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How stricter rules on foreign investment screening impact tech M&A in Europe

2352337225750  Tech MA in Europe ReportForeign Investment Control

Out-Law Analysis | 19 Oct 2021 | 10:25 am | 8 min. read

Many European countries have recently tightened their foreign investment control (FIC) regimes. This has a particular impact on transactions in the technology sector.

As technology companies are often considered part of a country’s critical infrastructure, the acquisition or partial acquisition of such companies is often subject to strict requirements, with severe penalties for non-compliance.

A study carried out by Pinsent Masons, the law firm behind Out-Law, in partnership with other firms in its European network, identified the trend as well as associated risks that must be navigated by European technology companies when involved in mergers or acquisitions.

Divergent rules throughout Europe

In many European countries, FIC provisions have been comprehensively revised or newly introduced. New FIC regimes have for example been enacted in the UK, Denmark and Spain. In Germany, France and Italy, the existing rules became more rigid. Here, the scope of monitored business activities was expended and governmental screenings increased. As a reaction to the Covid-19 pandemic, countries enacted further FIC provisions to protect national interests.

In addition, a new EU regulation effective since October 2020 provides some additional guidance on the supranational level to promote harmonisation and cooperation between the EU member states. Still, FIC provisions have not been harmonised in the EU and there remain some EU countries such as Ireland and several central and eastern European (CCE) countries which have not introduced FIC rules and have no intention to do so. Also, not all new laws based on the EU regulation on FIC screening have come into force yet. Luxembourg, for example, issued a legislative proposal on foreign investment control on 19 May 2020. It is based on the EU regulation, but the draft law has not yet been enacted. According to Dr Thomas Biermeyer of Wildgen, the draft law aims to scrutinize foreign investors seeking to acquire at least 10% of shares or voting rights in a company situated in Luxembourg.

According to Gian Marchet Kasper of Blum & Grob, Switzerland does currently not have an investment control regime and thus differs from its neighbouring countries. "Therefore, the topic is irrelevant for Switzerland," he said.  "However, there are sector-specific regulations such as financial market regulations and restrictions on the acquisition of real estate by persons abroad (Lex Koller), the latter requiring authorisation to purchase real estate in many cases."

Paul Williams

Paul Williams

Senior Associate

In the UK, transactions in certain sectors of the economy will require mandatory notification, and the new rules also include the power for the UK government to 'call-in' and review any other transaction which could raise national security concerns

In UK, new FIC rules will come into force in January 2022. Paul Williams of Pinsent Masons said: "Transactions in certain sectors of the economy will require mandatory notification, and the new rules also include the power for the UK government to 'call-in' and review any other transaction which could raise national security concerns."

How the new rules relate to tech M&A

The new FIC rules are especially relevant for tech M&A transactions. Many European governments have added activities in data rich industries to the list of activities requiring FIC filing and potentially clearance. For example, in Spain and Germany the list of FIC critical activities includes data storage and processing, in particular of sensitive information such as personal data. In France, FIC regulated activities include data systems security, cryptology and any means of telecommunication detection and interception. Sellers and buyers therefore must be aware of the new filing requirements and respective timelines when structuring a tech M&A transaction. In practice, this means a parallel governmental filing and clearance regime in addition to merger control filings. FIC filing can be required not only in the country of the target company but also in every country in which subsidiaries exist. It is therefore important to ensure that foreign investors are compliant with FIC rules in the relevant jurisdiction before closing a transaction.

The list of critical industry sectors and activities can be very long and specific, or rather broad. As a rule of thumb, the following sectors are very likely to be regulated by FIC screening rules:

  • defence, military weapons and equipment;
  • infrastructure, including water, energy and food;
  • media and communication;
  • telecommunications and data;
  • finance;
  • health; and
  • life sciences. 

According to Rafal Rapala and Adam Czarnota of Kochański & Partners, the catalogue of companies subject to protection in Poland has been significantly expanded under an amendment to the Foreign Investment Control Act that will come into force in July 2022. Thus, many M&A transactions not currently caught by the legislation could soon fall under FCI screening. "The new rules will have to be taken into account for a vast number of entities when carrying out transactions, while at the same time taking additional caution. There are concerns on the part of business that these rules may significantly hinder access to capital for domestic companies and will increase the costs of both possible transactions and ongoing corporate services. This may slow down the process of taking control over Polish companies - regardless of who currently exercises control over them and who intends to acquire their shares," Rapala and Czarnota said.

The situation is different in Portugal: according to SRS Advogados, Portugal is not more demanding with foreign investment than with Portuguese investments and no updates to the FIC regime were introduced with the COVID-19 pandemic. However, Decree Law 138/2014 applies to certain foreign investments. "Decree Law 138/2014 establishes the regime for the safeguarding of strategic assets essential for national defense and security or for the provision of essential services in the energy, transport and telecommunications sectors," members of SRS Advogados said.

Rafal Rapala and Adam Czarnota

Kochański & Partners

There are concerns on the part of business that these rules may significantly hinder access to capital for Polish companies and will increase the costs of both possible transactions and ongoing corporate services

Tobias Björklund of Setterwalls said that in Sweden, since 1 January, rules of the Protective Security Act are applicable to transactions with security-relevant entities involved. But the Swedish government has also appointed a special investigator to assess how a national system for FDI screening could be designed. Björklund said: "A final report from the special investigator shall be published no later than 2 November 2021”.


Typically, there are different thresholds of investment in a target company at which FIC filing will become mandatory. For example, in Germany, filing is always required for acquisitions of parts of defence-related companies, of whatever size. In contrast, investments in critical infrastructure companies are only caught if a foreign investor envisages to purchase 10% or more of the voting rights in the target. It is usually not relevant if the investment is structured as a share or asset deal. In the UK, transactions involving the purchase of an interest of 25% or more in a target in 17 particular sectors of the economy will be subject to the mandatory notification regime.

The investor

In many countries different rules apply to EU and non-EU investors. It is usually also of particular importance if an investor or one of its majority shareholders is controlled by a foreign government or armed forces or has been involved in criminal activities. This is one of the provisions stipulated in the EU FIC regulation and has been assumed explicitly in the FIC rules in Spain and Germany. The UK also notes that this factor will be important in a national security assessment.

Anders Hagstrøm of Bech-Bruun in Denmark said: "The Danish FDI regulation also covers indirect investments. If an American company buys a Canadian company with a Danish subsidiary within one of the particularly sensitive sectors, the investment must be approved by the Danish Business Authority prior to completion”.

According to Lorenzo Stellini of Italian firm GPBL, FIC screening in the various European countries ultimately serves national security and economic interests. "In assessing whether a transaction requires filing, one will have to analyse three main elements: the industry sectors involved, investment thresholds and the background of the individual foreign investor," he said.

Legal consequences

Similar to merger control filing rules, in European countries with FIC rules closing and implementing a transaction is prohibited before FIC clearance. Careful FIC analysis has therefore become vital in tech M&A transactions, due to the serious legal consequences resulting from a violation of the FIC rules. If closing occurred before clearance the transaction may be prohibited retrospectively and then has to be fully or partially reversed. Further consequences may include high fines and even criminal penalties for the investor and its management. In France, for example, the FIC authority may charge the foreign investor with a fine of twice the amount of the unauthorized investment or 10% of the annual turnover excluding taxes of the target company of the investment or €5 million for a legal entity or €1m for an individual, whichever is the highest.

Lorenzo Stellini

Associate, GPBL

In assessing whether a transaction requires filing, one will have to analyse three main elements: the industry sectors involved, investment thresholds and the background of the individual foreign investor

David Maria of Wildgen said that Luxembourg's draft law includes obligations of prior notification and a pre-evaluation procedure. "Non-observation can lead amongst others to administrative fines, a reversal of the transaction, suspension of voting and dividend rights."

Paul Williams of Pinsent Masons said that not making a mandatory notification in UK when required will be a criminal offence applying to the officers of a company, and fines of up to 5% of the annual worldwide turnover of the company or £10m can also be imposed.

According to Anders Hagstrøm of Bech-Bruun, investments and agreements covered by the Danish authorisation scheme cannot legally be carried out without having applied for a permit. "In such an instance, the Danish Business Authority can intervene and issue an order to stop the investment or the agreement or demand the buyer to divest the investment. If the Danish Business Authority suspects that an investment or agreement covered by the voluntary notification scheme has not been notified – and that it could pose a threat to national security or public order – it may decide to initiate an investigation up to five years after completion of the investment or agreement." However, the Danish FDI regulation does currently not provide for fines, he said.

Challenges and uncertainties

In addition to the new FIC rules, lack of administrative practice and unpredictability add another layer of complexity to the FIC systems and increase uncertainty. First of all, many FIC regimes have been newly introduced or authority practice has significantly changed so that there are no reference cases as guidance. The constant amendments to the FIC rules in many European countries in recent years have also increased uncertainty. Some FIC rules may also allow for governmental discretion on a case-by-case basis. There is also hardly any experience in the market how the FIC authorities are handling the new commendation rights of the other member states and the European Commission.

FIC filing and clearance details are overall confidential and not published by the FIC authorities. For an investor, it is difficult to assess if and to what extent FIC filing and clearance is required. It is therefore useful to have a legal expert who is dealing with FIC authorities on a regular basis. If the parties seek transaction security, there will often be no way around FIC filing as a matter of precaution. Even if FIC filing only assumed as a technicality, it can delay closing for months at a time, especially in the context of the still ongoing pandemic and if the investor is unlucky to be one of the first transactions to fall under a new FIC regime.

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