Russia-Related FDI to Receive More Scrutiny, Law Firms Say
As countries continue to impose trade restrictions against Russia and Belarus, companies should expect longer review times and increased scrutiny on foreign direct investment involving either of those two nations, law firms said. Deal-makers in the EU should specifically prepare for more red tape resulting from a recent “sweeping” guidance from the European Commission, Fried Frank said in a May 2 alert, which could also speed up the rollout of further mandatory FDI screening regimes across Europe.
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The commission's notice, issued last month, advises “greater vigilance” against investment from Russia and Belarus, the firm said, including in transactions where a person or entity is “associated with, controlled by or subject to influence by the Russian or Belarusian government.” In those cases, Fried Frank said, any EU member state may block the transactions “as a threat to security.”
Companies should expect “protracted” review periods for filings involving Russian or Belarusian entities, the firm said, partly because the commission’s communication gives member states “additional reasons to scrutinize a transaction.” Deal-makers should be prepared for “extensive requests for information,” Fried Frank said, and regulators may ask for more detailed information on the acquiring company’s ownership structure. “Until now, we have seen a fairly pragmatic approach to how regulators treat limited partners,” the firm said, “but that may change as they seek to verify information related to Russian or Belarusian investors.”
Although the commission’s communication isn’t a “formal law,” and the decision to approve inbound FDI remains with each individual EU member state, Fried Frank said the messaging represented an “unprecedented step” to single out foreign countries as hostile investors. “The Communication is remarkable in its directness, openly identifying ‘unfriendly states’ and advising Member States on how to act,” the firm said. It expects the guidance to “result in an alignment of Member States’ substantive reviews, including from countries that may have previously been minded to maintain good relations with Russia.”
The notice could also be seen as an “unsettling indicator of ‘competence creep,’” the firm said, including from some member states wary of the commission infringing on the individual authorities of EU countries. At the very least, Fried Frank said, the commission is “now seeking to set the tone for substantive FDI assessment” and that move could lead to “directions on substantive reviews in the future.”
The firm also stressed the communication may not have an impact on most investments, particularly because most companies have already stopped doing business with Russia and Belarus. Before Russia invaded Ukraine, just 1% of EU FDI was from Russia. “Nevertheless the message is clear -- investments involving Russian or Belarusian persons/entities can expect a protracted review,” Fried Frank said.
Regulators outside the EU, including Canada, are also expected to increase scrutiny on Russia-related FDI, Covington said in an April 14 alert. “While the number of interventions generally remain low,” the firm said, “regulators are demonstrating their willingness to intervene against transactions that are associated with the Russian state or government.”
The Committee on Foreign Investment in the U.S. hasn’t issued any guidance for Russia-related transactions but likely will “continue its already heavy scrutiny of proposed Russian acquisitions” of U.S entities, Herbert Smith said in an April alert. The firm said CFIUS is “undoubtedly” using its jurisdiction and “considerable resources” to investigate not only new Russian investments submitted for its review, but also pending or completed investments that weren’t notified to the committee. A spokesperson for the Treasury Department, which chairs CFIUS, didn’t comment.