Covid-19 prompts widespread tightening of foreign investment controls

Sep 16, 2020
Government action will complicate M&A landscape, especially for tech sector

Many of the world’s largest economies have strengthened foreign investment rules since the start of the Covid-19 pandemic, raising the complexity for companies trying to complete cross-border deals, according to new research.

Since March, 57 percent of countries in the Organisation for Economic Co-operation and Development (OECD) have enacted or plan tighter controls on foreign investments, finds a study by Linklaters. Of the 37 OECD member countries, 14 have hardened restrictions and six more are planning changes, says the law firm.

During the pandemic, countries have lowered their review thresholds for foreign investment in sensitive areas like communications, technology and healthcare. 

For example, the UK has brought in rules that allow the government to scrutinize takeover attempts that may affect the country’s ability to respond to the Covid-19 pandemic. It has also reduced the thresholds that would trigger a review into takeovers in three sectors: artificial technology, cryptographic technology and advanced materials.

Australia, meanwhile, has temporarily removed the lower thresholds for triggering reviews into foreign investments. Other countries to take action include the US, Canada, Japan, Germany and France. 

The technology sector has been a particular focus, says Linklaters, given its critical role in national security. 

‘Governments are keen to protect and develop their technological sovereignty through foreign investment screens and even outright bans on inbound investments,’ says Nicole Kar, partner and head of UK competition at Linklaters, in a statement.

‘Covid-19 has created even greater reliance on technology and created conditions for opportunistic M&A activity; combined with existing and rising geopolitical and trade tensions, that has proven to be a powerful catalyst for ever-stronger foreign investment control in the tech sector.’

Kar says tech companies contemplating M&A should ‘factor these new hurdles into deal timetables’ and ‘carefully consider their strategy in each jurisdiction’.

The tighter controls reflect growing tension between China and a number of other countries. Prior to the pandemic, the US had led a campaign to ban Chinese technology from 5G communications networks, citing security concerns.

During the Covid-19 health crisis, relationships have become even more strained with countries such as Australia, India and the UK becoming more vocal about the potential threat to national interests posed by the Asian superpower. 

Linklaters’ research also warns of potential political interference in M&A as economies start to recover from Covid-19. It says countries will have public policy goals, such as boosting employment or protecting the environment, and deals may need to show they are contributing to these objectives. 

‘We’ve seen ‘green strings’ attached to government support across Europe as part of the bloc’s ambitious Green Deal,’ says Annamaria Mangiaracina, partner at Linklaters, in the statement. 

‘Expect to see this agenda also come to light when deals are in their early stages and attempts are made to shape the outcome of M&A so that it is aligned with some of the environmental targets set for the years ahead, as well as broader public policy goals.’

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