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April 11, 2018

Foreign Investment Control: Trade Protectionism or Reasonable Control Over a Nation’s Industries?


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2017 witnessed a wave of foreign investment control reform in Europe, both at Member State and European Union level. Across the Atlantic, the Committee on Foreign Investment in the United States (CFIUS) has recommended blocking one foreign transaction, which may portend increasing trade protectionism in the United States as part of the Trump administration’s ‘America First’ policy.

In China, where foreign investments used to be subject to a case-by-case evaluation, the screening process for acquisitions of local businesses by foreign investors is being simplified and becoming more industry-focused. This article provides a summary of the recent foreign investment control developments and analyzes the trends that could affect transactions in 2018.

European Union

On September 13, 2017 Jean-Claude Juncker, president of the European Commission (EC), announced the EC’s intention to introduce a foreign investment screening regime. This proposal was supported by Germany, France and Italy but faced opposition from the Netherlands, Portugal and Spain. Currently, there is no harmonized foreign investment control regime at EU level, and just under half of the Member States have some sort of foreign investment control review mechanisms in place. If a merger meets the turnover thresholds of the EU Merger Regulation, Member States’ ability to exercise foreign investment control is more limited. They can only take ‘appropriate measures to protect legitimate interests’ in public security, media plurality and financial prudential rules.

The new EU-wide foreign investment proposals would apply to transactions that cause ‘security and public order’ concerns, which would include investments in: (i) critical infrastructure; (ii) critical technologies; (iii) the supply of critical inputs; and (iv) companies with  access to sensitive information or the ability to control sensitive information. With this legislative proposal, the EC attempts to achieve the objectives set out below.

First, Member States that already have a foreign investment control regime will be required to notify the EC of their review mechanisms and submit annual reports providing: (i) an overview of the application of the regime; (ii) information about the transactions reviewed or under review; (iii) whether the Member State ultimately blocked or approved the transactions, and if the approvals were subject to conditions; and (iv) the sectors, origin and value of the foreign investments screened and undergoing screening.

Second, the proposal introduces a cooperation mechanism whereby Member States reviewing a transaction must share information about the transaction with the EC and other Member States and allow them to provide their views on the transaction. If implemented as currently drafted, this particular section could have a significant effect on transaction timetables. After the Member States receive the information regarding the transaction under review, there is a 25-working-day period for Member States to submit their observations. The EC will have an additional period of 25 working days to decide whether to issue an opinion.

Third, foreign investments that could have an impact on projects or programs of EU interest will be subject to a security review by the Commission, which may issue an opinion to the relevant Member State. If the EC issues an opinion, the Member State is required to ‘take utmost account of the EC’s opinion and provide an explanation to the EC’ if it decides not to follow the recommendations in the opinion.

The lack of ambition of these proposals is telling. The EC has not proposed that it be given the executive authority to review foreign investment – to try to re-create the ‘one stop shop’ that exists for merger control. The EC’s role is limited to coordinating the activity of Member States and issuing an opinion if there is a direct impact on programs or projects of EU interest.

Even though these proposals have faced criticism from several Member States, it remains to be seen whether they will be implemented in 2018.

Although U.K. investors will be characterized as foreign investors once the U.K. formally leaves the EU, it is very unlikely that the U.K. or indeed other Western investors are the target of this initiative.


Germany was the first European country to introduce reforms to its foreign investment control regime in 2017. The reform was a response to Midea’s acquisition of German industrial robotics manufacturer Kuka for €4.5 billion and Fujian Grand Chip Investment’s proposed acquisition of German chip equipment marker Aixtron. These transactions were viewed as a sell-off of strategic German technology to companies that advance China’s industrial policy objectives.

The German government has powers to review the acquisition of 25% or more of the voting shares of a German company by a foreign investor if Germany considers that the acquisition poses a threat to public order or national security. The revised regime introduced: (i) a mandatory notification for acquisitions of targets active in the military sector and sensitive civil sectors; (ii) an extension of the review period to four months; and (iii) a non-exhaustive list of business areas in the civil sector which will be considered relevant for national security. These relevant business sectors include: (i) companies operating in critical infrastructures which are relevant for the security of supply of essential goods and services to Germany, including the energy, water, nutrition, IT and telecommunications, health, finance and insurance, and transport and traffic sectors; (ii) suppliers of dedicated software to operators of critical infrastructures;  (iii) companies that are obliged to implement measures to monitor telecommunications and companies which produce the monitoring devices; (iv) certain cloud computing service providers relevant to national security; and (v) key telematics infrastructure companies operating in the public health sector. Additionally, using an acquisition vehicle in the EU or Germany will no longer render the transaction outside the scope of review. Germany will consider whether the EU or German investment vehicle actually performs economic activities or has business premises, staff and equipment. No longer is it presumed that the reason for incorporating the investment vehicle in the EU was tax efficiency and not avoiding foreign investment review.

While this reform may make Germany a less attractive destination for foreign investment, it appears that the country will primarily scrutinize transactions where the acquirer is a State-owned or State-funded entity. However, in a competitive bid scenario, sellers may prefer domestic or EU investors, as the transaction would avoid foreign investment review (although most transactions require merger control anyway and the timescales involved are likely to be similar for the vast majority of buyers).

Even for deals in the military or sensitive civil sectors, the introduction of a mandatory notification for the acquisition of targets is unlikely to have a major impact. Generally, a prudent purchaser, under the previous regime, would have filed voluntarily to obtain a Certificate of Non-Objection. Although there was no standstill obligation, the parties would not usually risk closing a transaction before receiving the Certificate of Non-Objection.


Italy expanded its Golden Power rules on October 16, 2017 to strengthen its review powers and better protect the know-how and technological expertise of Italian companies from foreign acquisitions. The Golden Power rules apply to transactions and corporate actions involving companies in the defense and national security sectors that could pose a threat to Italy’s national security and companies in the energy, technology, transportation and communication sectors that could pose a significant threat to Italy’s interests in the security and operation of networks and systems, continuity of essential supplies and preservation of technological know-how.

Italy applies a mandatory notification procedure which requires foreign investors to notify acquisitions of equity interests in Italian-listed corporations active in the defense or national security sectors whenever the thresholds of 2, 3, 5, 10, 20 and 25% of capital are met. Acquisitions by foreign investors in the energy, technology, transportation and communication industries must also be notified. Corporate actions taken by foreign owners of Italian companies that could change the company’s ownership structure, corporate purpose or liquidate the operations of the company’s business must also be notified. Failure to make these notifications could lead to a fine of up to twice the monetary value of the transaction, which cannot be less than 1% of the turnover of the companies involved.

Italy places particular importance on acquisitions by foreign investors that could change the corporate governance and policies of Italian companies.

These include the relocation of the company’s headquarters or manufacturing plants outside of Italy and transferring know-how outside of Italy for the benefit of foreign investors.

Although Italy retains the power to block transactions, its enforcement practice has focused on behavioral restrictions. Italy has wide powers to impose: (i) conditions on the composition and structure of the board of the target company; (ii) ongoing monitoring requirements to ensure compliance with imposed conditions; (iii) safety measures requiring the implementation of safety plans or appointment of a chief safety officer; and (iv) measures of an organizational and structural nature aimed at ensuring the confidentiality of information and technological know-how of the target.

Unlike Germany, Italy imposes a statutory standstill period of 15 days, during which the Italian government reviews the transaction. This review period can be extended for a maximum of 10 days if the Italian government requires further information from the parties. The notification must be submitted within 10 days of the acquisition or enactment of a corporate resolution. This short review period is unlikely to adversely affect transaction timetables. The more burdensome issue is the ongoing monitoring of corporate resolutions to determine whether a notification should be submitted. In light of Italy’s reluctance to block transactions, the foreign investors’ chief concern would be the nature of the conditions that the Italian government may impose on the governance or operating structure of the acquired entity.

United Kingdom

The U.K. proposed the introduction of a foreign investment control regime in the autumn of 2017. Although the U.K. does not currently have a foreign investment control regime, the government is able to intervene in any transaction that adversely affects national security interests, the plurality, standards and quality of the media and the stability of the U.K. financial system.

On October 17, 2017,  the U.K. government published a green paper outlining two models for a foreign investment control regime: (i) in the short term, amending the merger turnover thresholds for transactions involving companies in the military and dual-use sectors and the advanced technology sector; and (ii) in the long term, enacting a self-standing regime to evaluate transactions affecting critical businesses that are essential to Britain and British society.

The short-term proposal would amend the turnover thresholds from the current £70 million to £1 million and eliminate the requirement for the merger to increase the share of supply to or over 25%. Should a merger in these sectors pose a national security concern, the Secretary of State would have the power to block the transaction. This proposal would be enacted through secondary legislation, thereby sidestepping a parliamentary debate on the legislation.

The U.K. has proposed two different models for the long-term foreign investment regime. Under the ‘expanded call-in powers’ model, the U.K. would retain the voluntary merger filing regime but expand the range of transactions where the Secretary of State could intervene to safeguard national security objectives. The Secretary of State’s intervention would be justified where it is reasonably believed that national security risks would be raised by the acquisition of significant influence or control over any U.K. business entity by an investor (either domestic or foreign). This model defines control as more than 25% of a company’s shares or votes. There would also be a ‘second limb’ test for transactions that give (directly or indirectly) significant influence or control over a company or over its assets or businesses in the U.K. The government is yet to publish how this second-limb test would be formulated. The time period for the government to intervene in a transaction is proposed to be three months.

The second model would introduce a mandatory filing regime for transactions in ‘essential functions’ of the economy that could pose legitimate national security concerns. Transactions in the civil nuclear, defense, energy, telecommunications and transport sectors would be subject to foreign investment screening. Government intervention would also be justified in circumstances where there are no other reasonable means to adequately mitigate the risks posed by foreign investment and where existing licensing or regulatory regimes are insufficient to provide the government with the information and powers required to protect national security. The government also envisages the introduction of sanctions for failure to notify, which could include financial penalties, criminal offenses and the disqualification of directors.

The consultation to the short-term proposal closed on November 14, 2017 and the deadline for submitting observations on the long-term proposals was January 9, 2018.


While the EU and U.S. are expanding the scope of the transactions that would fall under their foreign investment screening regimes, China is moving in the opposite direction. Since the gradual opening of its market from the late 1970s until 2014, foreign investments in China were subject to approval after a case-by-case assessment, regardless of the size and origin of the parties, the investment value or the industry involved. However, a gradual reform of the foreign investment procedure started in 2014, which saw the departure from the case-by-case assessment model and culminated in the adoption of the Pre-establishment National Treatment plus negative list system. In July 2017, China introduced a simplified file-for-record procedure which applies to acquisitions of Chinese businesses by foreign investors, provided the transaction does not relate to an industry appearing in the negative list. Transactions that fall under the negative list would have to be approved under the burdensome case-by-case analysis.

The negative list, which forms part of the Catalogue for Guidance of Foreign Investment Industries (Catalogue), is an essential element of Chinese industrial policy and indicates the level of sensitivity that China has towards foreign investment in a particular industry or sector. The Catalogue also contains a list of industries where China actively encourages foreign investment and offers several incentives to attract foreign capital.

The negative list in the 2017 Catalogue has a limited scope (63 industries in total, but representing a small proportion of the Chinese economy). It appears that most foreign investments into China will be exempt from foreign investment approval. While this may be true, transactions involving foreign investors may be subject to national security review (NSR) and/or merger control reviews. These, in addition to the foreign investment review mentioned above, are separate procedures with different thresholds. Receiving approval under one review system is not a pre-condition for approval under the others, and the outcome of the reviews may not be consistent. It is also notable that merger control in China is operated by MOFCOM rather than an independent competition agency and on the basis of a public interest test – which can permit non-competition concepts to enter the merger control analysis.

Acquisitions of domestic businesses active in the ‘national economic security sectors’ by foreign investors will only require NSR approval if the foreign investor acquires control over the target. For these purposes, control is defined as the acquisition of 50% or more of the shares of the target or the ability to exercise decisive influence over the target. By contrast, any acquisition (no matter how low) of a business operating in the ‘national defense security industry’ by a foreign investor would require NSR approval.

Transactions that meet the relevant turnover thresholds and result in a change of control would require merger control approval. The merger control does not target foreign investment per se, and theoretically the review should not be impacted by factors other than competition. However, in a number of mergers involving foreign entities, the Chinese merger control authority imposed remedies even though the parties’ market power in the relevant market would not normally be sufficient to trigger antitrust intervention. Remedies in these cases make more sense when thought of as safeguards for Chinese industrial interests.

The merger control regime is particularly relevant in terms of ‘foreign to foreign’ deals in raw materials. Neither NSR nor foreign investment review apply to offshore transactions, and given China’s perception of reliance on imported raw materials, the merger control system becomes the only way to pursue Chinese industrial policy concerns with respect to these transactions.

Unlike the foreign investment review mechanism, the NSR and merger control review processes do not contain a list of sensitive industries. Past decisions, regulations and guidance notes from government agencies provide helpful references for evaluating the likelihood of an industry being considered ‘sensitive.’ However, the industries that may be considered sensitive under the review mechanisms do not necessarily overlap. For example, potash appears in the ‘encouraged list’ of the Catalogue, meaning that it is not considered sensitive under the foreign investment review procedure. However, the recent decisions of Uralkali/Silvinit and Agrium/ Potash Corp of Saskatchewan confirm that potash is considered a sensitive industry under the merger control review.

With the introduction of the ‘PENT plus negative list’ model, foreign investors should expect a swifter and more efficient regulatory approval process for most investments in China. However, transactions in the industries highlighted in the ‘negative list’ will face significantly higher scrutiny. While the recent reforms are a welcome development, foreign investors still face the challenges of two additional regulatory review processes and related filings.


Under longstanding U.S. law, Presidents may block a transaction by a foreign person or entity that could result in foreign control of a U.S. business if they determine that the transaction will impair national security.1  The President has delegated this national security review authority to Committee on Foreign Investment in the United States (CFIUS), a nine-agency committee chaired by the Department of the Treasury.

As part of its grant of authority, CFIUS may block transactions, order divestitures or impose other conditions on a transaction within its jurisdiction at any time, including after the transaction is consummated, to preserve national security. Except in limited circumstances, CFIUS’s decision to take any such action is not reviewable by the courts.

2018 Antitrust 02 Graph

To provide certainty to foreign investors that their transactions will not be blocked prior to closing or unraveled after consummation, CFIUS has implemented a voluntary notification process. Under CFIUS’s regulations, if a foreign investor notifies CFIUS of a transaction and CFIUS clears it of national security concerns, CFIUS and the President may not order divestitures or other conditions at a later date.

CFIUS’s national security review can take between 30 and 90 days (depending on the level of review) from the time CFIUS ‘accepts’ the notification. Parties that plan on notifying CFIUS of a transaction may contact CFIUS before filing to identify potential issues at an early stage and expedite the review process.Data published by CFIUS shows an increasing number of notifications in recent years and that CFIUS reviews are taking longer, mostly driven by increased investment by Chinese companies.2 To illustrate, from 2005 to 2007 (the first three years for which data is available), CFIUS received 313 notifications; four (1.2%) of those transactions involved Chinese investors, CFIUS performed a second-level review on 14 (4.4%) transactions and 36 (11.5%) notifications were withdrawn during the first- or second-level review. The President did not block any transactions from 2005 to 2007. By contrast, from 2013 to 2015 (the most recent three years for which data is available), CFIUS received 387 notifications; 74 (19.1%) of those transactions involved Chinese investors, CFIUS performed a second-level review on 165 (42.6%) transactions and 33 (8.5%) notifications were withdrawn during the first- or second-level review. The President also did not block any transactions from 2013 to 2015.

As shown by the data, the President rarely exercises his authority to block mergers, having done so only four times since 1988 (although many more companies abandon transactions during the CFIUS review process).

However, due to a recent spike in foreign investment, particularly by Chinese investors in the technology sector, two of the four presidential blockages have occurred since December 2016, both involving proposed acquisitions of U.S. semiconductor businesses by Chinese investors.3 Given President Trump’s “America First” platform, CFIUS review and presidential action are increasingly important risk factors for foreign investors to consider when investing in U.S. companies.

Antitrust Team


1. ‘National security’ is not defined in CFIUS’s regulations, but the Department of the Treasury released guidance that includes an “illustrative list of factors for consideration by CFIUS and the President in determining whether a covered transaction poses a national security risk.” 73 Fed. Reg. 74,569 (December 8, 2008). These factors include: (1) effects on the domestic production for projected national defense requirements; (2) effects of foreign control of domestic industries and commercial activity on the ability of the U.S. to meet the requirements of national security; (3) effects of foreign control on U.S. technological leadership or national security-related effects on critical technology; and (4) effects on critical infrastructure, such as major energy assets and other critical resources and material.
2. Committee on Foreign Investments in the United States, Annual Report to Congress, CY 2015, September 2017 (CFIUS releases its annual reports on a delayed basis).
3. See for example Order Regarding the Proposed Acquisition of Lattice Semiconductor Corporation by China Venture Capital Fund Corp., 82 Fed. Reg. 43,665 (September 18, 2017).