Outside of anti-trust and heavily regulated sectors, are there any foreign investment controls or other governmental consents which are typically required to be made by financial sponsors?
Private Equity (2nd edition)
Other than for anti-trust or regulated markets purposes, there are no foreign investment controls or other governmental consents that are typically required by financial sponsors investing in Greece.
Luxembourg has an open economy and offers a business climate favourable to foreign investment, without any general system of foreign investment control or governmental consent requirements for foreign investors.
Non-Luxembourg residents are free to incorporate new Luxembourg companies or acquire existing Luxembourg companies without restriction.
The Dutch government maintains an open policy towards foreign investment. In principle, foreign investors can freely incorporate new companies, establish subsidiaries, transfer a company or acquire shares in Dutch companies. Other than competition legislation, rules for heavily regulated sectors (e.g. financial sector, healthcare sector) and specific rules for public take-overs, no specific governmental consents are required.
However, in line with similar initiatives in other European countries, in the Netherlands there is a legislative proposal whereby it would be able to veto foreign takeovers of companies active in the telecom industry for national security or public order reasons. The government is also looking at other sectors of ‘vital interest’ for the national security and public order where proposals may be made for intervention possibilities in case of foreign direct investment.
The Norwegian National Security Act provides that certain transactions are subject to ownership control by Norwegian public authorities. Pursuant to the Act, a direct or indirect acquisition of a "qualified shareholding" (i.e. 1/3 of shares/votes, or rights to 1/3 of shares/votes or other significant influence over the management) in a target company being of particular interest for the Norwegian national security and which as a result thereof is included on a "National security list" by the Norwegian Ministry responsible for the sector of such company, must be notified to and approved by such Ministry.
Apart from the anti-trust aspects and specific requirements related to highly-regulated industries, the most important governmental consents concern acquiring real estate properties, either directly or through a special purpose vehicle.
In particular, acquisition of real properties by a foreigner outside the EU requires a permit issued by the minister competent for internal affairs, unless the minister of defense lodges an objection, and as regards agricultural real properties - unless the minister competent for rural development lodges an objection.
Such permit is issued upon a foreigner’s application.
Additionally, different types of pre-emptive right, which depend on the real estate types and locations (e.g. special economic zones, forest real properties, developed real properties) might be applicable to a transaction.
Foreign direct investments are generally subject to pre-transaction reporting requirements under the Foreign Investment Promotion Act (FIPA) or the Foreign Exchange Transactions Act (FETA).
The FIPA applies, among other cases, in cases where a foreign investor invests a minimum of KRW 100 million in a target company and (i) acquires 10% or more of the equity interest in the target company, or (ii) owns any equity interest in the target company and dispatches or appoints directors, statutory auditors or executive officers of the target company. If the FIPA is not applicable the FETA applies.
Investments by non-resident financial sponsors are generally subject to the FIPA.
Outside of heavily regulated sectors (for example the financial sector), Sweden has no foreign investment controls or other governmental consents that are specifically required for financial sponsors. Swedish investment funds, or their managers (as applicable), may however be subject to the Alternative Investment Fund Managers Directive and therefore required to register with, or seek a permit from, the Swedish Financial Supervisory Authority. The same applies to foreign investment funds, or their managers (as applicable), that intend to market their funds in Sweden.
Switzerland takes a rather economically liberal approach to foreign investment and financial sponsors are, broadly speaking, not restricted or treated differently to domestic investors.
Investment in specific Swiss industries, for instance the banking or insurance sectors, might require certain governmental approvals or state-licensed undertakings. For public policy reasons, Swiss law applies restrictions to foreign investors seeking to acquire real estate that is not permanently used for commercial purposes, such as residential, state used property, undeveloped land or permanently vacant property (Lex Koller). Foreign investors are required to obtain special permits which are limited in application. This rule applies to Swiss companies who are ultimately owned by non-Swiss citizens and is the main exception to Switzerland's foreign investor friendly business environment.
The Belgian government maintains an open policy towards foreign investment. Foreign investors can freely incorporate new companies, establish subsidiaries, transfer a company or acquire shares in Belgian companies. Currently, no general system of foreign investment control is in place.
However, in line with similar initiatives in other European countries, the Flemish government has adopted a decree which entered into effect on 1 January 2019, whereby it is be able to veto foreign takeovers of state-controlled entities for national security reasons.
Pursuant to the Investment Canada Act (ICA), an acquisition of control by a non-Canadian of a Canadian business, and the establishment by a non-Canadian of a new Canadian business, is subject to notification or to review and approval according to a “net benefit to Canada” test where a specified threshold is exceeded. Factors to be considered under this test (as enumerated on the government of Canada website) include: (1) the effect on the level of economic activity in Canada, on: employment, resource processing, the utilization of parts and services produced in Canada, and exports from Canada; (2) the degree and significance of participation by Canadians in the Canadian business or new Canadian business and in any industry or industries in Canada; (3) the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada; (4) the effect of the investment on competition within any industry in Canada; (5) the compatibility of the investment with national industrial, economic and cultural policies; and (6) the contribution of the investment to Canada's ability to compete in world markets. These review thresholds are indexed and are revised annually.
For 2019, the applicable thresholds are as follows: (1) Cdn$1.045 billion in enterprise value for a direct acquisition of control of a Canadian (non-cultural) business by a WTO investor that is not a state-owned enterprise; (2) Cdn$1.568 billion in enterprise value for direct acquisition of control of a Canadian (non-cultural) business by a “trade agreement investor” (i.e., investor from countries with whom Canada has a trade agreement, such as the U.S. the E.U).; (3) Cdn$416 million in asset value for a direct acquisition of control of a Canadian (non-cultural) business by a state-owned enterprise from a WTO member country; and (4) Cdn$5 million in asset value for a direct acquisition of control of a Canadian cultural business.
If the applicable threshold for a net benefit to Canada review under the ICA is not met or exceeded, the acquisition of control of any Canadian business by a non-Canadian entity is subject to a relatively straightforward notification, which can be made either before or within 30 days after closing.
Separate and apart from the net benefit to Canada review process, the ICA also contains a mechanism to allow the Canadian government to review a foreign investment on national security grounds. There are no thresholds for such national security reviews; rather, they can be initiated at the discretion of the government.
There are no governmental consents or control procedures which target to, deliberately or discriminately, govern or restrict foreign investment by financial sponsors. Apart from the anti-trust review and industry-specific approvals, government consents or control procedures for foreign investment include: (i) filing with the National Development and Reform Commission (including its competent local counterparts, the “NDRC”) and MOFCOM, or approval by NDRC and MOFCOM if the investment sector falls within the scope of the Negative List, (ii) national security review (“NSR”) conducted by a joint committee led by MOFCOM and NDRC, where the foreign investments involve elements of national defense security (military industry, location adjacent to military facilities, etc.) or aim to acquire an effective control over targets engaged in key industries (e.g., agricultural products, energy and resources, infrastructure, transportation services or key technologies or important manufacturing of equipment and machinery having a bearing on national security), and (iii) foreign exchange control imposed by the State Administration of Foreign Exchange on capital inflow and outflow relating to foreign investment/divestment and remittance abroad of realized proceeds.
In March 2019, China adopted the first uniform Foreign Investment Law which will take effect as of January 1, 2020, thereby further deregulating the market access to foreign investors and the related foreign exchange control. Against this backdrop, however, China’s NSR is envisioned to become an increasingly important regulatory tool for government to oversee foreign participation in the nation’s economy and can inevitably be leveraged as a counteraction in response to the strengthening by U.S. and EU of their prohibitive or restrictive measures against China’s overseas investments in these jurisdictions.
In France, investment is in principle unrestricted. However, by way of exception, foreign investments carried out in business sectors deemed to be sensitive are subject to prior authorization from the services of French Minister for the Economy (“DGT”).
In the beginning, foreign investment control was limited to a small number of specific activities, such as gambling, cryptology, weapons and warfare equipment. This list has grown considerably over time and the system has been profoundly overhauled, in particular by a Decree dated 14 May 2014 on foreign investments subject to prior authorization. This list has been further extended in 2018 to cover certain technologies including artificial intelligence, robotic or space activities.
Powers of the authorities and sanctions have also been strengthened through the Pacte Law. Since 2019, the DGT can for instance force a foreign investor to either file an application for authorization, restore the situation preceding its investment at its own expense, and/or modify the investment. The DGT is also subject to a higher scrutiny from the Parliament and will, by the end of 2020, be required to coordinate with other EU countries in the implementation of foreign investment controls. This may entail a stricter enforcement of the French rules.
As a result of the foregoing, sellers tend to see the foreign investment rules as a risk similar to merger controls risk. Purchasers are more and more requested to make hell or high water commitment in connection with the issuance of foreign investment clearances.
If a German company is an acquisition target, there are two types of investment control procedures that it may be subject to under the German Foreign Trade Ordinance (Außenwirtschaftsverordnung). Firstly, a cross sector review which in principle, applies to all sectors. The German Federal Ministry of Economics and Energy (Bundesministerium für Wirtschaft und Energie, BMWi) has the right to review and prohibit any transaction where a foreign investor (any person or legal entity with direct or indirect ownership from outside the EU) acquires at least 25% of the voting rights in a German company, or (since 2018) 10% if the investment involves critical infrastructure. The review considers whether the acquisition endangers public order or security of the Federal Republic of Germany. Secondly, a sector specific review targets potential investments in industries that are considered significant for national security purposes (defence and IT security technology sectors). The BMWi's prior consent is required if foreign investors intend to acquire 10% or more of the voting rights in the relevant German company.
For a cross sector review, it is sufficient if a German company is acquired as part of an international group that is itself acquired by a foreign investor or if the foreign investor indirectly acquires the share in a German company through another EU-company. The BMWi may conduct a review without being officially notified and issue orders or prohibit the transaction. Parties to a transaction that may fall within the review scope, can notify the BMWi and voluntarily apply for a clearance certificate. As such, many share purchase agreements include clearance under the German foreign investment control regime as a closing condition. This is especially the case since the tightening of the German foreign investment control regime in 2018 and the impending adoption of the EU Regulation establishing a European screening mechanism for foreign direct investment due to become fully adopted on 11 October 2020 which may further tighten the rules.
Mexico has been, historically, a somewhat protectionist country when it comes to foreign investment. That said, in recent years it has become much more open.
In line with the foregoing, the Mexican Foreign Investment Law (Ley de Inversión Extranjera) sets forth certain restrictions applicable for few strategic activities and sectors, which are reserved to:
- Government agencies. For example, nuclear energy generation, exploration and extraction of oil and hydrocarbons, issuance of paper currency, minting of coin, and others.
- Mexican companies with no foregoing investment. For example, land passenger or freight transportation.
- Mexican companies where foreign capital ownership is limited to a certain percentage. For example, manufacturing of explosives or firearms, radio broadcasting, and others.
Foreign investment in other specialized sectors may be subject to prior authorization by the National Foreign Investment Commission (Comisión Nacional de Inversiones Extranjeras) (e.g. private education).
The question of whether any government consents or similar investment approvals are required is highly deal specific but, under recent revisions to the UK Enterprise Act 2002, it is possible we will see a significant increase in the number of deals being reviewed by the UK government on national security grounds. Advent’s takeover of Cobham plc, a UK defense contractor, is undergoing a review by the UK government for its potential impact on national security and is one of two recent high-profile private equity deals to attract government security, alongside the UK government’s review of the sale of satellite operator, Inmarsat Plc, to a consortium which includes Apax and Warburg Pincus.
Foreign investors and Vietnamese companies that have a majority foreign investment are subject to certain investment conditions and restrictions that do not apply to domestic investors. When acquiring an equity interest in a Vietnamese company, foreign financial sponsors are subject to conditions applicable to all foreign investors including DPI approval where the target operates in certain sectors having conditions applicable to foreign investors or where the foreign investor acquires a controlling stake in the target (see the response to question 3 above). Further, Vietnam has foreign exchange control relating to the use of DICAs and IICAs to remit capital contributions, lawful profits, and other legal investment activity revenues.
All monetary transactions in Vietnam must be made in Vietnamese Dong (VND). There are no restrictions on foreign investors converting earnings and other lawful profits denominated in VND into foreign currency for remittance abroad. However, outward foreign currency remittance requires supporting documents such as proof of tax obligation fulfillment. In addition, foreign investors are also required to submit to tax authorities a prior notification of profit remittance abroad (at least seven days prior to the remittance).
As per the foreign exchange rules in India, sectors requiring the prior consent of the government for foreign investment fall within the government route, and those not requiring such consent fall within the category of the automatic route. Presently, in line with the Indian government’s attempt to invite and incentivize foreign investment in India, most sectors in India are permitted to receive foreign investment under the automatic route. These sectors include agriculture, mining, manufacturing, civil aviation (100%, except in cases of air transport services and domestic passenger airlines, for which the permissible limit is 49% for resident Indians and 100% for non-resident Indians), infrastructure, wholesale trading, e-commerce, duty free shops, pharmaceuticals (up to 74%), asset reconstruction companies, non-banking financial companies (NBFCs), insurance and other financial services. However, some sectors, including (i) defence, banking and telecommunication services (beyond 49%), (ii) print media, and (iii) multi-brand retail trading, are required to take the government route to receive foreign investment. Additionally, there are some sectors, such as lotteries, gambling, real estate businesses, tobacco and the railways, where foreign investment is prohibited entirely.
In addition to this, the Indian Department of Industrial Policy and Promotion (DIPP) has set out conditions for various sectors in India. The DIPP has been actively trying to liberalize various sectors, to encourage and strengthen the ease of doing business in India. However, there are a few sectors in which the DIPP has been very particular about restricting foreign investments. One such sector which is usually unregulated in other jurisdictions but heavily regulated in India is that of retail trading. This is essentially to protect smaller retailers and micro, small and medium enterprises in India. Through foreign exchange regulations in India, the DIPP has, since the inception of these regulations, prohibited foreign investment in retail trading in India. A fairly straightforward and simple way of defining ‘retail trading’ is that it includes buying from another person and selling to end consumers. Foreign investment in Indian ecommerce entities is restricted to entities with marketplace, manufacturing or business-to-business (B2B) models; retail trading in any of these sub-sectors is also prohibited. The only avenues where 100% foreign investment under the automatic route is allowed for entities engaged in retail trading are (i) single brand retail trading (SBRT); and (ii) manufacturing entities. The DIPP has not prescribed too many conditions for a manufacturer to sell its products (including through e-commerce and including by way of contract manufacturing), except that a manufacturer can be eligible for 100% FDI under the automatic route only if it sells products manufactured in India. However, with respect to SBRT, the government has prescribed various conditions. For instance, products sold can only be of a ‘single brand’. It is unclear whether sub-brands not carrying the name of the main brand can be utilized to engage in such an SBRT business. Further, in respect of proposals involving foreign investment beyond 51%, at least 30% of the value of goods procured, need to be sourced from India, preferably from smaller vendors and retailers.
Further, based on the residential status of the purchaser and the seller, there are minimum pricing requirements, known as pricing guidelines, to be adhered to under Indian foreign exchange rules.
Another way of determining foreign investment controls in India, is by governing foreign portfolio investment. Foreign portfolio investment (FPI) in India means any foreign investment by one single portfolio investor of less than 10% of the total capital of a listed Indian company. Currently, and till April 1, 2020, the aggregate FPI limit for a company is 24%, which can only be increased with the consent of its shareholders. However, the foreign exchange rules now state that, starting from April 1, 2020, the deemed aggregate limit for FPI will be the relevant sectoral cap (as mentioned above). If a company wishes to decrease this limit, its board of directors and shareholders will have to pass resolutions to that effect, before March 31, 2020. However, if FDI is prohibited in a company, the cap for FPI for such company remains at 24%, in aggregate. In case FPI thresholds are exceeded, such FPI entity will have 5 trading days to divest such excess holding, failing which, the investment will be deemed to be FDI. Therefore, in the past, how foreign portfolio investors were prevented from taking a controlling stake in Indian listed companies, but now it appears that the Indian government is open to easing its position in this regard. Interestingly, this deemed increase in the limit for FPI (unless specifically decreased by March 31, 2020) may make Indian listed companies susceptible to a creeping acquisition or a hostile takeover under the Takeover Code by an FPI, even without the board of directors and the shareholders agreeing to increase the limit to allow for such acquisitions.
In addition to the above, as mentioned in Question 1 above, the external commercial borrowing-related regulations in India dictate that financial sponsors cannot engage in or effect any leveraged buyouts, i.e., investments and/or purchases in Indian companies against borrowings and/or loans, especially those where the aim is to strap such leverage onto the Indian target company (unless the target company is a foreign company). This also extends to domestic players, to whom banks are prohibited to lend funds for the purpose of making investments or purchases in companies.
Outside of certain mandatory regulatory approvals and governmental consents in specific regulated sectors such as healthcare, financial services or energy, no other controls apply to financial sponsors.
Hannes Snellman: There are no foreign investment controls or other governmental consents, which apply to financial sponsors in particular. However, on rarer occasions and more sector-specifically, the Act on Monitoring Foreign Corporate Acquisitions in Finland may become applicable if a foreign buyer acquires a controlling stake of 10% or more in a target company, which operates in a sector considered critical to the functioning of the society.
In the defence material industry, monitoring covers all foreign owners, whereas in other sectors, such as pharmaceuticals, monitoring only applies to foreign owners residing or domiciled outside the EU or EFTA. Acquisitions in the defence or dual-use sectors are subject to prior approval from the Ministry of Economic Affairs and Employment. In other sectors, an advance notification is voluntary, but the Ministry of Economic Affairs and Employment may subsequently examine the acquisition if no advance notification is made. The Act is rather open-ended giving the Ministry leeway in determining which companies are vital to the functioning of the society.
The Central Bank of Brazil (“BACEN”) is also heavily regulated, especially regarding the foreign exchange market. In Brazil, the foreign exchange market, which is regulated and monitored by BACEN, is the environment where exchange operations are carried out between agents that are authorized by BACEN, as well as between such agents and their clients, directly or through their correspondents.
The acquisition of ownership and certain lease interests in real estate by non-EEA nationals, or the acquisition of control over companies owning such interests, is subject to notification or approval by the local Real Estate Transfer Commission (Grundverkehrsbehörde). What interests are covered and whether notification or approval is required varies from state (Bundesland) to state. Where the real estate is used for commercial rather than residential purposes approvals are usually granted.
Foreign Trade Act
The acquisition of an interest of 25% or more or a controlling interest in an Austrian business by a foreign investor (that is, an investor domiciled outside of the EEA and Switzerland) is subject to advance approval by the Austrian Minister of Economic Affairs under the Foreign Trade Act (Außenwirtschaftsgesetz) where that business is involved in:
- Inner and outer security (Innere und Äußere Sicherheit), for example, defence and security services.
- Public order and security, including public and emergency services (öffentliche Ordnung und Sicherheit einschließlich der Daseins- und Krisenvorsorge), for example, defence, security services, hospitals, emergency and rescue services, energy and water supply, telecommunications, traffic and universities.
Within one month of submitting the application, the Minister of Economic Affairs must either approve the transaction or initiate phase two investigations. If phase two investigations are initiated, the decision is due within two months following the application. If no decision is adopted within those time limits, the transaction is deemed approved by law. The application for approval must be filed prior to signing. Transactions subject to approval cannot be completed pending approval. Failure to obtain approval is subject to criminal penalties.
While the acquisition of an interest of 25% or more or a controlling interest in an Austrian business by an investor that is domiciled in the EEA or Switzerland is not subject to advance approval under the Foreign Trade Act, ex officio investigations may be initiated at any time (that is, there is no time limit to start that procedure). These investigations can be initiated, for example, to counter abusive structures.
In certain transactions (e.g., transactions involving “critical technologies”), foreign investments in the US may require pre-closing declarations to the Committee on Foreign Investment in the US (CFIUS), with penalties for non-compliance running as high as the value of the investment. Even where a declaration is not required, CFIUS has broad authority to review foreign investments, before and after closing, for national security concerns. Private parties can insulate their transactions from after the fact review by CFIUS (and potential divestiture orders) only through making a filing with CFIUS and securing a clearance.
CFIUS has jurisdiction to review investments where foreign persons may acquire “control” over a US business, with control being widely defined to include influence over significant decisions of the US business. CFIUS has broader jurisdiction over investments involving US businesses developing critical technology, operating critical infrastructure and handling sensitive personal data. In those cases, jurisdiction may be triggered by certain information access and governance rights. This broader jurisdiction often impacts investment funds where limited partners may want relevant information access or governance rights.
When reviewing a transaction, CFIUS focuses on whether the US target presents national security vulnerabilities and whether the foreign investor presents a national security threat. Where CFIUS finds a national security risk, it can mitigate those risks through imposing conditions on the transaction or recommending to the President that he issue an order blocking or requiring divestiture of the transaction.
Investments by foreign financial sponsors will typically be subject to pre-transaction notification or post-transaction reporting requirements under the Foreign Exchange and Foreign Trade Act (“FEFTA”). Recently, there have been a series of amendments to the FEFTA and the pre-transaction notification requirements have been expanded. In May 2019, 20 types of businesses were added to the list of regulated sectors that require pre-transaction reporting, and, in September 2019, the scope of activities that are categorized as foreign direct investment (“FDI”) were expanded. In addition, the Japanese Diet passed an amendment to the FEFTA in November 2019 to further expand the scope of FDI (the “2020 Amendment”). While the 2020 Amendment is to become effective in the first half of 2020, the relevant regulations to set forth the details are not made public yet.
Under the FEFTA, among others, a pre-transaction notification and screening by the government is required for any acquisition by a foreign investor of (a) 10% or more shares or voting rights of a Japanese listed company, or (b) any number of shares or voting rights of a Japanese non-listed company from a person who is not a foreign investor, if the target is engaged in certain regulated sectors such as the defense industry or nuclear energy, social infrastructure or agriculture, or technology (which is widely defined to include, among others, semiconductor manufacturing, software, and information and communications services). In such cases, a waiting period of 30 days will apply, which is usually shortened to two weeks if the investment does not relate to national security. Following the 2020 Amendment, the foregoing threshold of 10% applicable to a Japanese listed company is expected to be decreased to 1% in 2020, which could drastically expand the potential scope of screening.
While the only case in which the government issued a cease and desist order under the FEFTA was the proposed follow-on investment by The Children’s Investment Fund, a British investment fund, in Electric Power Development Co., Ltd., the largest wholesaler of electricity in Japan, we have seen more detailed reviews on pre-transaction notification for FDIs, in particular in connection with the restricted businesses concerning national security.