The European Commission (the “Commission”) issued a White Paper on Outbound Investments (the “White Paper”) on 24 January 2024, setting out non-binding proposals for a detailed analysis of EU outbound investment. With its initiative, the Commission aims to understand whether the current limited regulation in the area of outbound investments is allowing leakage of strategic technologies and leading to potential risks to security. The conclusions of any review would inform possible EU policy responses, including whether to adopt EU-level rules regarding the screening of outbound investment to third countries. The White Paper is one of five initiatives set out in the Commission’s European Economic Security Package (the “EESP”) that aim to address the national security and public order concerns that the Commission has identified (see our Global Policy Watch blog).

In this blogpost, we discuss the key aspects of the outbound investment White Paper at the EU level. These are the main takeaways:

  • The White Paper does not introduce any immediate change to legislation or create an EU- level outbound investment screening framework, but is a step towards the EU identifying whether (and what) legislation may be necessary to close perceived ‘gaps’ in regulation that permit outbound investments made by EU businesses which could lead to potential security risks.
  • The White Paper envisages a joint effort by the Commission and Member States to explore the need to regulate and control outbound investment, prompted by the Commission’s perception of growing geopolitical tensions and technological shifts.
  • The Commission suggests a multi-stage process to evaluate risks potentially associated with outbound investments. This process began with a consultation (following the White Paper’s publication) followed by a monitoring period. Based on the findings of both the public consultation and monitoring, the Commission will assess the need and possible content of any policy response in Autumn 2025.
Continue Reading Outbound investment screening in the EU – A major step forward?

On 24 January 2024, the European Commission (the “Commission”) published its European Economic Security Package (the “EESP”), which included the long-awaited proposal to reform the EU Regulation which established a framework for Foreign Direct Investment screening (the “EU FDI Regulation”). The EESP’s proposed regulation (the “Proposed Regulation”) is one of the EESP’s five initiatives to implement the European Security Strategy (published in June 2023) – for an overview of the EESP, see our Global Policy Watch blog.

The Proposed Regulation seeks to improve the legal framework for foreign investment screening in the European Union and builds upon feedback that the Commission received during its public consultation in 2023. If adopted as proposed, it will significantly change the landscape of foreign investment screening regimes across the EU (for a full report of the public consultation see here).

This blog highlights the key changes under the proposed reform and analyses their impact on global deal making. We also provide an outlook on the next steps for the proposals.

Key takeaways and comment

  • Extended scope to include indirect foreign investments through EU subsidiaries and greenfield investments.
  • Minimum standards and greater harmonisation across the EU.
  • Introduction of call-in powers to review all transactions for at least 15 months after completion.
  • Coordinated submission of foreign investment filings in multi-country transactions.
  • Focus cooperation between Member States and the Commission on cases more likely to be sensitive.
  • More prescriptive guidance on substantive assessments and remedies, including a formal obligation for national screening authorities to prohibit or impose conditions on transactions they conclude are likely to negatively affect security or public order in one or more Member States.
  • Increased reporting, while protecting confidential information.
Continue Reading Draft EU Screening Regulation – a new chapter for screening foreign direct investments in the EU

The EU Foreign Subsidies Regulation (“FSR”), which creates a new screening mechanism for non-EU subsidies granted to companies doing business and engaging in certain activities in the EU, took effect on 12 July 2023, with notification obligations starting on 12 October 2023. This post looks back at the FSR’s first six months and attempts to provide an outlook of what companies active in the EU can expect in 2024.  

Key Takeaways

Based on the reported enforcement activity of the European Commission (“Commission”) to date,[1] we see three main takeaways that businesses could expect from FSR enforcement in 2024:  

  • In the first eight weeks of the FSR’s implementation, the Commission received 38 (pre-) notifications of transactions. This number already surpasses the 30 notifications that the Commission had anticipated to receive per year. At the same time the number of Commission staff has remained very small, well below the 145 employees it initially estimated it would require to enforce the FSR. The Commission has, however, remained confident that it would be able to deal with this higher-than-expected workload; and we do not believe that companies should expect less diligent screening of their notifications. That said, the Commission could make use of the flexibility provided by certain mechanisms in the FSR Implementing Regulation (e.g., waivers) to reduce the level of detail it requires in individual notifications. We anticipate that the extent to which it uses such flexibility will very much depend on the notifying parties’ ability to convince the Commission of the transparency and robustness of a lighter notification.
  • Businesses should be aware that the Commission will not publish details of any preliminary review decision that clears a foreign subsidy. Guidance on the interpretation of key concepts contained in the FSR (e.g., the criteria used to assess the distortive potential of a foreign subsidy) is not expected before 2026. Although the Commission publishes and updates questions and answers, there will be few insights on these key issues for some time. Engagement with the Commission’s teams might offer means to bridge this information gap in the context of a particular transaction or tender.
  • Finally, the Commission has opened a number of anti-subsidy investigations into certain Chinese exports into the EU, showing that it will continue to enforce its trade instruments, (in this case the EU Anti-Subsidy Regulation), and also providing insights about its interplay with the FSR.
Continue Reading The EU Foreign Subsidies Regulation – Enforcement expectations for 2024

Recent proposals to amend the UK’s national security investment screening regime mean that investors may in future be required to make mandatory, suspensory, pre-closing filings to the UK Government when seeking to invest in a broader range of companies developing generative artificial intelligence (AI). The UK Government launched a Call for Evidence in November 2023 seeking input from stakeholders on a number of potential amendments to the operation of the National Security and Investment Act (NSIA) regime, including whether generative AI, which the Government states is not currently directly in scope of the AI filing trigger, should expressly fall within the mandatory filing regime. The Call for Evidence closes on 15 January 2024.

Our Inside Global Tech blog sets out how the NSIA regime operates, how investments in companies developing AI are currently caught by the NSIA, and the Government’s proposals to refine the scope of AI activities captured by the regime, including potentially directly encompassing generative AI.

What do you need to know?

Following a call for information earlier this year, the UK’s Competition and Markets Authority (CMA) has now announced the changes it intends to make to its merger review process. The majority of the changes are to the Phase 2 process, which is only encountered in a minority of formal reviews, namely those where the CMA believes the merger could lead to a substantial lessening of competition – at the time of writing, of the 72 transactions qualifying for investigations under the merger provisions of the Enterprise Act 2002 since 1 January 2022, 17 (24%) of these were referred to Phase 2 (whereas around 10% of non-simplified merger review procedures lead to a Phase 2 review in the EU). These changes largely seek to make the Phase 2 process more interactive, with a view to arriving at acceptable remedies proposals sooner in the process. The proposed changes follow a period of criticism of the CMA’s approach to merger enforcement and reflect a desire to improve the effectiveness of the UK merger review process. The proposed changes are being consulted on until 8 January 2024. 

Continue Reading Towards a More Interactive Merger Review Process: UK CMA Proposes Amendments

On November 3, 2023, FTC Chair Lina Khan sent a letter addressed to Representative Thomas P. Tiffany describing the FTC’s merger enforcement program during her tenure at the agency. The letter was a response to an inquiry from seven members of congress for information about the costs associated with certain litigated merger challenges brought by the FTC. Chair Khan’s letter included an appendix that listed all of the merger enforcement actions the FTC had initiated during her tenure. The data in that appendix corroborate the key finding from an article I authored for Law360 in October 2023: merger enforcement actions during the Biden Administration are at their lowest level in decades.

The Chair’s letter is also noteworthy because it seems to acknowledge the practical and substantive benefits of consent decrees, which may suggest a softening of the FTC’s views on settlements.

Continue Reading Recently Published FTC Data Confirm Historically Low Number of Merger Enforcement Actions

In quick succession on 7 and 15 November 2023, the Administrative Court of Berlin (Verwaltungsgericht Berlin, the “VG Berlin”) has ruled on procedural matters in foreign direct investment review proceedings of the Federal Ministry for Economic Affairs and Climate Action (the “BMWK”) in two hearings. Because court rulings on these non-public administrative proceedings – which are non-public because they concern national security and public order – have been very rare to date, the court’s clarifications will contribute to legal certainty for companies involved in the proceedings and the BMWK.

Key takeaways

  • In its rulings, the VG Berlin overturned two BMWK decisions on purely formal grounds without having to deal with material law questions (such as the standards of assessment of the BMWK’s or individual case groups of sensitive activities).
  • In the future, the BMWK will need to adhere to the formalistic procedure to be able to effectively enforce its decisions in the event of security concerns regarding foreign investments.

From a practical perspective, it would be regrettable if the open, direct and easily accessible communication channels with the BMWK, which have been appreciated by all parties involved in the proceedings to date, would have to give way to a much more formalistic administrative practice. The BMWK’s open communication has significantly reduced the average duration of investment review procedures and made it easier for companies and legal practitioners to work with the (still developing) German investment review regime.

Continue Reading Berlin court clarifies significant German FDI issues

Das Verwaltungsgericht Berlin (VG Berlin) hat in zwei kurz aufeinanderfolgenden Verhandlungen vom 7. und 15. November 2023 zu Verfahrensfragen bei Investitionsprüfverfahren des Bundesministeriums für Wirtschaft und Klimaschutz (BMWK) geurteilt. Da Gerichtsentscheidungen zu diesen nichtöffentlichen Verwaltungsverfahren – es geht um die nationale Sicherheit und öffentliche Ordnung – bisher sehr rar sind, werden die gerichtlichen Klarstellungen zur Rechtssicherheit für verfahrensbeteiligte Unternehmen sowie das BMWK beitragen.

Wesentliche Punkte

  • In seinen Urteilen hat das VG Berlin zwei Entscheidungen des BMWK aus rein formellen Gründen gekippt, ohne dass es sich mit materiell-rechtlichen Fragen befassen musste (etwa zum Beurteilungsmaßstab des BMWK oder einzelnen Fallgruppen sicherheitsrelevanter Aktivitäten).
  • Das BMWK wird künftig wahrscheinlich stärker auf eine formal-korrekte Verfahrensführung achten, um seine Entscheidungen bei Sicherheitsbedenken gegenüber Auslandsinvestitionen wirksam durchsetzen zu können.

Aus Praxissicht wäre es bedauerlich, wenn dadurch die – von allen Verfahrensbeteiligten bislang geschätzte – offene Kommunikation mit dem BMWK mitsamt kurzer Dienstwege und guter Erreichbarkeit einer deutlich formalistischeren Verwaltungspraxis weichen müsste. Denn durch die offene Kommunikation hat das BMWK die durchschnittliche Verfahrensdauer von Investitionsprüfungen deutlich reduziert und Unternehmen sowie Rechtsanwendern die Arbeit mit dem (noch jungen) deutschen Investitionsprüfungsregime erleichtert.

Continue Reading VG Berlin zu Verfahrensfragen bei der Investitionsprüfung

On October 17, 2023, the U.S. Government Accountability Office (“GAO”) published a report on mergers and acquisitions (“M&A”) in the defense industrial base. The report details the current M&A review process of the Department of Defense (“DOD”) and provides recommendations to proactively assess M&A competition risks.

Currently, DOD’s Industrial Base Policy (“IBP”) office, with input from DOD stakeholders, provides DOD’s recommendations on transactions that could affect the defense industrial base, when asked to do so by the Department of Justice or the Federal Trade Commission (“the Antitrust Agencies”). While DOD does not have a formal role in deciding the outcome of an antitrust review of a transaction, it informs the Antitrust Agencies’ review as an affected “customer”—for example, providing input on potential competitive effects of a transaction.

The GAO report concludes that DOD has, to date, had a reactive role in defense industry M&A review. As a result, the report observes that DOD has missed opportunities to identify transactions that could negatively impact the defense industrial base and to manage the full range of risks that such transactions can present for DOD programs. The GAO believes that DOD’s historically reactive posture has been due in part to a lack of sufficient guidance and resources being made available to those at the DOD who are responsible for providing the DOD’s views to the Antitrust Agencies. For example, current DOD M&A policy, DOD Directive 5000.62, outlines the department-wide policy for assessing M&A in the defense industrial base, explaining that DOD should consider the effect of M&A on competition for prime contracts and subcontracts, on national security, and on innovation risks, but it does not provide a methodology for such assessments.

Further, the report observes that IBP has had limited resources, and as a result it has had limited capacity to look out for and monitor transactions that may be reportable to the Antitrust Agencies under the HSR Act but do not have an obvious defense connection, to look for and consider the effects of defense-related M&A that falls outside the scope of the HSR Act, or to conduct macro-level trend analyses or retrospectives. As a result, the report notes that IBP officials tend to prioritize and focus on large transactions regarding which the Antitrust Agencies seek DOD’s views, and to use those factors as a proxy for identifying the highest risk M&A. The GAO report observes that between fiscal years 2018 and 2022, DOD assessed approximately 40 M&A transactions per year, the vast majority of which were above the HSR size of transaction threshold, and that is out of a total of approximately 400 defense-related M&A transactions per year. It also observes that DOD has only monitored two completed M&A transactions in the past 10 years, both at the Antitrust Agencies’ prompting.

GAO has thus issued the following recommendations for DOD:

  • Provide direction to relevant personnel on assessing the full range of risks and benefits identified in DOD M&A policy.
  • Clarify which major defense supplier’s M&A transactions should be prioritized for DOD assessment.
  • Assess whether the IBP M&A office is adequately resourced.
  • Monitor the effects of concluded transactions in cases where DOD had identified risks, to determine if risks were realized or if additional action is needed.

DOD concurred with all four recommendations, stating it will soon promulgate new written DOD policy to provide guidance on conducting and prioritizing assessments, as well as monitoring completed M&A. DOD will also assess the design and implementation of an M&A monitoring mission and resources to support it. Additionally, IBP is requesting dedicated funding to support and increase its M&A work.

These developments underscore that the Biden administration and DOD are highly focused on merger activity, including in the defense industrial base. Parties considering transactions in defense-related sectors should consider their regulatory strategy at an early stage and work with counsel to develop a holistic approach that takes into account the expanded role that DOD is likely to play in merger review going forward.

The EU Foreign Subsidies Regulation (FSR) adopted in December 2022 creates a new instrument to prevent foreign subsidies from distorting the European Union (EU) internal market. It aims to fill a perceived regulatory gap left by EU State aid rules applying to subsidies granted by EU countries but not by foreign states. It started to apply on 12 July 2023 and its notification obligations kick in on 12 October 2023. Procedural details are laid down in the Implementing Regulation (IR) which entered into force on 13 July 2023.

Key things you need to know about the FSR and the IR:

  • The FSR creates an additional layer of deal conditionality for sizeable transactions besides potential foreign direct investment (FDI) and merger control clearance.
  • From 12 October 2023, when acquiring (including jointly) control of a company in the EU or participating in a public tender in the EU, companies – including EU ones – will have to notify the European Commission (Commission) of foreign financial contributions (FFCs) received from non-EU states if the relevant thresholds are met or if the Commission so requests. Notification is compulsory and suspensory. Failure to notify or to suspend closing pending clearance may lead to severe sanctions. Information requirements are far-reaching as they comprise FFCs irrespective of whether they have a link with the notified transaction or public procurement procedure.
  • Beyond notified transactions and public procurement procedures, the Commission may launch ex officio investigations where it suspects that a foreign subsidy may distort the internal market. The FSR can relate to any type of activity unless already governed by other legislation.
  • Where following an investigation (initiated either in relation to a notification or on an ex officio basis) the Commission determines that a foreign subsidy risks distorting the EU internal market, remedies could apply, and the Commission could even prohibit the transaction or the award of a public contract.

We have put together a brief overview for your reference. We would be happy to facilitate a discussion with our team to review what this regulation could mean for your company.