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Foreign Investment and National Security: Year in Review and Outlook

Olivia Ells

Foreign Investment and National Security: Year in Review and Outlook

On February 8, 2024, the newly formed Foreign Investment and National Security (“FINS”) Committee of the ABA Antitrust Section hosted a town hall showcasing a global survey of recent developments in foreign investment. The survey was presented by leading practitioners in the United States, European Union, United Kingdom, Asia, Australia, and Canada.  The event was moderated by the FINS Committee’s co-chair, Julie Soloway.

United States.  Jonathan Gafni highlighted the significance of President Biden’s August 2023 Executive Order (“EO”) on outbound foreign investment.  The EO prohibits or requires notification of certain outbound investments in Chinese companies involved with high-end semiconductors, artificial intelligence, or quantum computing.  Gafni previewed that the draft rules clarifying the U.S. outbound foreign investment regime will likely be in effect in the second half of 2024.  Finally, it is anticipated that there will be an increase in reviews by the DOJ National Security Division’s Team Telecom of foreign ownership once the Federal Communications Commission’s new rule requiring carrier licensees with at least 10% foreign ownership to provide one-time disclosures takes effect. 

European Union.  Pedro Callol highlighted the increase of foreign direct investment (“FDI”) screening regimes in EU Member States.  Callol expects that EU Member States will continue to refine their FDI screening tools and that those without a regime will likely adopt one in the next year.  At the EU level, in January 2024, it was announced that EU Regulation 2019/452, which established a framework for the screening of FDI into the EU, would be reformed.  There has been increased scrutiny of investments since the introduction of new mechanisms to filter transactions with an adverse foreign investment component. This scrutiny resulted in a White Paper on “levelling the playing field” and the introduction of the Foreign Subsidies Regulation (“FSR”).  Sensitive investments have increasingly been analyzed by regulators even if merger thresholds have not been met, including Towercast (C-449/21) and Illumina (T-227/21), both of which are pending before the EU Court of Justice.

United Kingdom.  Christine Graham reported that one of the most important recent developments in the UK has been the establishment of the UK National Security and Investment (“NSI”) regime.  Graham noted that although the regime is still very much in its infancy, it is in full swing.  Over the last two years, the UK has seen more FDI filings than other well-established regimes.  For the year ending March 2023, the UK received 866 notifications, which is almost double that of CFIUS (440 filings in 2022) and more than double received in France (325 filings in 2022) and Germany (306 filings in 2022).  The NSI regime casts a wide net, capturing only a small minority of deals that raise genuine national security issues; the vast majority of notifications (93%) were cleared without needing a detailed assessment.  This strategy raises concerns that the regime is disproportionate and places an undue burden on businesses.  To address these concerns, on November 13, 2023, the UK Government published a “Call for Evidence” on the regime’s operation.  The goal was to ensure that the regime followed a tailored approach to protect the UK against the small number of deals that could harm UK security, while simultaneously leaving the vast majority of transactions unaffected.  On January 15, 2024, the Call of Evidence closed, and Graham expects any potential changes to the NSI regime will be implemented later this year.

Asia.  Ninette Dodoo broke down the varied landscape across Asia into four broad categories: (1) more developed economies with tighter FDI screening regimes aimed at protecting strategic assets (e.g., Japan and Korea); (2) emerging economies shedding restrictions and opening up sectors to FDI while still screening some investments (e.g., Indonesia, Thailand, and Vietnam); (3) major economies that are relaxing their FDI regimes in some areas, but tightening them in others (e.g., China and India); and (4) jurisdictions with minimal restrictions (e.g., Hong Kong).

Looking ahead, Dodoo predicted numerous changes across Asia in 2024.  For example, Singapore passed the Significant Investments Review Act (“SIRA”) on January 9, 2024, requiring foreign investment in “designated entities” to be notified to the Minister for Trade and Industry.  Under SIRA, the Minister must approve some transactions in which a foreign entity has gained a large enough controlling interest in a designated entity.  This change signals a stricter, entity-based approach and applies to both foreign and domestic acquirers.

On the other hand, China is relaxing its FDI regime in part by gradually shortening its negative list for foreign investment.  However, China is also strengthening controls by increasing FDI screening for national security concerns.

India may be more receptive to considering applications from entities impacted by Press Note 3 where those entities provide essential components for electronic supply chains and/or are active in the EV sector.  The Press Note 3 regime requires prior approval for equity investments from countries sharing a land border with India.  Electronic components and EVs are sectors that India is seeking to develop, subject to these entities working with local Indian partners.

Australia.  Kirsten Webb expected that investments in Australian critical mineral mining operations and transactions involving personal or government data security concerns will be subject to particular scrutiny by the Foreign Investment Review Board (“FIRB”).  Following FIRB’s decision to block two foreign investments in the critical mineral sector, one from the U.S. and the other from China, the Australian government announced its critical minerals strategy.  This strategy reflects a focus on investment from the U.S., UK, Korea, Japan, France, Germany, and the EU.  The strategy states that “concentrated critical minerals markets lead to volatile and fragile supply chains which work against the public interest and hamper growth of the global industry.”  This statement appears to reference China's reported dominance in both critical minerals processing and the global market for rare earth elements.  The Register of Foreign Ownership of Australian Assets, which came into force on July 1, 2023, requires foreign investors to report a wide range of interests in Australian assets.  This information is shared across government agencies.

Canada.  Fraser Malcolm noted that the most important recent development in Canada is the increased scrutiny of investments under the Investment Canada Act (“ICA”).  Following the takeover of a number of “Canadian champions” like Hudson’s Bay Company and the Four Seasons Hotels, sweeping amendments to the ICA were passed that created a new national security screening mechanism and clarified certain restrictions on foreign investment into Canada.  Recently, the Cultural Sector Investment Review division, the regulatory body tasked with assessing whether an investment in a “cultural business” is of net benefit to Canada, has taken a hardline stance on investments from non-aligned countries in Canadian video games developers.  This development signals the intention to protect Canadian cultural businesses and a willingness to leverage foreign investment screening mechanisms to do so.

In 2023, 1,005 post-closing notifications were certified by the Foreign Investment Review and Economic Security (“FIRES”) branch of Innovation, Science and Economic Development Canada.  An additional five application for review were approved under the ICA. While the total number of filings decreased from the previous fiscal year, the total remained above the average annual total in the previous decade.  FIRES monitors news releases, media reports, and other commercial databases in addition to receiving referrals from security and intelligence agencies to locate “non-notifiable” transactions for national security reviews.

Similar to other jurisdictions, global geopolitical changes continue to impact Canadian FDI and national security reviews.  A significant number of investments subject to extended national security reviews are investments from Chinese investors. The Canadian government is paying particular attention to securing the resources necessary to protect supply chains and consumers in Canada.

There are major changes slated for the next year as the ICA is overhauled again.  These amendments are intended to increase Canada’s ability to screen investments and impose conditions on investments that pose a threat to Canada’s national security.  Following trends in other jurisdictions, the ICA will be amended to provide for a mandatory, suspensory pre-closing filing for investments in certain sectors deemed sensitive.  The list of sectors has yet to be publicized, but is expected that it will also closely align with those of Canada’s close trading partners, the US and the UK.

Looking Ahead:  Each jurisdiction is not insulated from domestic political and economic factors.  Asia is a jurisdiction to watch considering 2024 is an election year in Taiwan, India, Indonesia, and South Korea.  There is potential for foreign investment regime change, particularly given the role of local politics, economic factors and geopolitical tensions in these regions.  Considering the UK’s General Elections later this year, the UK’s main opposition party, the Labour Party, has warned against any dilution of the UK’s national security regime.

Further, no regime is isolated from the rest of the world.  The EU FSR influenced changes in the U.S., including, for example, the proposed changes to the Hart-Scott-Rodino rules that include disclosure of foreign subsidies.  Further, as the world experiences a rapid expansion of foreign investment regimes, transactions will have to be assessed with a multijurisdictional lens.  The need to submit filings in numerous foreign jurisdictions will require practitioners to quickly develop the requisite expertise and relationships with local counsel around the world.  The FINS Committee strives to create dialogue on foreign investment regimes globally and to provide an avenue for connecting with and building relationships with practitioners across the globe.

To join in the dialogue and join the FINS Committee, visit the Committee’s website for more information and a list of upcoming events.