Improved FDI Screening in UK, Germany, Canada Could Improve Status With CFIUS, Firms Say
Measures this year by the United Kingdom, Germany and Canada to boost their foreign investment screening regimes will likely improve their standing with the Committee on Foreign Investment in the U.S. and could catapult Germany into CFIUS’s group of excepted foreign states, observers said. Although Germany could become an excepted state, each country has tightened its screening tools to further scrutinize certain foreign direct investments, which will likely lead to more investment hurdles for their respective industries.
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Improvements to screening regimes in the U.K., Germany and Canada are part of a global effort by a range of U.S. allies to better scrutinize foreign direct investments, partly to match the standard set by the U.S.’s screening regime (see 2103180052). Those three countries specifically updated investment thresholds surrounding critical technologies and other sensitive sectors that have been identified by CFIUS, said compliance consultant K2 Integrity, which should “better position the United Kingdom and Canada to maintain, and Germany to obtain,” excepted state status with CFIUS. The excepted state concept was introduced under the Foreign Investment Risk Review Modernization Act, which allows investors from certain countries to benefit from certain CFIUS exemptions (see 2002270049 and 2105060056).
But the improved screening regimes of the U.K., Germany and Canada will also translate into more complications for industry, K2 Integrity said, including more mandatory declarations. “These updates will increase regulatory risk and impose procedural hurdles for cross-border investments involving” all three countries, the firm said July 29.
The U.K.’s new National Security and Investment Bill, which passed in April, “significantly expands the government’s powers to screen investments on national security grounds,” Baker McKenzie said in a July post. The government will have “broad jurisdictional nexus criteria to catch investments,” the firm said, and it also created a mandatory notification procedure for certain acquisitions of businesses operating in 17 sectors. The U.K. is still working to finalize definitions for those sensitive sectors, K2 Integrity said.
The U.K.’s secretary of state was also granted a “broad call-in power” to “prohibit or unwind transactions that pose heightened risks to national security,” K2 Integrity said. As a result, even parties that aren't subject to a mandatory notification requirement may want to submit a voluntary notification “to receive comfort that their transaction will not be called in for review later.”
Although Baker McKenzie said their experience dealing with the U.K.’s Investment Security Unit has so far been “largely positive,” it stressed that the new investment law “remains one of the broadest and most aggressive investment review regimes globally.” The firm said it hopes the U.K. “is true to its word in calling in for review only a very small proportion of deals genuinely harmful to national security, and speedily clearing all other notified investments.”
Germany in April also introduced new foreign investment screening measures by broadening the scope of its review process to require mandatory filings for investments in 16 new “activities” related to critical technology, K2 Integrity said. In addition, the scope of transactions subject to a “sector-specific review process” now includes military equipment that requires export licenses, defense products covered by “secret patents,” encryption technology products, and certain essential infrastructure, the firm said.
Those measures further align Germany’s screening mechanisms with the U.S.'s. “For this reason,” K2 Integrity said, “companies operating in Germany and in other countries that are revamping their foreign investment review regimes should closely monitor which countries are granted excepted foreign state status by CFIUS.”
The firm also pointed to Canada’s updated foreign investment review guidelines issued in March, which identify areas that may pose national security concerns, including sensitive personal data, sensitive technologies, critical minerals and investments by state-owned actors. Under the new guidelines, all investments by state-owned entities will be subject to increased scrutiny.
Canada also outlined 11 factors it may consider when reviewing an investment, the firm said, including the potential for an investment to “permit sensitive technology or know-how transfers” or an investment’s “potential to enable access to sensitive personal data.” Fifteen technology areas will specifically see increased scrutiny, including advanced materials and manufacturing, aerospace, biotechnology, medical technology, artificial intelligence and energy.
K2 Integrity said the rise in strengthened review regimes “present[s] both timing and substantive business, financial, and risk considerations for transaction parties,” particularly those involved in critical technology sectors. “A proactive effort to engage with governments early in the deal process will be preferable to mitigation, delays, unwinding, or penalties.”