Baker McKenzie’s Anahita Thoms on the rise of FDI screening

Why has the German public become increasingly wary of Chinese investment?

Germany is and will remain an investor-friendly country. In fact, one of the key principles in German law is that the trade in goods, services, capital and other types of trade with foreign territories is, in principle, free. Hardly any country is more dependent on an open, tolerant and investor-friendly approach than the export nation of Germany. This is not a naïve country, though. We defend our strategic interests. The German public is becoming increasingly aware that while foreign investments in German companies create jobs and prosperity, they also allow foreign stakeholders to gain an insight into German know-how and expertise. There have been a number of large investments that have led to increased wariness among the German public, particularly concerning Chinese investments, for example, when Beijing Enterprises and Chinese Media Group invested in Energy from Waste and Kuka, respectively. The failed Aixtron deal is another example. This has led to growing calls for improved protections of critical infrastructure, such as assets or systems essential for the maintenance of vital social functions, health, safety, security, and the economic or social wellbeing of people. The main impetus for reform is to protect German security interests by protecting such key infrastructure from foreign investors. The initiative for this law came directly from the federal government itself. It is not just the managing minister of economics Brigitte Zypries, from the Social Democrat party. Unease is growing among German politicians from all parties.

Are other EU countries following suit?

Yes. In October 2017 Italy completed a revision of its FDI screening mechanisms. In October 2017 the UK government published a Green Paper entitled ‘National Security and Infrastructure Investment Review’. In the short term, there are significant proposals allowing for increased review of transactions in the dual use of military and technology sectors. For the longer term, the government is consulting on broader reforms including proposed mandatory approval requirements for foreign investments in a number of sectors, including defence, energy and transport. The Dutch government in 2017 considered a telecommunications sector bill to block undesirable takeovers, as well as a hostile foreign takeover bill, that have not, or not yet, been adopted due to stakeholder opposition.

Is this a global trend too?

Yes, I am certainly seeing a trend. While the FDI screening mechanisms set up by countries such as Australia, Canada, China, Japan, South Korea, Russia and the US vary significantly in scope, most of these countries have tightened their FDI review schemes, rather than liberalising them. Canada relaxed its rules in 2017 by increasing its financial thresholds for ‘net benefit’ reviews for private investors from certain countries, but overall the national security regime has, if anything, tightened. Russia strengthened its FDI laws. I just had a meeting with the Japanese ministry of economy, trade and industry in Tokyo, where we discussed Japan’s newly introduced strengthened rules. And of course we have been seeing a big debate in the US in the past couple of months about expanding the scope of the US Committee on Foreign Investment in the United States [CFIUS]. CFIUS has applied increasingly close scrutiny in recent years, a trend that pre-dates but has been accelerated by the new administration. In addition, Congress is considering proposals to expand CFIUS’s jurisdictions to a broader range of transactions.

What is the latest on the EU’s FDI screening laws?

In September 2017, the European Commission published a proposal for an EU Regulation which establishes a framework for screening FDI inflows into the EU on grounds of security or public order. The proposal is a response to a rapidly evolving and increasingly complex investment landscape. It aims to strike a balance between maintaining the EU’s general openness to FDI inflows and ensuring that the EU’s essential interests are not undermined. Recent FDI trends and the policies of emerging FDI providers have cast doubt on the effectiveness of the EU’s decentralised and fragmented system of monitoring FDI inflows. The proposal’s objective is neither to harmonise the formal FDI screening mechanisms currently used by fewer than half the member states, nor to replace them with a single EU mechanism. It aims to enhance co-operation on FDI screening between the commission and member states, to increase legal certainty and transparency. 

The European Commission itself will not have the power to block foreign investments. But of course it can slow down deals. Member states, stakeholders and academia are divided in their views on the proposal. There was a letter from ministers from Germany, Italy and France, which set out their concerns about the “lack of reciprocity and about a possible sell-out of European expertise, which we are currently unable to combat with effective instruments”. The proposal was for a level playing field. i.e. that rights that investors from outside the EU have here should be reciprocated for EU investors. With regard to China, this would mean that European investors in China should have the same rights as Chinese investors in Europe. However, this broader proposal did not make it into the commission draft. For some member states, their own economic growth is more of a priority now than the rights their companies have in China, for example.