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The New World of Foreign Direct Investment in Europe During the COVID-19 Era

May 29, 2020

The New World of Foreign Direct Investment in Europe During the COVID-19 Era

May 29, 2020

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Several EU Member States have either already passed COVID-19 influenced FDI legislation or are in the process of doing so.

Notwithstanding the multi-layered measures taken by national governments to support their respective economies, the COVID-19 pandemic is threating the existence of an increasing number of businesses of all sizes.

As economies start to emerge from lockdown, many businesses will urgently need to look for sources of liquidity, whether in the form of debt or equity. This will create opportunities for both existing and new investors, particularly those that can transact quickly.

However, international investors wishing to make use of these opportunities will need to expect and plan for their transactions to come under close scrutiny as governments worldwide are reacting to domestic concerns about a potential sell-out of key industries and/or critical strategic assets in the aftermath of COVID-19 by tightening their foreign direct investment (FDI) rules.

The announcement by India’s Ministry of Commerce on April 18 that any entity based or tied to a country that shares a land border with India will require government approval before investing in an Indian company[1] is one of the latest examples of steps taken in this regard across Asia. The move followed the temporary changes to the Australian Foreign Acquisitions and Takeovers Act 1975 announced by the Australian Treasurer on 28 March 2020.

European Commission Guidance 

In Europe, the European Commission indicated as early as 13 March 2020[2] that its Member States[3] needed to be vigilant and use all tools available at EU and national levels to seek to avoid the COVID-19 crisis leading to a loss of critical assets and technology. The available tools referred to by the Commission include the EU Framework for the Screening of Foreign Direct Investments adopted in March 2019[4] (FDI Screening Regulation), which will apply fully in all Member States from 11 October 2020. The FDI Screening Regulation gives Member States the power to review investments within its scope and to take measures to prevent a foreign investor from acquiring or taking control of a company where this would result in a threat to security or the public order in the EU. Article 4 of the FDI Screening Regulation provides that in determining whether an FDI likely has an effect of this kind, the Member States and the Commission may consider the potential effects of the relevant investment on, amongst others, critical infrastructure, critical technologies and access to sensitive information, including personal data, or the ability to control such information (with “critical infrastructure” including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure, whether physical or virtual). It is worth noting that the FDI Screening Regulation does not contain any thresholds.

On 25 March 2020 the European Commission published a further Communication[5] with guidance to its member states concerning FDI and free movement of capital from third countries, and the protection of European strategic assets.

In the Communication, the European Commission:

  • States that, as a result of the COVID-19 emergency, there could be an increased risk of attempts to acquire healthcare capacities (such as for the production of medical or protective equipment) or related industries such as research and development establishments (for example, developing vaccines) via FDI;
  • Advises Member States that already have screening mechanisms in place “to make full use of their existing screening mechanisms in accordance with the Regulation and other requirements imposed by EU law”; and
  • Asks Member States that currently do not have a screening mechanism, or whose screening mechanisms do not cover all relevant transactions, “to set up a full-fledged screening mechanism and in the meantime to consider other available options, in full compliance with Union law and international obligations, to address cases where the acquisition or control of a particular business, infrastructure or technology would create a risk to security or public order, including health security, in the EU”. The Commission also confirms that these other options can in certain circumstances include a Member State retaining special rights in certain undertakings (“golden shares”) which in some cases may enable the Member State to block or set limits to certain types of investments in the companies concerned.

FDI Legislation from EU Member States and the UK

Several EU Member States have either already passed COVID-19 influenced FDI legislation or are in the process of doing so.

Spain has published the Spanish Royal Decree-Laws 08/2020 and 11/2020 on the basis of which non-EEA investments exceeding 10 percent in certain strategic industries relating to public health and public security (including infrastructure, technology and media) must be authorised by the Spanish government.

Italy has published the Decree-Law 8 April 2020, n.23.

The French Minister of the Economy announced the adoption of two new measures on 29 April 2020 that are aimed at protecting French companies that are active in strategic sectors from potentially opportunistic buyouts. 

The German government introduced an amended draft bill[6] to the German parliament in April, tightening Germany’s FDI screening system. Amongst other measures, the draft bill prohibits the completion of transactions pertaining to critical infrastructure prior to receipt of the necessary clearance (with breaches carrying criminal penalties and transactions that are closed without a necessary nonobjection certificate being legally void). In addition, on 20 May 2020 the German government formally made changes to the German Foreign Trade and Payments Ordinance (Aussenwirtschaftsverordnung) that require investments of 10 percent or more in certain pharmaceutical and medical device businesses to be reported to the relevant German authorities.

In the UK, the Queen’s Speech on 19 December 2019 announced the National Security and Investment Bill. Although the bill’s full details are unconfirmed, the bill will give the UK government increased powers to “scrutinise investments and consider the risks that can arise from hostile parties acquiring ownership of, or control over, businesses or other entities and assets that have national security implications.” An inquiry was launched by the (parliamentary) Foreign Affairs Committee in April 2020 into the Foreign and Commonwealth Office's role in blocking foreign asset stripping of UK companies (especially where there may be national security risks), and summons were issued in the same month by UK Members of Parliament to executives of the UK-based, but foreign-owned, Imagination Technologies to answer questions, reconfirming Westminster’s focus on FDI.

Considerations for Investors and Investees

Not all of the above COVID-19-related measures will ultimately be permanent. However, sellers of critical infrastructure or technology companies or assets and businesses in critical infrastructure or technologies sectors seeking to raise funds―in particular those who are looking for fast transaction times―should on the basis of the above:

  • Ensure that they have full visibility of the identity of any natural person, persons or undertaking(s) that ultimately own or control a potential investor or buyer early on in order to be able to assess potentially resulting FDI reviews; and
  • Bear in mind applicable and/or potentially applicable FDI review times when selecting preferred buyers and/or investors.

Non-EU investors should:

  • Closely monitor the changing FDI position in all European jurisdictions with which ongoing or contemplated transactions have a link or connection.
  • Expect transactions in critical sectors, particularly transactions involving targets operating in the healthcare sector, to come under the scrutiny of the relevant national authorities.
  • Expect applicable or potentially applicable FDI reviews to be taken into account by relevant sellers and entities seeking to raise funds when selecting buyers and/or investors.
  • Structure the closing timetable of relevant transactions taking identified foreign investment review risks into account.
  • Develop a coordinated approach where more than one national FDI screening mechanism is involved in a transaction.
  • Plan for potentially long review periods, as national authorities are dealing with an increasing number of reviews in a rapidly changing legislative landscape at a time at which they may (still) have reduced capacity.
  • Bear in mind that where a foreign investment that is planned or completed in one EU Member State does not undergo a national screening process in that EU Member State, Article 7 of the FDI Screening Regulation permits the other EU Members States and the European Commission to provide comments and opinions within 15 months after the foreign investment has been completed if they believe that such foreign investment is likely to the affect the security of or public order in another or more than one EU Member State. Any such comments or opinions may lead to the EU Member State where the investment takes or has taken place adopting necessary mitigation measures. In other words, a foreign investment closed in June 2020 may be subject to comments by EU Member States or opinions by the European Commission from 11 October 2020 (being the date of full application of the FDI Screening Regulation) until September 2021.

About Duane Morris

Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Prior Alerts on the topic are available on the team’s webpage.

For More Information

If you have any questions about this Alert, please contact Ute Mueller, Geoffrey M. Goodale, any of the attorneys in our Private Equity Industry Group or the attorney in the firm with whom you are in regular contact.


[1] Benjamin Parkin, “India moves to curb Chinese corporate takeovers”, Financial Times (April 18, 2020)

[2] Coordinated Economic Response to the COVID-19 Outbreak, COM(2020) 112 final.

[3] The Withdrawal Agreement between the European Union and the United Kingdom entered into force on 1 February 2020.

[4] Regulation (EU) 2019/452.

[5] Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), COM(2020) 1981 final.

[6] Gesetzesentwurf der Bundesregierung, Erstes Gesetz zur Aenderung des Aussenwirtschaftsgesetzes und anderer Gesetze, Bearbeitungsstand: 31 March 2020. The draft has had its first reading in the German Parliament on 23.04.2020.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.