Foreign direct investment (FDI) reviews have become an increasingly critical issue in cross-border M&A transactions. Although many countries continue to encourage inbound investment, Taiwanese businesses and investors should carefully consider and prepare for FDI regulatory scrutiny early in their deal processes.

We are seeing views converging across the United States, Europe and other countries in agreement that so-called "sensitive" sectors need protection from what is described in the US as "adversarial capital." This trend is displayed through both lower thresholds that trigger FDI reviews and an expanded understanding of what qualifies as a "sensitive" sector for purposes of FDI reviews, export controls and international trade compliance.

The current focus areas for FDI agencies now often fall squarely within the range of business activities for many Taiwanese companies. Sensitive sectors are no longer limited to the traditional areas associated with high-level national security, such as defense, energy and telecommunications. Instead, FDI regulatory scrutiny is expanding to encompass biotechnologies, high technologies, new critical technologies such as artificial intelligence or 3D printings, and other data-driven activities.

Moreover, the COVID-19 pandemic brought FDI into sharper focus and accelerated movement on a national level across Europe and elsewhere around the world. Governments were concerned about the potential for foreign investors to take opportunistic advantage of companies in distress, and more generally about the resilience of supply chains. Naturally, the global pandemic also led many governments worldwide to add the healthcare sector to those considered sensitive industries.

New screening regimes in Europe

Today, 18 out of 27 Member States of the European Union (EU) have an FDI screening regime. Some of them adopted a new regime after the EU Screening Regulation was published or entered into full effect. Additional Member States have also announced the planned introduction or expansion of an FDI review regime.

While the EU Screening Regulation does not require EU Member States to introduce a national FDI review process, it is to be expected that all EU Member States will soon have FDI regimes, with the newer ones increasingly based on the EU Screening Regulation and the more mature ones increasingly brought in line with the EU Screening Regulation.

For example, Germany revised its FDI rules in 2020, including by broadening the review scope for COVID-19-related reasons, lowering the mandatory review threshold to 10 percent, introducing a standstill obligation outside defense deals and establishing criminal sanctions for non-compliance. In addition, the 17th amendment to the German Foreign Trade and Payments Ordinance (AWV) aligned the scope of review more closely with the EU Screening Regulation and cast a wider net for mandatory FDI reviews. The revised regime includes 16 new "critical activities" in addition to the list of 11 target activities that previously triggered a filing requirement and standstill obligation under the cross-sectoral review.

In the UK, a new investment screening regime will enter into force in January 2022 and include a mandatory pre-screening mechanism for specific designated sectors.

There is also increasing coordination on FDI review within the EU.

The EU Screening Regulation has been in full operation since October 2020. National screening authorities now must notify all deals they screen to the European Commission (EC) and the other Member States, which can then ask questions and provide comments or opinions—which they actively do in deals of interest. The EU Screening Regulation does not delegate veto or enforcement rights to the EC. This means that individual Member States continue to control FDI reviews for their jurisdictions. At the same time, each reviewing Member State must take into account the observations of the EC and other Member States.

Additionally, 5G technology has become a source of particular concern for certain Member States, which have issued specific rules to ensure FDI screening of deals involving 5G networks and equipment. In Italy, the government's "Golden Power" pre-clearance process is mandatory for contracts or agreements with non-EU persons relating to the supply of 5G technology infrastructure, components and services. France introduced a specific ad hoc authorization process for operating 5G technology within French territory. In Germany, the Federal Network Agency has published a security catalog for telecommunications and data processing, highlighting the critical nature of 5G networks. Germany's federal government is also contemplating supplementing the technical security check for 5G networks with a political review process.

Expanded resources in the US

In the US, the Committee on Foreign Investment in the United States (CFIUS) review process remains robust and a key consideration for deals. CFIUS is fully utilizing its expanded resources under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). This is reflected in a continued high number of annual reviews, including via a new short-form filing process, called a declaration, which was introduced under FIRRMA and has enabled parties to benefit from shorter, cheaper filings in certain cases. CFIUS is also aggressively pursuing reviews of non-notified transactions subject to its jurisdiction—including ones that may have long since closed.

FIRRMA introduced the concept of sensitive sectors to the CFIUS process by giving CFIUS additional authorities—including expanded jurisdiction and certain mandatory filing obligations—to review foreign investment in "TID US businesses," which are certain US businesses involved with critical technologies (certain technology, items and services subject to US export controls), certain identified critical infrastructure or sensitive personal data of US citizens.

Despite these expanded authorities, CFIUS's jurisdiction—and interest—is not limited to TID US businesses or given sectors. In other words, it remains essential that parties to a proposed transaction carefully assess all potential CFIUS implications as part of their deal planning for any cross-border deal where the target is, or includes, a US business.

Just as there is increased coordination among EU Member States, CFIUS is actively coordinating with other countries regarding national security reviews of FDI.

Although the CFIUS process is highly confidential, FIRRMA included specific provisions permitting information sharing between governments and requiring the establishment of processes enabling CFIUS to consult with other governments. Collaboration between allied governments on FDI reviews will likely continue to increase as countries throughout the world bolster their FDI regimes.

Impact for Taiwanese companies and investors

The good news for Taiwanese investors is that most countries worldwide encourage inbound investment. The EU has stated unequivocally that it wants to remain an attractive place for foreign investments. With the EU cooperation mechanism in full swing, many screening agencies are learning quickly and becoming more pragmatic. Similarly, the US actively encourages foreign investment, and the vast majority of transactions reviewed by CFIUS are approved without mitigation.

Still, the direction of change is clear. EU Member States, the US and other countries are upgrading and strengthening their FDI regimes, while increasing their focus on industrial policy and concerns about the resilience of global supply chains after the pandemic.

Larger geopolitical dynamics can also impact FDI reviews. For example, ongoing tensions between the US and mainland China have led to heightened CFIUS sensitivity regarding Chinese investment in the US. This has correlated with a steep decline in Chinese investment in the US in recent years. CFIUS is also actively using its enhanced FIRRMA resources to find non-notified transactions of interest, which are often Chinese deals, and call them in for review—sometimes impacting transactions that closed years ago.

Another key area of CFIUS focus is on "third-country risk," where a foreign investor's ties to sensitive countries can impact CFIUS's view of the investor's threat profile—and, accordingly, the potential risks presented by the transaction. Thus, even for deals involving non-Chinese investors, the investor's business dealings in mainland China—including manufacturing, other operations, joint ventures, sales and licensing arrangements—and potential technology transfers to mainland China are likely to be considered as part of CFIUS's analysis.

Many focus areas for FDI authorities coincide closely with the business activities of a range of Taiwanese companies. Semiconductors have long been a sensitive area, and the automotive chip shortage and the rise of 5G have only heightened this trend. For example, the German regime defines semiconductor products as "micro- or nano-electronic circuits (optical and non-optical, integrated and discrete) including all relevant production and processing equipment (including crystal pulling, lithography, epitaxy, grinding, cutting, etching, doping, testing, etc.), but not input material more broadly." Several cross-border M&A transactions pending in this sector are undergoing close FDI scrutiny in the UK, the EU and the US.

The main consequence as countries develop and bolster their FDI regimes is that FDI has emerged as a key regulatory consideration for multinational deals. This means that Taiwanese parties to cross-border deals must consider FDI issues in every relevant jurisdiction from the outset, so they can effectively manage all risks, timing and review processes.

It is more important than ever to get clarity on all of the target's activities and an overall FDI risk assessment early in the deal process, develop a clear strategy to address issues that may present challenges, and factor in sufficient time and resources for FDI review in the transaction timetable.

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