Foreign investment screening is here to stay. New report from Herbert Smith Freehills and Global Counsel charts impact of politics and public interest on cross-border M&A
LONDON, 26 February 2018 – Major changes are happening globally both to the formal policy frameworks for screening inward foreign investments and the way they are used. Increasingly assertive politicians are adopting new strategies to influence deals, often deliberately creating ambiguity about the state’s power to force acquirers to court their approval. This typically means using more fully the room for discretion that invariably exists within existing legislative frameworks. In some cases, however, politicians are going further and seeking new policy tools that allow for more thorough vetting of investments, often requiring new legislation. The result is a much more fluid and uncertain environment for foreign acquisitions, which makes it essential for investors to understand both the legal framework and the political context they are operating in.
Global law firm Herbert Smith Freehills and advisory firm Global Counsel have teamed up to analyse the current FDI landscape from both the legal and the political perspective. The report provides guidance for investors on how to navigate this rising tide and complete transactions through effective planning and execution.
The report identifies three inter-related trends that are important predictors of sensitivity for acquisitions. They are changing how the governments of many countries perceive FDI in today's world:
- A Chinese pivot: the increasing scale of outbound Chinese investments and a shift in the targeted sectors to more politically sensitive areas.
- A contested view of national security: the widening scope of the technologies and sectors captured by policymakers' interpretation of their national security interests.
- A value chain dilemma: the increasing pressure on politicians to consider the impact of acquisitions on politically-favoured employment in advanced manufacturing, research and technology.
Herbert Smith Freehills' Foreign Investment Regulation Group is made up of experts in global M&A and Competition, Regulation & Trade. Alongside the joint report, the Group has launched an interactive map and global foreign investment guide, an essential tool which guides companies through FDI/public interest control processes and trends country by country. The Global Counsel team is comprised of policy experts who have held senior roles in the British government and European Union institutions earlier in their careers. They now advise major corporations on the impact of political and policy risk on meeting their business objectives.
The report’s authors issued the followed comments:
Herbert Smith Freehills' Competition, Regulation & Trade partner, Veronica Roberts:
"Policy makers are walking a balancing act, seeking to ensure they do not deter necessary investment by excessive protectionism, whilst managing political sensitivities about foreign investment and exerting control over its terms. This is particularly acute in a pre-Brexit UK. The definition of national security is changing: now AI, data storage and other IP-rich technologies can be as much of a 'red flag' as military and defence targets. The shift in Chinese outward investment towards critical technologies has prompted a shift in FDI-vetting focus in the US and Europe. It is essential that deal parties take into account not only the formal legal requirements, but also how authorities/governments apply these in practice, and how this is influenced by the prevailing political landscape. A global approach is crucial, in particular given the prospect of liaison between authorities and governments."
Global Counsel’s Chief Economist, Gregor Irwin:
“The liberal consensus on foreign direct investment, which held sway in most OECD countries in the first part of this century, has now broken down. Political leaders are under intense pressure to demonstrate that they have control over the forces of globalisation and how these impact on national security and economic interests. There is a risk of investment screening becoming overly politicised as politicians use their existing or new-found powers of discretion to respond to short term political pressures, while losing sight of long-term economic interests. These changes are more likely to be structural rather than cyclical and may even accelerate. The investors who succeed in this more challenging environment will be those that are able to interpret accurately the political currents they are facing and structure their approach in a manner that turns this to their advantage.”
Global Counsel’s Senior Director, Stephen Adams:
“The door is far from closing for foreign investors in developed markets. But policymakers are scrutinising deals in new ways and from new angles and deliberately injecting new ambiguity in some areas. The simplest maxim for investors in potentially sensitive sectors is always that the capacity to buy does not equal the licence to buy. There is no substitute for good planning and sensitive handling for companies entering these contested areas.”
Herbert Smith Freehills' Corporate M&A partner, Alex Kay:
"Our recent global client survey found that an overwhelming majority of respondents regarded increased political involvement as an impediment to M&A. Screening mechanisms can provide governments with a pause button, providing time for counterbidders to emerge and for compromises to be extracted from acquirers. It is more important now than ever for foreign investors to understand both the relevant legal frameworks and the political and policy context. FDI considerations should be a key part of transaction parties' regulatory strategy."
Notes to editors
- Herbert Smith Freehills operates from 27 offices across Asia Pacific, EMEA and North America. HSF is at the heart of the new global business landscape providing premium quality, full-service legal advice. The firm provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors, including Banks, Consumer products, Energy, Financial buyers, Infrastructure & Transport, Mining, Pharmaceuticals & Healthcare, Real estate, TMT and Manufacturing & Industrials. Website:www.herbertsmithfreehills.com. Follow us on Twitter @HSFPressOffice
- Global Counsel advises international investors and businesses on political and regulatory risks in markets around the world. We help investors and companies in a wide range of sectors to anticipate how government policies and regulations will impact on their investment plan or business strategy and to develop and implement responses to these challenges. Global Counsel has offices in London, Brussels and Singapore. Website: www.global-counsel.co.uk. Follow us on Twitter @Global_Counsel