COVID-19 continues to wreak havoc with the global economy, disrupting all manner of business throughout the world. Stock markets have plummeted and many companies are having to grapple with economic damage that seemed unimaginable at the start of the year.
This unprecedented environment could afford opportunistic buyers the chance to acquire or invest in companies that have been weakened by the crisis. In addition, creditors may unintentionally find themselves in a position where they acquire control over a business.
Before the crisis, the world was already de-globalising with rising national protectionism driving calls for stronger screening of foreign investment across the globe. Now, COVID-19 has prompted some countries to take an even more drastic approach. Some national governments, notably in Europe, are now taking steps to protect companies that have become vulnerable as their economies are struggling from being taken over by foreign investors.
The Spanish government has just introduced a new temporary requirement that ex-ante approval will be required for foreign (non-EU) direct investments in strategic sectors in Spain.
This affects investments in Spanish companies by non-EU/EFTA entities where the foreign investor would (i) hold a stake of 10% or more in the share capital of (ii) acquire the right to participate in the management of or (iii) acquire control of a Spanish company, and applies to a broad range of sectors, namely:
• energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities;
• critical technologies and dual-use items, including artificial intelligence, robotics, semiconductors, cyber-security, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies;
• supply of key inputs, in particular energy, raw materials and food security; and,
• sectors with access to sensitive information, in particular personal data, or with the ability to control such information.
The French Minister of Economy has stated that the government is ready to protect important French companies by recapitalising them, buying shares or even taking them over. The government has also stated that nationalisation of strategic companies will not be ruled out.
The Italian government, meanwhile, is considering qualifying all Italian companies listed on the Milan Stock Exchange as ‘strategic’ for the purposes of applying the existing Special Powers rules under the foreign investment review regime. This would mean that the Special Powers, which allow the Prime Minister to veto or impose conditions on certain transactions in the defence/homeland security, telecoms, energy, and transportation sectors, could be extended to foreign investment in all Italian-listed entities.
The Hungarian government is able to prevent acquisitions by non-EEA entities in certain strategic industries (eg, finance, telecommunications, energy, defence) for public reasons, including national safety, energy supply, and financial stability. COVID-19 has prompted the government to take control of 140 strategically-important companies in various sectors.
In summary, some countries are using foreign investment screening to protect wider economic and social concerns triggered by COVID-19. At present, this approach seems to be limited to Europe, which makes sense as this region has been declared, for now, as the ‘epicentre’ of the global pandemic. However, as the virus continues to spread, it is possible other countries could take a similar stance to protect their national interests and economies.
These developments highlight the need for investors to carefully consider foreign investment review risks at this highly-sensitive and volatile time both for deals currently underway and transactions being contemplated. Cross-border transactions in strategic sectors will likely encounter tougher scrutiny and face a prolonged approval process. Taking time to understand the rules and identify a regulatory strategy – including calibrated communication with the relevant governmental authorities and thinking about the impact on deal documentation – early in the bid process will minimize the risk of delays, last-minute changes to the deal structure, or failed transactions.
For potential bidders the basic message is that the environment for corporate transactions has already been transformed in Europe by this crisis, and perhaps soon the world. Never has it been more relevant for companies to keep in mind the age-old advice for acquirers: buyer beware.
Samantha Mobley is a partner in Baker McKenzie’s competition and trade practice in London