Regulatory intelligence for US exporters

European Countries Expanding Investment Screening Regimes to Keep Up With CFIUS, Lawyers Say

Companies will continue to see a rise in global scrutiny of foreign direct investments as European countries try to match the U.S.’s investment screening regime, which has set the standard for investment reviews, trade lawyers said. Several countries, including the United Kingdom and Germany, are quickly bolstering their regimes while the U.S. is continuing to expand its jurisdiction to keep China and sanctioned countries from acquiring critical technologies, the lawyers said.

The U.K. is moving quickly to enact a foreign investment review bill that will significantly expand the number of transactions subject to reviews and create greater due diligence requirements for U.K. companies (see 2006080029). The bill, introduced last year, is moving through Parliament and is expected to be implemented before the fall, said Diarmuid Ryan, a London-based Squire Patton Boggs lawyer, speaking during a March 18 event hosted by the law firm.

Ryan said the bill will introduce several new disclosure requirements for investments, including a mandatory notification regime for certain transactions in 17 critical sectors of the U.K.’s economy. Those include the defense and energy sectors as well as transactions involving “critical suppliers” to the U.K. government. “It represents really quite a revolution in terms of how the U.K. scrutinizes foreign direct investment,” Ryan said.

Germany is also expanding its screening mechanism and is considering a bill that would increase its jurisdiction, said Oliver Geiss, a Brussels-based Squire Patton Boggs lawyer. Geiss said the country had “started off with really very specific and narrowly defined areas” for investment screening but said the new bill “extends the list considerably” and would cover 27 “areas where the law applies.” Germany’s previous regime covered only 11 areas, he said, and added that the regime has proved challenging for industry. “It makes it more difficult to assess whether a transaction is or is not caught by the German regime,” Geiss said during the webinar. “There are broad categories that will be difficult to interpret.”

Although some European countries are bolstering their investment screening mechanisms, they still don’t appear to be as wide-reaching as the Committee on Foreign Investment in the U.S., which Squire Patton Boggs lawyer Matthew Kirk referred to as the “granddaddy” of foreign direct investment regimes. CFIUS’s jurisdiction was expanded last year by the Foreign Investment Risk Review Modernization Act (see 2001140060), which allows CFIUS to review transactions involving a range of export-controlled critical technologies. But those critical technologies haven’t been clearly defined (see 2010020055) and the CFIUS process has grown “extraordinarily broad,” said George Grammas, a Squire Patton Boggs trade lawyer.

Grammas said foreign buyers need to “think very carefully” about the types of technologies and products associated with an investment to determine if a CFIUS filing is required. The buyer may also be held liable if their investment target incorrectly says it doesn’t produce or use technology captured by CFIUS’s jurisdiction, he said. “Under the revised U.S. regime, the buyer really cannot simply rely upon the target to accurately classify its technology because sometimes the target may not have a great deal of experience, because they maybe don't do a great deal of exporting,” Grammas said. “If the target under-classifies, that mandatory filing requirement could be missed, and there are penalties on both parties.”

Grammas also said the CFIUS process can sometimes “expose” a company’s non-compliance with sanctions and export control regulations. If one of the agencies on the interagency committee -- which includes the Commerce and the Justice departments -- identifies a compliance failure under another set of regulations, Grammas said, he has “often” seen that agency follow up with the CFIUS filer after the CFIUS process to pursue enforcement.

Foreign buyers should also closely review their business relationships with China before pursuing a U.S. investment, Grammas said, especially because CFIUS heavily scrutinizes China-related transactions (see 2101220034 and 2008250038). “The US government might well want to know the details of how the buyer is interacting in China,” he said. “Does it have a [research and development] facility in China, and what are the risks that the technology that’s acquired in the United States might end up flowing to China?” Investors should also pay close attention to their business ties to U.S.-sanctioned countries, Grammas said. “The U.S. government uses CFIUS as a means of pushing out its foreign policy interests onto buyers.”