The COVID-19 pandemic has seen an increased focus on foreign investment, with the European Commission having called on its Member States to act "already now" and Australia having temporarily extended the remit of its foreign investment review board.
However, while many of the immediate announcements and actions are a direct response to perceived threats to nations' healthcare capabilities, there has been a general global trend towards increased scrutiny of foreign investment for some time.
In this update, we look in more detail at the EU's approach to foreign investment in the context of the pandemic, as well as some interesting developments in its more general approach, and also provide an update on the situation in the UK.
European Commission's response to COVID-19
There is currently no framework for the screening of foreign direct investment ("FDI") at an EU level in the way that there is for reviewing mergers and acquisitions for example. Whilst the European Parliament approved a new regulation aimed at establishing a regime to review FDI in February 2019, the co-operation mechanism established by the regulation is only due to become fully operational from October 2020. This has led the Commission to urge Member States to move faster, with the Commission looking to take a central role in monitoring and facilitating information exchanges.
In response to the COVID-19 pandemic, the European Commission has already issued guidelines aimed at ensuring a robust EU-wide approach to foreign investment screening in a time of public health crisis and economic vulnerability. As stated by Phil Hogan, Commissioner for Trade: "We need to know who invests and for what purpose."
The guidelines are aimed at addressing the concern that the economic shock caused by the pandemic could see an increased risk of hostile attempts to acquire European healthcare companies (such as personal protective equipment manufacturers) or related industries (such as institutions developing vaccines) via FDI. Specifically, the guidelines call on the Member States to make full use of their FDI screening mechanisms and where they currently have no, or only partial, screening mechanisms to set up fully-fledged screening mechanisms as soon as possible and in the meantime to use all other options available to them under EU law.
As regards these other available options, the guidelines note that while Article 63 TFEU provides for the free movement of capital (not only within the EU but also with third countries), restrictions can be applied to this freedom provided that they are suitable, necessary and proportionate to attain legitimate public policy objectives. The guidelines make it clear that threats to public health could be relied upon to justify such restrictions and provide examples of possible restrictions including Member States holding "golden shares" in companies that allow them to block certain investments, as well as taking more general measures to restrict "predatory buying" of strategic assets.
European Commission's general approach to FDI
These alternative methods for controlling FDI suggested by the Commission are particularly interesting given the public policy objectives they could seek to achieve beyond public health.
While discussing proposals to regulate state-backed entities entering the European market and distorting competition through unfair means, Margrethe Vestager, executive vice-president of the European Commission, made clear that the Commission does not "have any issues of states acting as market participants if need be — if they provide shares in a company, if they want to prevent a takeover of this kind.”
It therefore seems that the Commission views the use of "golden shares" and Member States acquiring stakes in European companies to stave off the threat of non-EU takeovers as a potentially legitimate action that applies more widely than just the current healthcare crisis.
This promotion of state intervention is a notable development and has been seen by some as a response to pressure from France and Germany to ensure a level playing field between European and Chinese competitors.
UK approach to FDI
In the UK, the drive towards increased scrutiny of foreign investment pre-dates the COVID-19 pandemic, with the December 2019 Queen's Speech having announced that a National Security and Investment Bill is to be introduced, giving the Government enhanced powers to scrutinise and intervene in transactions in the interests of national security.
This focus on national security, as opposed to pandemic specific protections, is still very much the driving force behind developments in the UK.
This month, the Foreign Affairs Committee launched an inquiry into the Foreign & Commonwealth Office's role in blocking foreign asset stripping of UK. In particular, the inquiry will examine how the FCO should assess whether a potentially hostile party is seeking to secure significant influence or control over a UK company and in what circumstances the FCO should intervene. The Committee will also look into what safeguards are required in the forthcoming National Security and Investment Bill. The deadline for submitting views to the committee is 29 May 2020.
These actions come at a time when the EU is in the process of negotiating a Comprehensive Agreement on Investment (CAI) with China and the UK is looking to cement long term relationships outside of the EU post-Brexit and so it will be interesting to see what sort of impact these measures have on these relationships going forwards.