Post Covid foreign investment controls: protectionism versus globalism

Thursday 22 September 2022

Judit Budai

Szecskay Attorneys at Law, Budapest

Arthur Davis

Addisons, Sydney

Report on the joint session of the Banking Law Committee and the Securities Law Committee at the 37th International Financial Law Conference in Venice

Friday 13 May 2022

Session Co-Chairs

Judit Budai Szecskay Attorneys at Law, Budapest

Arthur Davis Addisons, Sydney


Neil Cuninghame Ashurst, London

Roberto Rio LMCR, Milan

Lawrence Scheinert United States Department of the Treasury, Washington, DC

Philippe Tardif Borden Ladner Gervais, Toronto

Alfred Page Borden Ladner Gervais, Toronto

The session consisted partly of a presentation by remote speakers and partly a discussion-style format to ensure that the in-person panellists could engage in a lively and dynamic dialogue.

The two Co-Chairs and the four expert panellists shared perspectives and comments on two main areas that may have a significant impact on deal flows and their financing due to the increased tendency towards national government intervention on the grounds of protecting national security, namely: (1) sanction policies when the protection of national security is derived from a genuine reason; and (2) the growth of foreign investment controls in Europe.

Sanction policies when the protection of national security is derived from a genuine reason, like sanctions against states supporting terror or war aggression

To provide a level playing field and enable the audience to fully understand the context of national security protection that may have an impact on capital market transactions and their financing, Lawrence Scheinert, Associate Director for Compliance and Enforcement at the United States Treasury Department’s Office of Foreign Assets Control (OFAC), guided us through a few cases. As an example, in the Toll Holdings case in April 2022, which closed with a fine of $6,131,855, an Australia-based international freight-forwarding and logistics company originated or received payments through the US financial system involving sanctioned jurisdictions and persons. The lesson learnt from this case is that non-US companies that use the US financial system to engage in commercial activity must take care to avoid transactions with sanctioned countries and persons.

In the Nordgas case in March 2021, which closed with a fine of $950,000, an Italy-based company that produces and sells components for gas boiler systems re-exported 27 shipments of air pressure switches procured from a US company intended for customers in Iran. The lesson learnt from this case is that foreign companies face risks when they involve US persons and goods procured from the US in dealings with US-sanctioned jurisdictions and entities.

Non-US persons should avoid prohibited transactions that involve sanctioned jurisdictions and persons when their activities rely on the use of US financial institutions or otherwise involve US persons or a US nexus. Non-US persons that seek to conduct business that involves US persons or the US should ensure that their compliance policies contain measures to prevent violative dealings with sanctioned persons or jurisdictions. Obfuscating the involvement of a sanctioned country or person in a transaction by falsifying the names of end-users or other parties does not insulate either US or foreign persons from potential liability. Foreign companies should not expect their obligations with respect to US sanctions to be fulfilled by their US partners. In international trade transactions, each party is responsible for understanding its own obligations pursuant to OFAC regulations. On the OFAC website, there are a number of compliance tutorials.

The panel also concluded that, similar to the US in the context of Russia, the sanction policy in everyday M&A and finance transactions is a very important new risk factor.

Growth of foreign investment controls in Europe

Again, to provide a level playing field and enable the audience to fully understand the topic, Neil Cuninghame’s summary was that foreign direct investment (FDI) screening is intended to protect national security interests by controlling investment in strategic undertakings. The European Union in response to the US Committee for Foreign Investment in the US (CFIUS), which established the practice of screening FDI, adopted Regulation 2019/452 to establish a regulatory control framework for screening FDI into the EU (the ‘EU FDI Screening Regulation’). In addition to the EU umbrella rules, during the Covid-19 emergency, EU Member States, beginning with Italy, introduced further national security screening rules to further block FDI.

Among a number of reasons, this was driven by the desire to capture a wider range of businesses and reduce the reliance on non-domestic suppliers and the risk of strategic businesses being bought ‘on the cheap’. However, many ‘temporary’ FDI rules became permanent and often not only were foreign investment regimes caught but also EU/domestic acquirers.

The financial sector is not always explicitly caught (eg, see the examples of the United Kingdom and Spain (currently)), but critical infrastructure may include financial infrastructure (eg, in Germany, Italy and Spain). This may mean that deals backed by acquisition finance may need to be notified because they can result in debt for equity swaps or enhanced lender rights, or default events might give rise to control. Granting security on its own, however, does not typically require clearance, but in the UK, an intervention right for the maintenance of the stability of the financial system has been put in place.

As the bottom line, FDI reviews are far more important than they used to be. We can expect that further national regimes will be introduced and the intensity of reviews will increase. Decision-making is often opaque and not published, which results in unpredictability in transactions because the conditions of prohibitions (which remain rare) are hard to assess.

Roberto Rio emphasised, from the host country’s point of view, that during Covid-19, Italy was the first country to introduce the following: in strategic sectors, the acquisition of a minority stake, above ten per cent at a value of €1m by non EU acquirers or the acquisition of a controlling stake, can trigger a screening obligation in the latter case even if the acquirer is an EU entity. Although such a regulation, according to some Italian scholars, raises the risk of the incompatibility of Italian FDI rules applicable to EU entities with European law, in relation to the freedom of establishment (set forth in Article 49 of the Treaty on the Functioning of the EU (TFEU)) and free movement of capital (set forth in Article 63 of the TFEU), the rules are still in place.

Growth of foreign investment controls

Arthur Davis added that, in Australia and the Asia Pacific region (including China, Hong Kong SAR, India and Taiwan), very similar protectionist trends can be seen in strategic industries or where there are government or semi-government investors (including pension funds) in the ultimate holding entities. Investment is invariably approved, but results in an increase in regulatory and transaction compliance costs.


As a conclusion Philippe Tardif outlined, in summary, that a number of reviewing agencies have gained broader discretionary powers in reviewing transactions (eg, on the grounds of national security and relating to sovereign-controlled companies/state-owned enterprises). Essentially, that has renewed protectionism in state procurement policies.

This trend began pre-pandemic, but has gained traction during the pandemic and since. Increased uncertainty in the outcome of the approval process for international M&A activity may have a negative impact on the availability of financing sources. Hurdles in the export market may trigger greater capital investment requirements to overcome restrictions. Restrictions on foreign acquisitions may have an impact on acquisitive business plans. Therefore, we have to keep a careful eye on and revisit the status of the regulatory framework from time to time in the hope of re-liberalisation.

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