member States incorporate some or all of the sectors mentioned into their own FDI laws, although national definitions of the sectors frequently diverge. Member States may also supplement the list of sectors based on domestic risks and preferences. Typical activities subject to review across all FDI regimes, globally, include military and dual-use goods, critical infrastructure (such as, energy, water, telecommunications, health, transport), critical technologies (such as, artificial intelligence, advanced materials, cyber security, biotechnology), critical inputs and raw materials (such as food), data processing (particularly relating to personal or sensitive data), and media or media plurality. FDI regulators may also have ex officio powers to screen transactions occurring in any sector, for example, in the UK and Germany.
The purpose of FDI regulation also varies by jurisdiction. A number of FDI regimes emerged to address primarily economic concerns – most notably, in Australia, New Zealand and Canada. These regimes apply general “net-benefit” requirements and other investment controls to protect specified domestic industries (e.g. agriculture in Australia), and have introduced screening powers on national security grounds more recently. Other FDI regulators, such as the CFIUS, were empowered with a national security focus from the outset. The UK National Security and Investment Act 2021 is intended to focus on national security, and not other economic, risks. Within the EU, any restriction of the freedom of establishment of capital must be justified under EU law by overriding reasons in the general interest. The European Court of Justice has traditionally applied high standards in this regard, requiring a genuine and sufficiently serious threat to a fundamental interest of society.
Given that FDI proceedings concern national security issues, they are typically confidential. There are few publicly reported cases and even fewer court decisions testing the boundaries of application for FDI laws. However, in October 2021, the European Commission opened an investigation to determine whether Hungary had breached the EU Merger Regulation by blocking the acquisition of sole control over the Dutch Insurer Aegon by Vienna Insurance Group. The transaction was blocked by Hungary based on emergency amendments to its FDI screening regulation, after the European Commission had granted clearance for the transaction pursuant to EU merger control rules. Following its investigation, the European Commission indicated that national security and public policy considerations must be carefully circumscribed and remain compatible with the EU Merger Regulation, particularly where freedom of movement of capital within the EU is at stake.
In another case, in Italy, investors are challenging whether a prohibition decision issued by the FDI authority was a proportionate response to an acknowledged national security risk in circumstance where extensive undertakings were offered.
In terms of process, it is increasingly common for FDI filings to be submitted to a dedicated FDI regulator (sometimes established within a government ministry). In a smaller number of jurisdictions, FDI review remains sectoral and is managed as a component of other regulatory approvals. To the extent that FDI notification requirements remain broad, it is evident that the actual substantive national security and public policy interest is narrower and the overwhelming majority of transactions that are filed under FDI regulations are cleared without intervention by FDI authorities – more than 80% in the EU. In those cases where mitigation is required, regulators frequently favour behavioural remedies (including commitments to maintain a national presence or certain activities/facilities, information barriers or restrictions on the transfer of intellectual property and know-how to other jurisdictions). The blocking of transactions on national security grounds is rare, although the deterrent effect of FDI regulations remains difficult to measure.
