Public interest or protectionism?

Navigating the new normal Contacts Public interest or protectionism? Navigating the new normal

Your key public interest and foreign investment contacts Introduction

Nigel Blackaby Christine Laciak Arend von Riegen Public interest and foreign investment screening is nothing new. Disputes, Litigation and Special Counsel – Foreign Global Transactions Partner, Arbitration Partner, Washington DC Investment, Washington DC Frankfurt All of the largest economies have had some form of review process in E [email protected] E [email protected] E [email protected] place for many years. However, recent times have seen a rapid intensifying of these controls: since 2015, 11 G20 countries, including Heiner Braun Mary Lehner Alan Wang Global Transactions Partner, Antitrust Partner, Global Transactions Partner, all of the G7, have enacted or set in motion more restrictive public Frankfurt Washington DC Beijing interest or foreign investment measures. E [email protected] E [email protected] E [email protected]

Shawn Cooley Alastair Mordaunt Kaori Yamada As a result global M&A is more complex and Instead we have focused on those themes where Special Counsel – Foreign Antitrust Partner, Antitrust Partner, deal execution risk is higher than ever. A tricky the landscape for merging companies has Investment, Washington DC Hong Kong Tokyo regulatory process can have a huge impact on changed significantly over recent years and, based E [email protected] E [email protected] E [email protected] deal value, whether through delays to closing on our experience, how this new landscape can or reducing expected deal synergies. be successfully navigated within a deal timetable. Pascal Cuche Sylvia Noury Hazel Yin Global Transactions Partner, Disputes, Litigation and Antitrust Partner, In our experience, although the impact of public Paris Arbitration Partner, London Beijing interest or foreign investment restrictions can Key trends E [email protected] E [email protected] E [email protected] greatly increase uncertainty for companies, it Not only are more countries introducing public is possible successfully to navigate these issues interest and foreign investment controls, but John Davies Richard Perks Gian Luca Zampa by building them into deal planning from the the sectors and types of transaction those rules Antitrust Partner, Global Transactions Partner, Antitrust Partner, outset. It can be helpful to engage with the address are also expanding in response to London and Brussels Hong Kong Rome relevant authorities at an early stage, and it political pressure: E [email protected] E [email protected] E [email protected] may be necessary to take a creative approach • a wider range of investors is becoming affected. to remedy planning by building it into the Michele Davis Jérôme Philippe The rise of protectionist sentiment and a Many thanks to the Antitrust Partner, Antitrust Partner, intended deal structure. rapidly changing economic and geopolitical following contributors: London Paris Although regulatory processes vary greatly across environment mean that screening rules are being applied against investors from any E [email protected] E [email protected] Bowmans jurisdictions, there are many common concerns. T +27 11 669 9000 In this guide we have taken a thematic approach third country, not just those from jurisdictions Bruce Embley Piers Prichard Jones to share some of our lessons learned, also drawing perceived to be particularly ‘risky’, and Global Transactions Partner, Global Transactions Partner, Shakti Wood on insights from some of the firms we have including domestic acquisitions in some cases; London London Competition Partner, worked with on major cross-border matters in E [email protected] E [email protected] Johannesburg recent years. We have chosen the themes based G7 G20 on those issues that we have seen giving rise to Natasha Good Julian Pritchard Brunswick Group Global Transactions Partner, Global Transactions Partner, T +32 2 235 6510 public interest and foreign investment concerns London London more frequently, either in response to new E [email protected] E [email protected] Sir Jonathan Faull challenges (such as the rapid development of Partner and Chair of technology), or due to the cross-fertilisation of Kathleen Healy Frank Röhling European Public Affairs, Brussels existing ideas across a much wider spread People and Reward Partner, Antitrust Partner, Philippe Blanchard of jurisdictions. This guide does not cover areas London Berlin Managing Partner, Brussels where sector-specific regulation is already mature E [email protected] E [email protected] and widespread (such as telecoms), or media Juliane Hilf Noah Rubins Clayton Utz plurality, which will already be familiar territory Disputes, Litigation and Disputes, Litigation and T +61 2 9353 4000 (as seen in the Comcast and Fox tussle for Sky in Arbitration Partner, Düsseldorf Arbitration Partner, Paris the UK, which trod a well-worn path). 100% 55% Kirsten Webb E [email protected] E [email protected] Competition Partner, Sydney Thomas Janssens Christiaan Smits Rory Moriarty Countries that have recently Antitrust Partner, Head of EU Regulatory and Corporate Partner, Sydney strengthened, or are considering new, Brussels Public Affairs, Brussels measures on foreign investment Matthew Battersby E [email protected] E [email protected] Senior Associate, Sydney

Freshfields Bruckhaus DeringerLLP

2 3 Introduction Public interest or protectionism? Navigating the new normal

• the range of industry sectors affected is Similarly, the proposed UK reforms would growing. On the target side, public interest allow the government to intervene in an or foreign investment screening increasingly acquisition of assets that might pose a risk targets deals that are outside the ‘obvious’ to national security purely through their national security and defence sectors. The list proximity to sensitive sites (a concept that is of critical sectors in many jurisdictions can already applied in the US, as seen in CFIUS’ be extensive, although the detailed nature intervention in Ralls Corporation’s acquisition of the products and services covered may of a wind farm project near to a Department not be clearly defined. This can make of Defense site); and Protectionism seems to be a trend predicting whether and where a target may • overall, the trend is for governments to be worldwide. Governments strengthen provoke scrutiny difficult for acquisitive more willing to intervene, backed by a rise in companies, particularly in the early planning protectionist sentiment and perceived risks to stages, without full access to the target’s national security or the public interest around their screening powers to protect business people; the globe. Although the core rationale for most • a wider range of transactions is triggering controls is national security, in practice the sensitive assets and businesses. interest. Public interest and foreign investment scope of what constitutes a threat to that regimes will often have lower thresholds security appears to be increasing. This results in a step change in the than ‘traditional’ merger control (seen in the The impact of these trends is clear. On our own recent UK changes, which catch acquisitions number of deals being impacted major M&A mandates, we have seen a more than of targets in particular sectors with more than 30 per cent increase in deals affected by public £1m of turnover, compared to £70m for all by foreign investment control interest or foreign investment considerations in other sectors) or have no thresholds at all recent years. In addition, whereas companies are (as in Germany or the US, where there is no considerations. These risks must be generally well versed in merger control processes, minimum turnover requirement). They also public interest or foreign investment reviews often capture minority shareholdings (eg under bring new challenges for acquirers and targets handled right from the outset – its existing authority the Committee on alike, including the following. Foreign Investment in the United States even more so as the underlying (CFIUS) has reviewed acquisitions of as low • Timing delays caused by a combination of as 10 per cent of shares,1 and pursuant to understaffed agencies and more in-depth concepts of national security and recently enacted reforms could review an investigations. This can be a gating issue investment of almost any size in certain for transactions with no antitrust issues, public order are ever evolving and not critical or sensitive businesses); particularly given the longer timescales (and, in some cases, lack of formal time • we are seeing authorities learn from each other limits) applicable to public interest or agnostic to policy considerations. across jurisdictions and cross-fertilise ideas foreign investment reviews. in order to expand the scope of their own regimes. For instance, we have seen authorities look to the experience of their counterparts in other jurisdictions in expanding the lists Juliane Hilf of technologies considered to be sensitive.

1 CFIUS reviewed the proposed 10 per cent joint investment by NavInfo, Tencent Holdings and GIC Pte proposed in HERE International. The investment ultimately was abandoned in response to CFIUS opposition.

4 5 Introduction Public interest or protectionism? Navigating the new normal

• Deal execution risk is growing for all types • More public scrutiny, especially where the of businesses and investors, and there is a target is a household name or an important greater need for parties to be protected against local employer, means that a co-ordinated public the unpredictability that is particularly acute affairs and communications strategy is vital. where public interest or foreign investment • Increased risk of regulators talking to each issues arise. Many regimes are voluntary, but other on transatlantic cases in the manner the possibility of calling in a transaction for of what we have seen in antitrust review in review after closing (for example, up to five the past decade but with even less procedural years in Germany and indefinitely in the US) transparency (perhaps the most notable raises the prospect of continued uncertainty example being Fujian’s proposed acquisition even after completion and therefore of Aixtron where the German government At the moment, when compared incentivises parties to notify. withdrew its clearance, reportedly after a • Extensive disclosure requirements mean tip-off from US intelligence services2). to antitrust review processes, that companies can expect detailed questions We would like to thank contributors from on the target’s activities and the buyer’s chain Bowmans, Clayton Utz and Brunswick Group of ownership and future intentions for the foreign investment and public interest for their enthusiastic assistance with this target, taking up significant management time publication, and in particular our colleague and requiring substantial co-operation from reviews are far less predictable, Olivia Hagger for leading this project. the target business. If you are interested in learning more about even if remedies can be devised. any of the issues covered, please get in touch via your usual contacts or those in our public They are also often less transparent interest and foreign investment group. and can provoke communications At least 108 jurisdictions now have investment laws challenges. Thorough planning is needed to maximise the chances of navigating a way through.

John Davies

Foreign investment review

Public interest review

2 https://global.handelsblatt.com/companies/berlin-faces-spat-over-blocked-chinese-takeover-633473.

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Global themes

1. National security and defence 11

2. Innovation, R&D and critical technologies 17

3. Protection and creation of employment 23

Public interest and foreign investment controls in the G20 28

As governments continue to learn 4. Critical infrastructure and natural resources 31

from each other and co-ordinate more 5. Structuring deals to negotiate uncertainty 37

in relation to national security and 6. Reciprocity and trade 43 other related risks, it is becoming 7. Engaging with all stakeholders 49 increasingly important for investors to take a globally co-ordinated Conclusion 52 approach to their strategy on foreign investment controls in their cross-border deal-making.

Alastair Mordaunt

8 Public interest or protectionism? Navigating the new normal

1. National security and defence

Even countries that generally have free and open as a factor to be considered by CFIUS. Initially in trade policies scrutinise the potential impact of 2003, the US Department of Homeland Security foreign investments on national security, using – the agency responsible for protecting critical frameworks separate from those used to evaluate infrastructure – was added as one of the agencies the economic impact of such deals. For example, designated to review foreign investment. Critical the US enacted legislation in 1988 – the so-called infrastructure and critical technology explicitly Exon–Florio Amendment – that enables foreign were added as national security factors through investments to be reviewed and blocked if they legislation adopted in 2007 following the threaten to impair national security,3 while the proposed acquisition by Dubai Ports World of 1 EU permits investments to be limited on public P&O, the US portion of which failed to obtain security grounds even by other member states.4 CFIUS approval.6 2 National security, though, is in the eye of the More recently the US has used its national beholder, and applicable legislation tends not to security review regime to address concerns draw bright lines around what constitutes a 3 related to the acquisition by foreign persons of national security threat. This flexibility may be large, sensitive data sets regarding US persons,7 considered critical to protecting national security and of businesses located near to sensitive 4 as it provides regulators the agility to address a defence facilities.8 CFIUS had signalled its changing threat environment. But the lack of developing concerns in these areas by listing certainty is also criticised for permitting an 5 them among the considered national security unbridled and opaque expansion of what can or factors in annual reports. The reformed should constitute a national security threat. legislation now explicitly authorises CFIUS to 6 review (i) investment of nearly any level in US Flexible US approach businesses involved in sensitive data sets; and 7 US national security review legislation does not (ii) acquisitions of undeveloped real estate located define national security, but rather includes a near sensitive defence facilities.9 It also enables non-exhaustive list of factors to be considered by CFIUS to review investment of nearly any level the relevant regulatory agencies that conduct in ‘emergent and foundational technology’. the review. The original list focused on defence This to-be-defined category is reportedly meant requirements and the protection of defence to focus going forward on national security products and technologies. Over time the list factors arising from acquisitions involving, of factors has grown both by legislative changes among others, artificial intelligence, robotics and and as a matter of policy.5 biotechnology. More broadly, in the Broadcom/ Qualcomm transaction, the US president acted to For example, following 9/11, the national block the deal to ensure Qualcomm’s leadership security impact of foreign investment in critical in 5G technology, which was viewed as essential infrastructure and critical technology was added to US national security (see Chapter 2).10

3 50 USC § 4565. 4 For example, in November 2017 the Italian government used its ‘golden power’ rules to block the acquisition by Altran Italia, an Italian subsidiary of a French company, of Next AST, an Italian engineering services company. Next AST provided software to Italian defence contractors. 5 For example, CFIUS, the US government agency responsible for conducting the national security review of foreign investment, includes in its annual report a general list of the national security factors raised by transactions reviewed during the year. Disclosure of a new factor on this list often signals a growing area of concern. 6 See Foreign Investment and National Security Act of 2007. 7 For example, China’s Ant Financial abandoned its proposed acquisition of MoneyGram International after failing to receive CFIUS clearance reportedly over security concerns related to personal data. See www.sec.gov/Archives/edgar/ data/1273931/000119312518000668/d517771d8k.htm. 8 See Order Signed by the President regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation, dated 28 September 2012, available at https://obamawhitehouse.archives.gov/the-press-office/2012/09/28/order-signed-president-regarding- acquisition-four-us-wind-farm-project-c. 9 See Foreign Investment Risk Review Modernization Act of 2018. 10 See Presidential Order Regarding the Proposed Takeover of Qualcomm Incorporated by Broadcom Limited, dated 12 March 2018, available at www.whitehouse.gov/presidential-actions/presidential-order-regarding-proposed-takeover-qualcomm-incorporated- broadcom-limited/. 11 National security and defence Public interest or protectionism? Navigating the new normal

National security screens export-controlled products and defence industry The UK government recently strengthened its critical suppliers to government and emergency around the world suppliers. The list of sectors was extended in powers to intervene in transactions on grounds services, and the military and dual-use sectors 2014, while in February 2018 the French of national security and has proposed further are likely to be caught, but this is not an Other jurisdictions also apply national security government announced its intention to further significant reforms that will bring the UK’s exhaustive list. The UK government has made screens, many of which continue to evolve. extend the list to cover artificial intelligence, regime closer in line with other countries. In clear that technological, economic and Canada, which had long applied a net benefit test space, data storage, semiconductors and financial June 2018, changes to the UK’s merger control geopolitical changes mean that national security to foreign investment, introduced a separate infrastructure. The German sector-specific and public interest regime came into force, concerns could arise in an increasingly wide national security review regime in 2009. In 2016, review regime protects essential security which lowered the thresholds for government range of sectors and the new regime must be the Canadian government issued guidance on the interests and reviews investments in companies intervention in acquisitions of businesses active sufficiently flexible to deal with these new and 1 factors it considers under that regime, including engaged in particularly sensitive areas of war in three areas: (i) the development or production challenging risks. a focus on defence capabilities, production of weapons, engines or gears to drive military of items for military or military and civilian use defence goods and protection of critical Finally, European Commission President 2 vehicles, IT security related to classified (‘dual use’); (ii) the design and maintenance of infrastructure.11 The Canadian list already Jean-Claude Juncker announced in September information, certain satellite data and other key aspects of computing hardware; and (iii) the anticipates the current US legislative focus 2017 a proposal for a European regulation defence technologies. Since July 2017, Germany development and production of quantum 3 on outbound transfers of sensitive technology establishing a framework for screening foreign has provided a non-exhaustive list of sectors, technology. These ‘short-term’ reforms are, and know-how, but also includes a focus on the investments that raise ‘security and public order’ acquisitions in which may present a ‘danger to however, likely to be replaced by a new regime, supply of ‘critical goods and services’ to the concerns,13 which would allow for an in-depth 4 public order or security’, which includes which will significantly increase the UK Government of Canada or to Canadian citizens. discussion between member states and the operators of critical infrastructure in specific government’s screening powers over a broad European Commission. Politically, there is a France, Germany and Russia similarly have industries such as energy and information range of transactions and sectors. Proposals 5 focus on foreign investment coming from entities foreign investment screens based on national technology, health and water.12 These published in a white paper in July 2018 provide controlled by a foreign government. The earliest security and defence rather than economic transactions are now also subject to a mandatory for voluntary notification and extensive call-in the regulation could come into force is early 6 considerations. The French regime reviews filing regime. Russia has a list of ‘strategic powers for acquisitions of control or significant 2019, although member states are pushing for foreign investment in certain strategic sectors activities’ and reviews acquisitions of entities influence over any entities or assets that could a delayed implementation that may push its on national interest grounds. Many of these that conduct one or more of 46 regulated raise national security concerns. Deals involving 7 entry into force into late 2020. sectors have analogues in the US and Canadian activities that range from defence to fishing. national infrastructure, advanced technology, frameworks, including consideration of

‘While Europe has taken a rather lenient approach to public interest ‘Twelve out of 28 EU member states currently have national security review and foreign investment in the past, we are now seeing increased mechanisms in place, and the European Commission has been under scrutiny of such transactions and even, in some rare cases, prohibitions. pressure to harmonise these processes. The proposed EU framework will Chinese investors face heightened risk, but investors from other regions, see an increased advisory role for the Commission – which will likely such as North America, may also be required to agree to burdensome expand timelines for companies. The framework will also lead to member mitigation measures. The sheer volume of reviews has not been matched states exchanging information with each other on individual transactions, by increases in resources for reviewing agencies, leading to lengthy which may eventually lead to a more harmonised approach across review processes even in relatively straightforward cases.’ Europe, and continued attention for screening in countries that don’t have a mechanism themselves yet.’ Frank Röhling Christiaan Smits

11 Guidelines on the National Security Review of Investments, available at www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81190.html. 13 Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct 12 The Ninth Regulation Amending the Foreign Trade and Payments Regulation entered into force on 18 July 2017. investments into the European Union dated 13 September 2017.

12 13 National security and defence Public interest or protectionism? Navigating the new normal

CASE STUDIES

Canyon Bridge/Lattice: US semiconductor prowess threatened How can buyers deal with If a data room exercise is the only option, it is Proposed acquisition by Canyon Bridge President Trump issued an national security concerns? important to think broadly about the potential The deal The outcome national security profile of the target business. Fund I, a Chinese-backed private equity fund, of executive order blocking the transaction on These variations notwithstanding, it is clear that Given that national security analysis is a two-way Lattice Semiconductor Corporation, a publicly 13 September 2017. national security review regimes should not be traded US company that manufactures analysis, it is also important for a target to Points to note The Canyon Bridge deal was construed to be narrowly focused on defence programmable logic devices (ie general purpose diligence the ownership and control structure one of a number of proposed acquisitions of contractors. A buyer may not easily be able to semiconductors that end users can program to of the buyer. semiconductor companies by Chinese acquirers identify at the early stages of a transaction provide functionality similar to microchips). between 2015 and 2017 following a Chinese whether a target’s business implicates national If national security concerns arise, parties need The deal was valued at approximately $1.3bn government policy announcement in 2015 that 1 security considerations, and whether national to consider how they might be addressed. Similar and was announced on 3 November 2016. security review regimes may apply. In the case to the merger control context, divestiture of a China should enhance (among other things) its of a direct supplier to the defence industry, the particularly sensitive business is an option that The issue CFIUS was concerned about Chinese semiconductor capabilities. As noted above, the 2 implications may be apparent, but the dual uses has been used successfully in a number of cases.14 investment in the semiconductor industry. DoD in particular viewed Chinese advancement of a particular technology might not. Further, Sometimes, less drastic measures may be The US Department of Defense (DoD), a CFIUS in the semiconductor space as a national security 3 indirect suppliers (tier 2 or 3 suppliers and those sufficient. CFIUS includes in its annual report a member agency, in particular viewed the threat, and as a result, CFIUS opposed many of further down the supply chain) are typically summary of the types of mitigation measures it semiconductor industry as one in which it was the proposed transactions. President Obama had difficult to identify but may raise analogous adopted in a particular year – examples include important to maintain a technological edge and issued an executive order blocking another 4 security concerns. Conducting due diligence on requiring firewalls or other security measures leadership position vis-à-vis China for national semiconductor transaction – Fujian Grand Chip a counsel-to-counsel basis is typically the most or making supply commitments. In Germany, security reasons. Investment Fund’s proposed acquisition of Aixtron 5 effective way to evaluate the national security typically, behavioural remedies laid down in – on 2 December 2016, less than a year before the considerations. Particular difficulties arise if the so-called security agreements between Germany, Canyon Bridge transaction was blocked. target’s information on defence-related projects the investors and the target are the method of 6 is classified and may not even be known to choice to resolve concerns about potential threats in-house counsel. In such cases, issues may arise to public order or security. 7 quite late in the process. BlackBerry/Secusmart:

‘The line between protecting national security and establishing German government gets security guarantees

industrial policy is increasingly blurred as the concept of national The deal In summer 2014, BlackBerry The outcome In November 2014, the German security evolves and expands in light of technological and geopolitical announced the acquisition of Secusmart, government approved the transaction upon changes. In this rapidly changing environment, there are no excluded a German software encryption specialist. concluding a security agreement with BlackBerry. It was reported that the security sectors and investors will need to quickly identify potential issues The issue Secusmart provided to the German agreement included certain control rights in government encryption technology to protect through targeted due diligence and stakeholder engagement much favour of the German government, including devices (including mobile phones) of government earlier in the process.’ access to the source code of Secusmart’s software officials. The German government feared that the and certain ‘no-spy’ provisions that obliged takeover may enable the tapping of phone Shawn Cooley BlackBerry not to disclose any information to conversations and bugging of messages by other foreign intelligence agencies. parties or intelligence agencies. With the encryption software, classified state information Points to note Even small niche applications of could be processed and was, thus, most likely the target’s products can raise serious concerns licensed by the Federal IT Security Agency for this of the government where there are possible purpose. This made the whole transaction subject security implications, and can hold up a deal to a mandatory filing, and required approval by considerably. Provisions in the security agreement, the German government in advance of closing. the method of choice to sort out concerns, may make it more difficult to run the target’s business in the future or exit the investment a couple of years down the line.

14 For example, in December 2016 Kuka AG (Kuka) sold its aerospace division, Kuka Systems Aerospace North America, in connection with CFIUS’ review of China-based Midea Group’s proposed acquisition of Kuka.

14 15 Public interest or protectionism? Navigating the new normal Public interest or protectionism? Navigating the new normal

2. Innovation, R&D and critical technologies

Digital disruption affects every industry. US to extend screening of Technology has transformed sectors including critical technology telecoms, media and banking, while the fourth industrial revolution – the development of CFIUS has always considered the national technologies such as software, robotics, 3D security impact from foreign investment in printing and data management – is set to critical technology, but CFIUS’ authority to revolutionise manufacturing. Deals involving the review a transaction was limited to acquisitions acquisition of automation and data technologies of ‘control’ of a US business by a foreign person. have increased as a result; China is leading the Following the adoption of recent reforms, CFIUS 1 way, reflecting its desire to evolve to a tier-one will have the authority to review investment manufacturing economy from its status as the of nearly any level in a US business involved in 2 world’s largest low-cost, low-tech production critical technology.16 Furthermore, foreign hub. It announced in 2015 that it would government investment in such businesses spend $1.3tn as part of its ‘Made in China 2025’ will be subject to a mandatory notification 3 strategy, designed to foster domestic high-tech requirement. Critical technology largely remains manufacturing. defined by reference to existing US export control 4 laws. However, the US government will develop In response, governments around the world a new category of ‘emergent and foundational have proposed a raft of public interest and technologies’ (see Chapter 1) that will be subject 5 foreign investment screening measures to to automatic licensing requirements, and foreign protect high value, sensitive innovations investment in companies involved in such and enable them to develop their own 6 technology will be closely scrutinised by CFIUS. competitive base for advanced tech. Moreover, although these issues are most acute 7 for rapidly developing technologies, they also ‘Control over advanced technologies arise in R&D more generally, such as in the life has become a key battleground for sciences industries. With high values attached governments, who are increasingly to intellectual property rights and patents, bids for such assets are being more closely expanding the scope of formal scrutinised by governments that view them review processes to ensure that they as essential to economic growth. can intervene in sensitive deals to the The political importance of such issues means point, as has been the case in Italy, of that they do not only arise through formal blocking deals even of modest value processes. For instance, in Japan, where given the wide discretion available.’ technology companies are considered particularly important for the economy, the Gian Luca Zampa Ministry of Economy, Trade and Industry (METI) has been known to bring pressure to promote Japanese solutions, over foreign bidders.15 It may, therefore, be necessary to make commitments outside formal public interest or foreign investment review processes, in order to appease governments or politicians.

15 METI can also, if needed, make use of foreign exchange and foreign trade laws to block foreign deals but would generally do so only where there is a link to national security. 16 In order to avoid CFIUS jurisdiction, investments would need the following restrictions: no access to non-public technical information; no access to financial data not available to other shareholders; no board or other advisory positions; and no substantive decision-making role for the investor.

16 17 Innovation, R&D and critical technologies Public interest or protectionism? Navigating the new normal

The EU follows suit In Germany, the government has expanded In the UK, short-term reforms lowering the R&D remedies to address innovation its powers to block the takeover of German thresholds for government intervention in deals Many European countries have followed suit, investment concerns companies amid growing concerns about the involving multipurpose computing hardware although proposals are careful to maintain the The political focus on innovation and the scale of Chinese deal-making in the German as well as quantum-based technology, including conventional link to national security and importance of R&D can also be seen outside the high-tech sector. In 2016, Chinese companies related IP or components, came into force in public order in order to protect advanced tech industry. Commitments from investors announced or completed purchases of German June 2018. The reforms followed a number of technologies. The European Commission’s required to secure deal approvals increasingly firms collectively worth €11.3bn, including the controversial investments in UK companies, proposed EU-level screening framework (see relate to R&D. acquisition of Kuka, a German robotics including the acquisition of the chip designer Chapter 1 for details) intends to account for the manufacturer, by Midea, a Chinese appliance- Imagination Technologies by Chinese-backed For example, France’s foreign investment 1 effects of acquisitions on critical technologies, maker (see case studies in Chapters 5 and 7 for Canyon Bridge (which was itself blocked by regulation expressly states that the Minister of including artificial intelligence, robotics, the legal and communications perspectives). the Trump administration from acquiring a Economy can require commitments in relation semiconductors, technologies with potential 2 The changes represent a shift in approach from US chipmaker, see case study in Chapter 1) and to maintaining R&D capacity and associated dual-use applications, cyber security, space and the German government, which had never the acquisition of technology firm ARM Holdings know-how. Those commitments can be broad nuclear technology, as well as their impact on previously prohibited a foreign investment. by Japan’s SoftBank for £24bn. It is notable that and can include maintaining the ownership of 3 access to sensitive information. The prospect of In addition to a new notification obligation the commitments made by SoftBank to reduce patent applications and relationships with tech deals impacting the EU economy has led the applying to foreign investments across a range political tension were made outside the UK’s leading universities or laboratories. General European Commission to justify the proposals as 4 of critical infrastructure sectors (energy, IT and merger control or public interest regimes, Electric, as part of its acquisition of Alstom in a way of ensuring that foreign companies do not telecommunications, transport, healthcare, which were not triggered by the transaction.17 2014, had to commit to maintain and develop gain access to these strategic assets ‘to the water supply, nutrition, finance and insurance), The short-term reforms are intended to ‘address R&D in France by carrying on Alstom’s existing 5 detriment of the EU’s technological edge’. the new measures also capture companies risks in vital, emerging technology industries’. programmes, developing new ones and ‘taking However, the final decision-making power will developing software for such infrastructure The UK’s proposed new regime for national an active role in local innovation ecosystems’. remain with member states. The French 6 as well as investments in providers of cloud security screening identifies certain advanced government announced plans in February 2018 In practice, merging companies in R&D-intensive computing, public healthcare data processing technologies as a core area where acquisitions to introduce expanded screening mechanisms industries must anticipate the need to give and telecommunications surveillance measures. may pose a national security risk. 7 that are already in line with the proposed EU R&D commitments at an early stage. It may be approach. In particular, France is to broaden the The foreign push for access to technology has helpful to plan early meetings with the relevant scope of the French foreign investment regime, also been felt in Italy. In 2016, the Chinese- ‘Protection of the local scientific authorities to assess what commitments may be extending it to various digital sectors in which European private equity fund AGIC Capital required and how long they may last, given that it has some significant players in the fields of acquired the Italian robot toolmaker Gimatic. landscape has become an area of this is likely to have an impact on a buyer’s artificial intelligence, semiconductors, space A year later, the Italian government proposed particular concern for national synergy analysis. Any undertakings concerning and data storage. to extend its foreign investment screening authorities, who wish to maintain R&D need to be serious, adequate and consistent measures to cover takeovers by non-EU their leadership at the frontier of in order to persuade authorities that there is no companies in high-tech sectors. Acquisitions may cause for concern. only be prohibited on grounds of national developments in dynamic sectors.’ security or public order, but the types of tech deals captured for review are extensive: critical Pascal Cuche or sensitive infrastructure (eg storage and management of data or fintech infrastructure), artificial intelligence, robotics and security of procurement for critical high-tech inputs, to name a few.

17 SoftBank was the first bidder to make use of the UK Takeover Code’s post-offer undertaking (POU) regime. SoftBank included three binding POUs in its cash offer for ARM, committing to (i) keep ARM’s Cambridge-based headquarters; (ii) at least double the UK employee headcount of ARM within five years; and (iii) grow the number of non-UK based ARM employees.

18 19 Innovation, R&D and critical technologies Public interest or protectionism? Navigating the new normal

CASE STUDIES

Broadcom/Qualcomm: US fears losing to China in 5G race

The deal In November 2017, Singapore-based United States’.* Further details reveal that Broadcom announced a bid to acquire rival CFIUS was concerned that Broadcom would US chipmaker Qualcomm, ultimately raising stunt Qualcomm’s ability to innovate, citing its offer to $117bn. The deal would have been Qualcomm’s unmatched R&D and technological the largest ever tech merger to date. leadership in standard-setting. CFIUS alleged that Broadcom would undermine those strengths The issue The combination of Qualcomm by leveraging Qualcomm with debt and changing and Broadcom would have created the world’s its licensing practices. third-largest maker of microchips behind Intel and Samsung but raised political Points to note The US government’s decision concerns in the US. demonstrates the weight given by CFIUS to the ability of US companies to maintain technological The outcome In March 2018, President Trump Companies making an acquisition leadership. The concerns cited by CFIUS were not signed an order blocking the transaction. rooted in Broadcom (which at the time was in the Unusually, CFIUS’ otherwise confidential letter to process of re-domiciling to the US) being a foreign in the tech space need to be aware the parties disclosing its reasoning was released entity – a domestic private equity firm might publicly, enabling a glimpse into CFIUS’ concerns. equally leverage Qualcomm or change its licensing of the prospect for parallel notifications In the letter, CFIUS reports that ‘a weakening practices. Thus, the decision appeared to be of Qualcomm’s position would leave an opening motivated more by a desire to maintain critical in numerous jurisdictions – even when for China to expand its influence on the 5G technological leadership than a concern with standard-setting process’ and that ‘a shift to respect to risks posed by foreign investment per se. buying small assets as revenue Chinese dominance in 5G would have substantial negative national security consequences for the *Committee on Foreign Investment in the United States letter to thresholds may be low or non-existent – Broadcom and Qualcomm, 5 March 2018. to allow sufficient time and to build appropriate safeguards into Pfizer/AstraZeneca: fears over loss of national R&D expertise deal documentation.

The deal Pfizer, the US drug maker, launched a order to ‘lead all European and certain global bid to acquire AstraZeneca, its UK rival, in 2014. R&D functions’. However, the acquisition was ultimately abandoned after repeated bids by Natasha Good The issue Pfizer’s announcement of a Pfizer were rejected by the AstraZeneca board. non-binding cash and share proposal to take The proposed transaction also ran into fierce over AstraZeneca immediately provoked sharp opposition from politicians in Britain, Sweden reactions in the UK and created a swell of and the US over fears that it would have a concern that a foreign takeover could lead to negative impact on jobs and R&D. the erosion of UK scientific innovation, given the significance of the deal. Points to note The whole process played out outside any formal merger control or foreign The outcome Pfizer announced that it would investment framework (which would only have make significant and tangible undertakings, been relevant later), showing the significance including committing to establish the combined of political pressure. Pfizer and AstraZeneca company’s corporate and tax residence in executives were required to appear in front England, complete construction of the planned of parliamentary committees to answer AstraZeneca Cambridge campus, create a questions about the bid, while Pfizer’s proposed substantial R&D innovation hub in Cambridge commitments were made in a letter to the and base key scientific leadership in the UK in prime minister.

20 21 Public interest or protectionism? Navigating the new normal Public interest or protectionism? Navigating the new normal

3. Protection and creation of employment

Many countries seek to protect and sometimes Identify any Africa nexus early on even create employment on the grounds of In many African countries, where unemployment ‘public interest’ when investigating M&A. is often worryingly high,19 it is not uncommon These considerations are often not restricted to see competition authorities formally tasked to foreign acquirers. with factoring in employment as part of their The blending of competition analysis with other consideration of mergers, or being empowered industrial, trade and socio-economic to take steps to prevent job losses resulting from considerations has been relatively common in deals. Take for example Namibia, where the 1 some African and Asian jurisdictions for some promotion of employment (along with the time. However, in recent years we have also seen advancement of the social and economic welfare an uptick in these concerns being raised as part of Namibians) is a stated purpose of the 2 of transaction reviews in Western economies, Namibian Competition Act.20 In considering a including, for example, in France, Germany and merger, the Namibian Competition Commission 3 the UK.18 For example, in the wake of Melrose’s may base its determination on any criteria that bid for British engineering company GKN in 2018, it considers relevant, including the extent to calls were made for Melrose to give additional which the proposed merger would be likely to 4 assurances to maintain GKN’s existing affect employment.21 employment levels. The German government Likewise in South Africa, the competition 5 may in certain high-profile cases consider authorities consider whether a merger can guarantees to maintain German sites or to keep be justified on substantial public interest a minimum number of employees on the 6 grounds by assessing a range of factors, company’s payroll in its foreign investment including the effect that the merger will have review. Merging parties will therefore need to on employment.22 Other sub-Saharan African 7 consider, and where possible pre-empt, countries that include similar employment employment-related concerns. provisions in their merger regulation regimes include Botswana, Zambia, Kenya and Tanzania, ‘It is particularly important for large as well as the Common Market for Eastern and Southern Africa (COMESA) Competition cross-border deals that the deal Commission. timeline takes into account any Given the importance of employment concerns employee engagement and in mergers relating to Africa, parties should consultation processes that may be identify any Africa nexus early on, including any necessary, as these can be critical locally registered subsidiaries or other assets to the successful implementation or production facilities ‘on the ground’, to leave sufficient time to provide the necessary assurances (as well as clearance) of a merger.’ to the relevant authorities where appropriate.

Kathleen Healy

18 In the US, employment considerations are not included in the merger control process (other than when evaluating the size of projected synergies), and job offers made to obtain US national security review clearance have failed. Legislation proposing that the US government subject foreign investment to net benefit screening, in addition to national security screening, has been introduced on multiple occasions in the US Congress but has not been enacted. 19 For example, in South Africa the official rate of unemployment is 27.7 per cent, while the expanded unemployment rate, which includes those who wanted to work but did not look for work, is 36.8 per cent. www.statssa.gov.za/?p=10658. A similar picture emerges in many other sub-Saharan countries. http://databank.worldbank.org/data/reports.aspx?source=jobs. 20 See section 2 of the Namibian Competition Act, 2003. 21 See section 47(2)(e) of the Namibian Competition Act, 2003. 22 See section 16 of the South African Competition Act, 1998.

22 23 Protection and creation of employment Public interest or protectionism? Navigating the new normal

How to mitigate deal risk in A bidder is now required to provide a more Negotiating employment-related concerns Continental Europe detailed statement of intentions and strategic plans with regard to the business, employees and The consideration of employment issues as part pension schemes of the target and to provide that of the merger process is not limited to Africa. statement earlier on in the takeover process than For example, in France and the Netherlands, in was previously the case. Our recent experience transactions involving companies with 50 or is that the Takeover Panel expects this statement more full-time employees, buyers are required to have a high level of granularity – for example, Takeover Panel rules Post-offer undertakings to consult with their works council before any 1 if a cut in headcount is planned the statement changes: more becoming the norm in decision to proceed with the transaction can be Increasing government should set out the numbers or percentage granularity required sensitive UK deals intervention including on made. However, in contrast to the position in the reduction envisaged. (eg quantification of (eg SoftBank/ARM, 2 African countries listed above, the works council’s employment aspects Any statement of intention made by the bidder impact on workforce Melrose/GKN, decision does not necessarily prevent a transaction numbers) Comcast/Sky) in relation to the target workforce constitutes a going ahead. In Europe, the merging parties 3 ‘post-offer intention statement’. This must be an can proceed notwithstanding a negative opinion accurate assessment of the buyer’s intention at of the transaction from the works council. the time it is made, must be made on reasonable 4 That said, mandatory information and grounds and is binding for 12 months following consultation processes with works councils in the end of the offer period. If the bidder decides 5 Europe can still cause uncertainty and delay to take a different course of action to that in because share purchase agreements cannot be the statement, it will need to consult with With such heightened focus on employment issues arising from transactions, signed until the works council process has been the Takeover Panel. businesses looking to engage in M&A activity should consider such issues up 6 completed, something that can take several front, in particular when analysing deal synergies and valuation. For example, As well as making a post-offer intention months. In certain situations, employees may it is not uncommon for competition authorities in African jurisdictions to place statement, a bidder may decide to make a 7 have a pre-emption right to make an offer to a moratorium on any merger-related job losses for a period of up to five years post-offer undertaking (POU) in relation to acquire the target company. To achieve an following the implementation of a deal. Such a conditional approval of a merger employee matters. POUs are legally binding acceptable level of deal certainty during this can have a significant impact on planned cost synergies and buyers ought to for the period stated and buyers should treat phase, buyers may want to negotiate a put factor this into their calculations. them as absolute commitments. The Takeover option, including exclusivity and standstill Panel will insist on mandatory reporting and Positively, from our experience in large cross-border M&A transactions, arrangements, to cover the consultation period. monitoring of compliance of any POUs by an governments and competition authorities are increasingly receptive to creative independent supervisor. Given the strength of solutions to potential employment issues and there are often a number of Post-offer undertakings in the UK the commitment, POUs can be a very effective options available to merging parties to alleviate concerns, for example In the UK, recent changes have been introduced means of offering legally binding assurances establishing local procurement funds, giving undertakings to maintain certain by the UK Takeover Panel that enhance the relating to, for example, the target’s employees minimum headcount levels, or offering local investment commitments. disclosure obligations of the parties in public M&A and management and maintaining the target’s and provide a regulatory framework for any headquarters and/or key sites of operation. statements made by a party about their intentions ‘Bidders offering POUs over post-offer intention statements may We are seeing a clear trend towards the inclusion or commitments to the workforce after the offer improve their chances of a successful outcome as firm undertakings – of employment-related POUs on high-profile UK period. These changes are intended to address transactions – and those POUs are becoming particularly in a post-Brexit world where many stakeholders in the the lack of enforceability of commitments and increasingly precise in nature. Communicating a UK have employment-related concerns – are increasingly desired.’ assurances given by bidders in public takeovers willingness to offer a POU at an early stage can in the UK. In particular, these changes were improve overall chances of a successful outcome Piers Prichard Jones prompted by the political outcry over Kraft’s and will allow a buyer to gain maximum traction perceived broken promise to keep Cadbury’s with relevant stakeholders. Somerdale factory in south-west England open. Its closure resulted in 500 job losses.

24 25 Protection and creation of employment Public interest or protectionism? Navigating the new normal

CASE STUDY CASE STUDY

AB InBev/SABMiller: EDEKA/Kaiser’s Tengelmann: job guarantees help win South Africa clearance jobs beat competition concerns

The deal AB InBev (the world’s largest beer merger specific unless the merged firm could company) announced in late 2015 that it would prove otherwise. Furthermore, the Tribunal The deal The acquisition by EDEKA of Kaiser’s The outcome The minister’s approval was acquire its main global competitor, SABMiller (the considered that an overbroad condition would Tengelmann (both leading grocery store chains) appealed by a number of competing grocery second largest beer producer on a global scale). burden the competition authorities with the was notified to the German merger control chains, but the appeals were withdrawn Despite the global position of the parties, AB InBev arbitration of retrenchment disputes indefinitely. authority in October 2014 and blocked by the following negotiations with EDEKA, rendering did not have local manufacturing operations and The Tribunal’s solution (in the interests of authority in March 2015. In March 2016 and the minister’s decision final. following an application by the parties, the constituted a miniscule share of the South African rationality and practicality) was to retain the Points to note Under German law, the approval German Minister for Economic Affairs approved market. Notwithstanding this, a range of concerns presumption of merger-specificity (and onus by the Minister for Economic Affairs of 1 the transaction, overriding the merger control were raised by the Competition Commission and on the merged entity to show otherwise) for a transactions that have been blocked by the authority’s decision. various interested parties. The large merger period of five years, and thereafter to apply a competition authority is a rare exception. Overall, 2 was approved by the Competition Tribunal subject reverse onus on the employee to show merger- The issue EDEKA and Kaiser’s Tengelmann were there have been fewer than a dozen approvals to conditions on 30 June 2016. The Tribunal specificity. The Tribunal was notably reluctant to among the largest grocery store chains in since the inception of the system in 1973. attributed the relative ease of the South African impose a time limit on the moratorium, given Germany. Given the substantial overlaps in the Approval can only be granted if the restraint of 3 clearance process, in part, to the pragmatic that this was a ‘concession’ already agreed to by parties’ activities in a number of cities, the competition that the transaction generates is approach adopted by AB InBev in voluntarily the merging parties. transaction was blocked on grounds of (i) outweighed by advantages to the economy as 4 agreeing a ‘wide range of significant measures’. Points to note AB InBev successfully negotiated competition. The minister’s decision to approve a whole; or (ii) if the transaction is justified by the transaction was mainly on grounds of job an overriding public interest. The minister The issue During the course of the Commission’s positive and (relatively) speedy outcomes before 5 investigation, the merging parties concluded an the competition authorities by being able to security. EDEKA was the only bidder who offered considered job security for an elevated number agreement with three government departments, identify and proactively address the potential to buy all the Kaiser’s Tengelmann stores; of employees to be of public interest. competing bidders were only interested in containing undertakings in respect of various public interest issues arising from the Interestingly, in a preliminary ruling, the 6 specific stores and the remaining stores would public interest issues, including employment. transaction. The Tribunal was practically minded competent court had, inter alia, considered likely have been closed. The minister argued that These undertakings were incorporated (with and sought to strike a balance in preserving the that the minister’s deliberations regarding job prohibiting the sale would lead to the dismissal 7 some modification) in the draft conditions broad commitments made, but ensured that the security were potentially faulty and likely of a large number of Kaiser’s Tengelmann’s circa recommended by the Commission to the condition could be enforced and monitored. insufficient to justify approval, and it is unclear 16,000 employees. Tribunal. Under the conditions, the merging Interestingly, the Tribunal was aware that the whether this decision would have withstood a parties agreed not to retrench employees in moratorium on merger-specific retrenchments formal court judgment. South Africa as a result of the merger, was likely an easy concession, since there were no in perpetuity. operational overlaps between the parties in South Africa. However, the merged firm’s employment The outcome Although the merging parties commitments signalled its understanding of the had been willing to agree to the moratorium in ‘The competition authorities are likely to require a definitive statement in government and competition authorities’ stance perpetuity, the Tribunal considered it improbable relation to employment impacts – even in the case of large, global on the importance of preserving employment in that merger-related retrenchments could South Africa. transactions. Whereas the parties could previously indicate that no local practically occur indefinitely. Instead, the integration planning had yet been carried out in the context of a large, Tribunal reasoned that ‘merger-specificity is a function of time’. The Tribunal also raised This case study was kindly contributed by multijurisdictional transaction, they are increasingly requested to provide issues with the proposed presumption that any Shakti Wood and Simon Trisk, a firm statement on the question of merger-related job losses, before the retrenchment, at any time after the merger, was Bowmans. transaction is cleared.’

Shakti Wood, Bowmans

26 27 Public interest and foreign investment controls in the G20 Public interest or protectionism? Navigating the new normal Public interest and foreign investment controls in the G20*

Country PI issues General Mandatory/ Suspensory? Formal review Additional Country PI issues General Mandatory/ Suspensory? Formal review Additional in merger FI voluntary period sector-specific in merger FI voluntary period sector-specific control? regime? FI restrictions? control? regime? FI restrictions?

Argentina No No N/A N/A N/A Yes Indonesia No Yes Mandatory Yes Five working days to Yes eg media; rural land; obtain a business licence eg banking, finance and border areas; air and five working days to insurance; energy and transport; satellites obtain an operational mineral resources; licence (once all broadcasting information satisfactorily Australia No Yes Mandatory Yes 30 calendar days, Yes submitted) extendable by 90 eg banking; civil aviation; (plus 10 calendar days airports; shipping; media; Italy No Yes Mandatory Suspension of 15 working days General FI regime only to notify parties) telecoms; defence; certain voting and (extendable by 10) applies to certain sectors, agricultural land governance rights eg national security and defence; energy; Brazil No No N/A N/A N/A Yes transport; telecoms eg nuclear energy; post; aviation; financial Japan No Yes Mandatory Yes 30 days (extendable to Yes institutions; rural five months for national eg broadcasting; radio; properties; media; security concerns) aviation; mining; insurance; aerospace telecoms; freight forwarding; shipping Canada No Yes Mandatory Yes 45 calendar days Yes (extendable by eg telecoms; Mexico No Yes Mandatory Yes 45 business days – 30 or longer as agreed) broadcasting; financial services; transport; Russia ✦ Yes Mandatory Yes Three and a half to six Yes Up to 200 calendar days No uranium mining; fishing; and a half months eg insurance; banking; for national security oil sands aviation; media reviews

Saudi Yes Yes Mandatory Yes 30 days Negative list of sectors China Yes Yes Mandatory Yes Administrative approvals: Yes Arabia included in general 90 days unless the eg automobile; banking; FI regime applicable sector approval securities firms; life regime has different insurance; futures South Yes No■ N/A N/A N/A Yes requirements companies; medical Africa eg broadcasting; institutions; education telecoms; banking; National security review: insurance; defence; 30 business days (Phase 1) mining plus 60 business days (Phase 2) for national South No Yes Mandatory Yes One to two business days Yes security reviews, Korea for routine cases, or eg rice and barley unless extended longer where special farming; nuclear power approval is needed due materials; electric power; EU No No N/A N/A N/A No to national security newspaper publishing; concerns broadcasting; telecoms; education; financial France Yes Yes Mandatory Yes Two months Yes services; defence (by ministerial (unless extended) eg air transport; intervention) electricity/gas Turkey No Yes Mandatory ▲ 15 business days for Yes transmission; Yes changes to liaison offices eg mining; broadcasting; radio/television petroleum; aviation; One to five months for electricity; railways; Germany No Yes Voluntary No Two months (Phase 1) Yes acquisitions of real education, cabotage; (mandatory for plus four months property banking; telecoms critical (Phase 2) Mandatory and infrastructure) suspensory regime (with different timelines) for eg certain defence- UK Yes No N/A N/A N/A No related sectors and (by ministerial satellite systems intervention)

US No Yes Voluntary No 45 calendar days (Phase 1) Yes India No Yes Mandatory Yes 10–12 weeks Yes (currently, but eg aviation; banking; eg gambling; real estate; future mandatory 45 calendar days (Phase 2) communications tobacco; atomic energy; regime for certain (standard with and broadcast; railway operations investments 15-calendar-day energy; insurance; in progress) extension possible) domestic shipping *As at September 2018. ■ In July 2018, a revised version of the Competition Bill, 2018 was tabled before 15 calendar days the South African parliament that proposes various amendments to the (presidential review) ✦ Although note that merger control review will be suspended Competition Act, including a new section aimed at foreign investment. until after foreign investment clearance is given, where relevant. ▲ For establishing/extending the term of a liaison office and for the initial acquisition of a real property by a foreign capital company.

28 29 Public interest or protectionism? Navigating the new normal Public interest or protectionism? Navigating the new normal

4. Critical infrastructure and natural resources

Protecting access to critical resources is one of Many other countries also have sector-specific the cornerstones of civilization. Critical resources restrictions over foreign investment, such as are a source of tension between nations, as in nuclear energy supply (including the US,24 demonstrated by the issues surrounding the Brazil, India and South Korea), or air transport supply of gas to Europe. From fresh water to (eg Argentina, France and Japan). fertile land, protecting particular resources has Recently, concerns around foreign ownership of always been deemed vital to support progress infrastructure have also spurred new controls and prosperity. Similarly, critical infrastructure and a tougher stance by agencies. Critical sectors such as energy, financial services, water 1 infrastructure is one of the key areas of focus of supply, transportation and telecommunications the European Commission’s recent proposals for are considered essential to ensuring security harmonisation of foreign investment screenings.25 2 and public order. The UK’s ongoing reform is focused on critical For these reasons, in many countries ownership infrastructure and was prompted by the 3 of such resources and infrastructure was – and negotiation of the Hinkley Point C nuclear power in some cases still is – entrusted to the state. project with EDF (owned by the French state) and Even in a privatised world, they have often Chinese co-investors (see case study). In Australia, 4 been labelled ‘sensitive’ and made subject to following the controversy around the acquisition ownership restrictions and foreign investment of Port Darwin by a Chinese company in 2015, 5 screening, and it is no surprise that they are the acquisition of electricity networks and certain once again in the spotlight given the recent generation assets has become more heavily resurgence of protectionism. These limitations scrutinised. In 2016, the Australian government 6 are achieved via sector-specific regulations blocked Hong Kong’s Cheung Kong Infrastructure general foreign investment review regimes and China’s State Grid from acquiring a 50.4 per 7 and even merger control laws. cent stake in Ausgrid, a state-owned electricity distributor. A new Critical Infrastructure Centre Restrictions on critical (CIC) has recently been set up to identify infrastructure investment Australia’s most critical infrastructure, conduct national security risk assessments, develop risk Restrictions on the ownership of infrastructure mitigation strategies and support government deemed ‘critical’ have existed in many bodies such as the Foreign Investment Review jurisdictions for some time. In the EU, for Board (FIRB) in its decision-making. The CIC’s example, there have been rules in place since initial focus is on national security risks to five 2009 to ensure that the acquisition of gas and key sectors: electricity, gas, water, ports and electricity networks by foreign nationals does telecommunications. In early 2018, the Australian not put the security of energy supply to a government announced that all future member state or the Union itself at risk.23 applications for the sale of electricity transmission In China, the construction and operation of and distribution assets, and some generation nuclear power stations, electricity grids and assets, would be subject to ownership restrictions gas networks must be in the form of a joint or conditions for foreign buyers. New laws have venture controlled by a Chinese party, and also been introduced requiring entities that are investment in air traffic control and postal either direct interest holders or responsible for companies is prohibited. critical infrastructure assets to provide the Australian government with ownership, control

23 Third Energy Package, Directive 2009/72/EC concerning common rules for the internal market in electricity and Directive 2009/73/EC concerning common rules for the internal market in natural gas. 24 In addition, the US more broadly considers the national security implications of foreign ownership of critical infrastructure, including energy infrastructure, transportation, financial systems and water. 25 Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union (Article 4).

30 31 Critical infrastructure and natural resources Public interest or protectionism? Navigating the new normal

and operational information. In August 2018, as the successful bidder. The US also seems poised it was reported that the Australian government to take a more restrictive stance. While China had banned Huawei and ZTE from supplying has generally relaxed its approach to inbound equipment for planned 5G mobile networks foreign investment in this area, transactions over concerns that foreign interference could can still attract commitments around terms and compromise the ‘integrity and availability’ conditions of supply. In the Agrium/PotashCorp of the 5G network.26 deal, the Chinese regulator imposed a requirement on the parties to continue to export Deals involving natural resources potash fertilisers to China on a reliable and competitive basis. Historically, resource-rich countries have also imposed controls over acquisitions involving Many countries have had rules restricting natural resources, namely in the mining sector. Mitigating deal concerns In recent years, countries including China,27 The extent to which concerns relating to critical foreign ownership of infrastructure India and Brazil have relaxed their limitations infrastructure or natural resources can be on foreign investment in the mining sector in a remedied depends on the country in question or natural resources in place for a number bid to encourage development. However, a and whether it has hard legal restrictions or number of other countries still scrutinise closely an approvals process in place. In the former, of years. With governments around the or restrict foreign investment in natural bilateral investment treaties may be a long-term resources, for example Australia (in relation to option but are not in the hands of investors the acquisition of interests in land), Canada (see Chapter 7). world poised to take an even more (uranium-producing mines), Myanmar, the When it comes to government approvals, there Philippines and Thailand. Concerns were also restrictive approach in this area, crafting a are steps companies can take that increase their raised about the acquisition of a platinum and chances of a positive outcome and a quicker and palladium mining company by a South African bespoke mitigation strategy to address smoother review process. Strategies that have buyer with substantial Chinese backers, but the been deployed in the past that are particularly deal was ultimately approved in April 2017. these concerns is more important relevant to these sectors include: assurances of Finally, with respect to the agriculture and food continuity of supply; consultation prior to taking than ever to improve the chances of industries, the ownership of farmland by foreign certain business decisions; ensuring that only nationals is restricted or subject to approval in national citizens occupy certain posts or handle a successful outcome. many countries (including Australia, Brazil, certain information; allowing step-in rights for Canada, China, India and Mexico).28 In Australia, the government as a backstop in case continuity the acquisition of agricultural land is now the of supply is under threat; listing conditions for subject of tighter controls, with the treasurer the selection of senior management; putting in requiring proof that the sale has been marketed place restrictions on the ability of the foreign Michele Davis widely to Australian bidders before approving a shareholder to influence certain business foreign investment. For example, the treasurer decisions; setting up a Corporate Security initially opposed the sale of S Kidman & Co 29 to a Committee for monitoring and reporting foreign purchaser and then ultimately approved purposes; and/or putting in place special rules its sale following a revised bid process that saw a when handling government contracts. majority Australian-owned consortium emerge

26 www.minister.communications.gov.au/minister/mitch-fifield/news/government-provides-5g-security-guidance-australian-carriers. 27 Restrictions in certain segments are still in place, namely for the exploration and exploitation of oil and natural gas (including coal-bed gas and excluding oil shale, oil sand and shale gas), graphite, tungsten, molybdenum, tin, stibium, fluorite and radioactive minerals. 28 In the US, legislation has been introduced multiple times to include formally the Secretary of Agriculture on the multi-agency committee that reviews foreign investment on national security grounds in order to focus the review on food security issues. That proposal was not included in the reform legislation that ultimately was enacted in 2018. Nevertheless, large agricultural transactions regularly are submitted for review to CFIUS including ChemChina’s acquisition of Syngenta, which received clearance. The US agriculture department and other related agencies, though, typically participate on an ad hoc basis in such reviews. 29 S Kidman & Co is the largest private landholder in Australia and represents approximately 2.5 per cent of Australia’s agricultural land.

32 33 Critical infrastructure and natural resources Public interest or protectionism? Navigating the new normal

CASE STUDY CASE STUDY

ADM/GrainCorp: Nuclear new build: no to foreign ownership of agri-infrastructure UK’s ‘golden share’ relieves national

The deal The takeover of GrainCorp Limited The outcome ADM committed (i) to invest an security worries (GrainCorp), Australia’s leading agribusiness in extra A$200m in infrastructure improvements grain handling and processing, by Archer Daniels focused on rail projects; (ii) to put in place price The deal Hinkley Point C is a project to build The outcome The UK government required EDF Midland Company (ADM), a US agricultural caps on handling charges; and (iii) to ensure ‘open the first nuclear power station in the UK for to agree to a ‘golden share’, which allows the commodities trader, was valued at approximately access’ for port services. The transaction was more than 20 years. Two state-owned companies government to have a veto right over the sale of $2.3bn and was announced on 5 January 2013. prohibited by the treasurer on 29 November 2013 will build and operate the power station: EDF’s controlling stake in Hinkley Point during due to the threat to Australia’s national interests. Électricité de France (EDF) (85 per cent owned the construction phase (existing rules and the The issue The FIRB and the treasurer at the time, The decision was criticised by some for being by the French state), which will have a majority proposed new foreign investment framework Joe Hockey, raised concerns that the acquisition 1 politically motivated. stake, and China General Nuclear Power would allow the UK government to intervene would limit the access of growers to GrainCorp’s (a Chinese state-owned enterprise) (CGN). The once the power station is operational). The grain storage, logistics and distribution network, Points to note The fact that the deal would have estimated construction costs for EDF and CGN agreement signed between EDF, CGN and the UK 2 which included over 280 up-country storage put control over Australia’s incumbent grain have been put at over £20bn. As consideration for government also foresees step-in rights for the sites and seven of the 10 grain port terminals. processor in foreign hands seems to have been this investment, the British government entered government in certain prescribed situations. 3 The treasurer also alluded to the fact that the the key factor for the decision to prohibit the into an agreement with EDF and CGN under Following a comprehensive review of the project, deal would have a negative impact on competition transaction, and commentators have suggested which British electricity consumers are expected it was approved in September 2016. as the sector had only recently been deregulated that the final decision may have been influenced to have to pay £30bn over a 35-year period. 4 and GrainCorp was the incumbent. Politicians by election year politics. GrainCorp was Points to note Due to the financial and national The issue In addition to delays, mounting costs security risks involved in the project, the Hinkley expressed concern that the deal could affect the effectively seen as the main gateway for grain 5 country’s supply chain and capacity to grow producers to sell their product domestically and to the UK taxpayer and state aid, concerns were Point negotiations prompted the UK government export markets. This was a separate process to – critically in this case – abroad. ADM’s also raised over the investment by French and to announce that it would also take a ‘golden the formal competition review of the transaction wide-reaching commitments were insufficient Chinese state-controlled companies in a highly share’ in all future nuclear projects to ensure that 6 that was undertaken by the Australian to persuade the treasurer. The main objection sensitive infrastructure project that will be significant stakes cannot be sold to foreign critical to the UK’s future energy supply and investors without the government’s knowledge Competition and Consumer Commission, which to the commitments seems to have been their 7 cleared the acquisition. complexity and the potential interference with that involves a high degree of operational and consent. More importantly, the deal re-ignited free competition in this sector. and national security risk. Access to sensitive the debate in the UK about foreign ownership of information about the UK’s energy supply critical national infrastructure more generally. This case study was kindly contributed by was another concern voiced at the time the Until a new foreign investment regime for Kirsten Webb, Rory Moriarty project was being discussed. critical national infrastructure is in place, the and Matthew Battersby, UK government seems poised to bilaterally negotiate ‘golden shares’ and other conditions Clayton Utz. on a project-by-project basis.

‘Identifying and understanding early in the process the potential sensitivities of particular governments and regulators, their recent ‘Quite often, governments identify very specific concerns, which decision-making and approval history, and developing a strategy to can be remedied by bilateral agreements with the government. manage the interaction between foreign investment review and merger Identifying and understanding the potential risks of a transaction control processes have become very important parts of the regulatory is key to obtaining clearance and this can often be done during clearance strategy for transactions involving critical infrastructure.’ the early stages of a transaction.’

Kirsten Webb, Clayton Utz Heiner Braun

34 35 Public interest or protectionism? Navigating the new normal Public interest or protectionism? Navigating the new normal

5. Structuring deals to negotiate uncertainty

Resolving possible public interest or foreign Dual headquarters and dual listings investment concerns need not only be a question The location of a merged company’s headquarters of submitting remedies once a screening process can be an area of focus for governments and has identified specific issues. Our experience regulators in significant cross-border M&A shows that by considering deal structuring transactions (as was seen in the attempted options early on in the M&A timeline, parties merger between London Stock Exchange Group have been able to enhance their prospects of and Deutsche Börse). In terms of optics, successfully negotiating the uncertainty of what governments will be interested in preserving a may be a highly political process. 1 company’s identity and heritage post-closing, and the location of headquarters is often linked to Pre-emptive disposals future plans for the workforce and innovation in 2 Divesting problematic parts of the business can that jurisdiction. Dual headquarters (especially be the most straightforward way of resolving in the context of a combination branded as a 3 challenges. The advantage of divestments is that ‘merger of equals’) can be a helpful conciliatory they can resolve entirely perceived issues gesture to governments in the parties’ home without any need for ongoing monitoring or jurisdictions to assuage concerns about loss of 4 involvement by the authorities, although there control of a national champion or businesses is an obvious direct impact on deal value. with sensitive know-how. 5 If divestments appear necessary, and the relevant A merged company could also seek to list its parts of the business are not critical to the deal, shares on more than one stock exchange, using it can be more efficient for buyers to consider a 6 either a structure with one holding company or pre-emptive disposal. Arranging the relevant two that are united in a dual-headed structure. disposal before, or as part of, any regulatory These approaches can broaden the investor base 7 notification or filing may help to mitigate in strategically important jurisdictions and potential public interest or foreign investment demonstrate commitment to the company’s concerns without waiting until the end of a business in those countries. They also give protracted review process. This improves deal comfort that the company has submitted to the certainty and may enable a better price to be oversight of local regulators. Alternatively, a obtained for the divested business. dual-headed structure (or a ‘virtual merger’) However, where the sensitive part of the business may help to convince politicians that their is core to the deal, divestments are not likely to ‘national champions’ will survive after a merger. be acceptable to the buyer. We have found that However, a dual-headed structure has sometimes in these circumstances creative structuring been blamed for corporate governance/structural options can help to limit opposition to a inefficiencies, a point about which activist transaction from the outset. investors have been especially vocal recently (for example, see Elliott Advisors’ pressure on BHP Billiton and the recent debate over Unilever’s dual-headed structure).

‘Deal certainty is of particular importance to companies considering cross-border transactions. Careful structuring can greatly increase the chances of success by diffusing political concerns in advance.’

Arend von Riegen

36 37 Structuring deals to negotiate uncertainty Public interest or protectionism? Navigating the new normal

Reverse takeovers A ‘reverse takeover’, whereby a listed company acquires a larger company, can be used to achieve a combination without changing the holding company of the listed company. It may also be a way to avoid having the transaction supervised by the local public M&A regulator (and thus particular commitments that might have been required from the larger party). This structure was recently used by French industrial group Schneider Electric and UK software developer AVEVA: AVEVA’s UK listing and headquarters were retained but majority control of the group shifted to Schneider (subject to a relationship agreement that protected AVEVA’s independence as a listed Parties facing political interest/foreign company). In other cases, this could provide the basis for a more appealing proposal to governments with concerns about the relocation of national champions or key investment risks can put themselves in a industrial operations. However, businesses considering reverse takeovers should be mindful of political much stronger position by using sensitivity regarding so-called tax inversions. Clear and consistent messaging and PR strategies will be key (as with any M&A activity) to help ensure the transaction structuring and related techniques to is favourably received. optimise their chances of success. Staggered shareholdings Staggering the acquisition of the stake in the target can sometimes mitigate public A clear and consistent narrative is required interest concerns, where the deal is structured to increase or reduce the shareholding of the buyer dependent on its completion of investment undertakings made to from the outset that portrays the governments or local regulators. This approach may appeal to buyers interested in acquiring sensitive assets where a government is unwilling to allow a complete deal in the best possible light for political takeover (either in the early stages of new ownership – or at all) and may go a long way to alleviating concerns about whether undertakings made during the offer process and regulatory audiences. Nonetheless we will be kept. For example, following the Greek debt crisis, Chinese shipping company COSCO purchased a controlling stake in Piraeus Port from the Greek government in are also seeing parties focus more a €280m privatisation deal. As part of the deal, COSCO promised to invest €300m in the port, and for public interest reasons was limited to acquiring a 51 per cent stake and more on downside protections if their until the investment is complete. The acquisition was structured so that a conditional increase to 67 per cent will only be completed in 2021 if the promised investment deal can’t successfully complete. programme has taken place.

Consortium structures We often come across transactions that involve purchaser consortia composed of Bruce Embley financial sponsors together with sovereign wealth funds controlled or funded by foreign governments. The structuring of these consortia and their internal governance arrangements may greatly influence the view that regulators would take of these consortia, and may also determine whether relevant control or filing thresholds are met. In addition, consortium arrangements can be structured such that they provide for tailored ‘Chinese wall’ arrangements whereby certain minority partners who may be viewed critically have restricted access to sensitive data or technology of the target business. These measures – either upfront or as a negotiated solution with regulators – may help address governmental concerns in the target company’s home jurisdiction or in critical export markets.

38 39 Structuring deals to negotiate uncertainty Public interest or protectionism? Navigating the new normal

CASE STUDY

Midea/Kuka: the legal perspective

The deal In January 2017, Midea Group, This led to the negotiation of an investment a Chinese-listed home appliances company, agreement with commitments to keep the acquired Kuka, a listed German robotics company’s management and financing manufacturer, for €4.5bn. independent, maintain Kuka’s headquarters and employee base in Germany, and not delist the The issue Kuka, Germany’s biggest business. Further, the parties agreed to divest manufacturer of industrial robotics, develops pre-emptively Kuka’s ITAR-registered US robots used by German carmakers such as subsidiary as a condition to settlement of the BMW and Audi. Midea’s bid raised fears that tender offer. Midea also committed to allowing Germany’s ‘Industry 4.0’ strategy would be Kuka to continue to operate independently, stalled by interest in domestic assets from and to helping the business expand into Chinese With the increase in Chinese outbound China’s manufacturing sector. Opposition from markets. The deal received approval from certain members of Kuka’s management and shareholders and regulators, including clearance supervisory board, as well as shareholders and investment in critical sectors, from CFIUS, in part due to the pre-emptive politicians, could have prevented the deal from divestment of Kuka’s US subsidiary. completing. Kuka also had a US subsidiary deals may trigger foreign investment engaged in highly sensitive US defence-related Points to note By understanding the regulatory activities, which was International Traffic in landscape and likely roadblocks prior to processes in numerous jurisdictions. Arms Regulations (ITAR) registered. Pursuant to commencing negotiations, Midea and Kuka were an embargo imposed on China by the US, there able to take a proactive approach to the merger This needs to be considered as a day one is a prohibition on Chinese ownership of process and allow the deal to proceed with the ITAR-registered companies. minimum of regulatory intervention. As a result issue to ensure that the commercial of the transaction, Midea obtained access to The outcome Midea initially followed a cutting-edge robotics, Kuka’s shareholders rationale for the transaction is clearly stakebuilding strategy to build up its obtained a significant premium on their shares, ownership in Kuka. This highly regulated and Kuka itself remained independent and approach kept the tender offer price down understood and the structuring obtained access to Chinese markets. and offered an opportunity to test the target, market and internal reaction to the transaction. and execution processes are aligned to deliver a successful result.

Richard Perks

40 41 Public interest or protectionism? Navigating the new normal Public interest or protectionism? Navigating the new normal

6. Reciprocity and trade

In addition to the inward-looking public interest Following joint calls by Germany, France and and foreign investment concerns covered in Italy for foreign investment based on reciprocity previous sections, some foreign investment of investment conditions, the issue has featured regimes are also influenced by outward-looking in discussions around foreign investment considerations of fairness and reciprocity. regulation within EU institutions and by This is hardly a new idea in other fields of policy. European business groups.31 The notion of It is well established for governments and reciprocity also played a role in the discussions policymakers to use these principles to encourage when Germany tightened its foreign investment other countries to open their markets, as well regime in July 2017. Even though reciprocity 1 as to justify domestic policies on inbound trade is not specifically part of the legislative text, and investments. These are the foundations upon European Commission officials have frequently 2 which free trade agreements and investment alluded to the lack of progress on trade talks treaties are negotiated. with China as a reason for adopting the proposals for EU-wide screening. The European Parliament 3 However, record levels of Chinese outbound debated the issue openly and now wants the investment and the rise of nationalist politics have proposals explicitly to take into account the recently renewed the debate around reciprocity 4 characteristics of the investor’s home country, in the context of foreign investment regulation. including whether they have an open market Business communities and politicians have called and whether a level playing field exists. 5 for tougher screening of foreign capital when home investors face substantial barriers abroad. On the other side of the Atlantic, foreign The concept also seems to have popular support: investment rules have been limited to 6 in a survey of American and Chinese adults, it safeguarding national security. Nonetheless, was found that respondents were consistently the Trump administration is revamping its 7 more likely to oppose foreign acquisitions when foreign trade policy to enforce a level playing the foreign firm’s home country did not provide field for cross-border trade and investment. reciprocal market access.30 The US government has announced various unilateral tactics to respond to what it perceives How the debate has played to be unfair trade practices by others. This has out in practice spanned innovative tech industries to more traditional sectors like steel and aluminium. In the EU, the reciprocity debate was part of the impetus behind current proposals to create A case in point: in response to alleged unfair EU-wide rules on foreign investment screening. Chinese trade practices, including theft of While Chinese state-funded acquisitions of key technology and intellectual property, the White European assets have surged in recent years, House ordered new investment restrictions to European companies are blocked from receiving address concerns around Chinese investments similar subsidies from their domestic in the US and declared that imposing tariffs to governments under strict state aid rules. combat the effects of global oversupply of steel and aluminium was necessary to protect its national security interests.32

30 Chilton, A S, Milner, H V, and Tingley, D (2017), ‘Reciprocity and Public Opposition to Foreign Direct Investment’, British Journal of Political Science, pp 1–25. 31 China Manufacturing 2025: Putting Industrial Policy Ahead of Market Forces, 7 March 2017, European Union Chamber of Commerce in China. 32 Statement from the White House released on 8 March 2018, available at www.whitehouse.gov/briefings-statements/ need-know-section-232-investigations-tariffs/.

42 43 Reciprocity and trade Public interest or protectionism? Navigating the new normal

The current state of reciprocity role in cross-border foreign direct investment (FDI) Where does this leave us? flows, there is one discernible exception: China. Whether or not the measures that have so far Although reciprocal market access is negotiated at the state level and, therefore, inherently not As the second largest international investor after been proposed by the US are suitable responses, deal-specific, there are various steps a company can take to capitalise on the current state of affairs. the US, it maintains a list of some 48 sectors in concerns around lack of reciprocity are not which foreign investment is restricted or • Identify opportunities and pitfalls in trade developments entirely unfounded. prohibited. Foreign investment in these sectors As trade and investment often go hand in hand, changes to attitudes around trade often have a For example, limitations on foreign investment can be subject to ownership caps or joint venture knock-on effect on foreign investment in particular sectors. Keeping pace with trade negotiations in the US only exist in a small number of sectors, requirements, and inbound investors must often and broader geopolitical trends can help businesses more accurately predict political headwinds in including aviation, banking, communications comply with onerous rules around technology cross-border deal-making. For example, recent US proposals to restrict trade and foreign investment 1 and broadcast, energy, insurance and domestic licensing and data access. It is worth noting, have provisions to exempt ‘friendly’ countries, which is good news for some. As an acquirer, having shipping. In the EU, member states are restricted however, that the number of sectors on the a precise grasp on current affairs means better risk assessments, while for a potential target, this 2 in their ability to hamper foreign investment but so-called ‘negative list’ is shrinking (it was could represent an additional bargaining chip. for a few narrowly defined exceptions under EU recently reduced from 63 to 48). Various • Structuring around investment treaties law, meaning that formal limits generally relate measures have been adopted in the past few 3 Investment treaties have commonly protected foreign investors from expropriation by governments to certain regulated sectors and specific years to liberalise China’s foreign investment seeking direct control over key or strategic industries and other adverse state measures. We have companies in which the relevant government environment, reducing ownership restrictions seen increasing numbers of investors seeking to take advantage of international investment treaties 4 retains historic ‘golden shares’. and easing administrative burdens for foreign by adapting ownership structures to benefit from their substantive protections, as well as to gain investors. It remains to be seen whether On the other hand, there are still many countries access to international recourse against states in the event that they breach those protections. protectionist trends elsewhere (and an emerging 5 in Asia and the Middle East that have not The prospect of a dispute between a government and an overseas business in an international trade war) will cast a shadow on China’s undergone economic liberalisation. Here, a arbitral proceeding based on a foreign investment treaty may act as a deterrent to public interest commitment to improve its investment foreign investor can still find onerous ownership intervention in some cases. 6 environment for foreign investors. We are restrictions in a wide range of sectors. Although already seeing spillover effects of the US–China • Engage and influence policymakers most of these countries tend to be smaller, trade spat in the form of delayed foreign deal Whether in the context of a specific transaction or the negotiation of trade deals/investment 7 developing economies that play a less significant approvals from Chinese regulators. treaties, engagement can help ensure that your company and sector are taken into account. Understanding how reciprocity and fairness are used to set economic policies will help your

argument carry more weight with key decision makers. Where possible, ongoing engagement FDI regulatory restrictiveness per country, 2017 with governments and the appropriate use of government affairs advisers can nurture a positive relationship, and in those crucial moments help tip the balance in your favour.

‘Shifting trade alliances can present huge opportunities for businesses that are attuned to these developments and are nimble enough to take advantage of them.’

Hazel Yin

Key 0.00–0.05 Least

reflective 0.05–0.10 0.10–0.15 0.15–0.20 0.20–0.30 Most

reflective 0.30–0.40 N/A

Source: OECD FDI Regulatory Restrictiveness Index database (https://stats.oecd.org/Index.aspx?datasetcode=FDIINDEX#).

44 45 Reciprocity and trade Public interest or protectionism? Navigating the new normal

CASE STUDY

Qualcomm/NXP: antitrust and geopolitics intervene

The deal The proposed $44bn acquisition of never set for an easy regulatory process given the chipmaker NXP Semiconductors (NXP) identified competition concerns, the decision to by Qualcomm was set to be the largest abandon the deal was based on the semiconductor deal in history. First announced understanding that ‘the current geopolitical in October 2016, the deal had received eight of environment’ was unlikely to change in the near Trade reciprocity between the US and nine regulatory approvals by January 2018, with future according to the CEO of Qualcomm. China left as the final regulatory hurdle. China is making big headlines, but efforts Points to note A spokesman for China’s The issue Between the months of March and Ministry of Commerce said the absence of to use CFIUS to address perceived July 2018, the Trump administration announced approval by the long stop date was an issue tariffs on $50bn of Chinese goods – many in the of antitrust enforcement and not related to imbalances largely have failed for good tech sector – and threatened further tariffs of the ongoing trade frictions between the two $200bn more. It also temporarily banned US countries.* Indeed the deal raised complex component makers from selling parts to Chinese antitrust issues that resulted in in-depth reason. Voluntary and transaction- handset company ZTE for the latter’s sanctions investigations and the imposition of remedies violations. Meanwhile, Qualcomm and NXP were elsewhere in the world. Besides, by the time specific foreign investment reviews are engaging in extensive remedy negotiations with Qualcomm abandoned the deal, the statutory China’s Ministry of Commerce (then responsible review period in China had not lapsed. not a particularly effective tool to for reviewing mergers) to resolve the authority’s Nonetheless, given the timing and similar delays competition concerns. experienced by other global deals with a US implement industry-, or economy-, wide nexus during this period,** many commentators The outcome When the 25 July long stop date speculated that the merger review process was trade strategies. The US is instead turning lapsed without a green light from China, being used tactically by the Chinese government Qualcomm abandoned the deal and paid a $2bn in response to the bilateral trade issues. to tariffs, using national security in some termination fee to NXP. Although the deal was

** See transcript of MOFCOM press conference held on 26 July 2018 (Chinese language only), available at www.mofcom.gov.cn/article/ae/ cases to justify them, and China is ah/diaocd/201807/20180702770500.shtml. ** According to commentators, UTC’s acquisition of Rockwell Collins (http://ir.utc.com/static-files/8f825861-6e32-43c2-bd96-3bbf718e796a) and Bain Capital’s acquisition of Toshiba’s memory chip business (www.ft.com/content/b51606a0-4851-11e8-8ee8-cae73aab7ccb) are just responding in kind. Until one side relents two high-profile transactions that appear to have suffered from the ongoing US–China trade spat. Although other US-related transactions have been cleared within a reasonable timeframe, those transactions tend to occur in non-sensitive or strategic sectors. and actual progress can be made on substantive trade policies, expect the complaints about the lack of reciprocity and unfair trade practices to continue.

Christine Laciak

46 47 Public interest or protectionism? Navigating the new normal Public interest or protectionism? Navigating the new normal

7. Engaging with all stakeholders

This chapter and case study were kindly An example of the public scrutiny occasioned by contributed by Sir Jonathan Faull and such a transaction arose during AB InBev’s Philippe Blanchard, acquisition of brewer SABMiller (see case study in Brunswick Group. Chapter 3). As SABMiller was seen by many as South Africa’s national champion, the transaction At a time when politics is becoming a factor in triggered a public interest provision in business to an extent not seen for decades, the competition legislation. The merging parties were case for careful, strategic communications in required to present significant commitments to M&A is stronger than ever. This is especially the South African government to allay public 1 the case in those transactions that involve interest concerns. To this end, a broad foreign investment and topics of public interest engagement programme with government and 2 such as employment, national security, and political stakeholders was undertaken to solicit industries and technologies that governments feedback and generate broad understanding of deem strategic. Effective stakeholder AB InBev’s commitments. In combination with a 3 engagement and communication strategies willingness to engage proactively with media can facilitate smooth regulatory approval and to explain the transaction’s rationale and benefits, 4 can increase understanding of and support this led to positive feedback and endorsement for the transaction among regulators, being received from local stakeholders on its politicians, investors and the broader public. public interest package. 5

Established procedures: 6 public interest tests and foreign ‘We live in an era in which investment control governments and businesses face 7 Amid heightened transaction scrutiny, many the challenges of rapid change. jurisdictions have established procedures that go Governmental activities have beyond traditional competition merger review. enormous consequences for the As seen in the preceding chapters, increasingly, business world. Now, more than public interest tests are incorporated in reviews, while many authorities are equipped with powers ever, they need to talk to each to control foreign investments in their territories. other and work together on Transactions that need to pass these formal ways to respond to the public’s controls tend to prompt significant public, media legitimate concerns.’ and political scrutiny, and can be put at risk if stakeholders have incomplete or inaccurate Sir Jonathan Faull, Brunswick Group information or feel their concerns have not been adequately addressed.

48 49 Engaging with all stakeholders Public interest or protectionism? Navigating the new normal

CASE STUDY

Midea/Kuka: the communications perspective Outside established procedures: A complementary media engagement strategy In spring 2016, Midea Group, a • communicate openly and transparently to strategic investment control allowed the company to underscore the rationale The deal and benefits of the transaction. This fostered Chinese-listed home appliances company, made all stakeholders, educating the markets on However, a well-planned communications a better understanding among commentators a public tender offer to acquire Kuka, a listed Midea and its long-term objectives; and strategy is necessary even where these based on accurate information, promoted a German robotics manufacturer, for €4.5bn. established procedures are not triggered, or • engage with third-party commentators more thorough evaluation of the strategic The deal concluded successfully in January 2017. have not yet commenced: public interest and and relevant media representatives, when rationale and reiterated the benefits of open foreign investment concerns may arise outside The issue Midea’s bid for Kuka sparked debate in appropriate, to reiterate key messages market principles. legally defined frameworks. In fact, it is not Germany amid fears from some quarters that key (eg via interviews). technologies might be acquired by foreign 1 unusual to see a formal process triggered by Overall, in cross-border M&A, it is crucial that Communications facilitated a better institutions while China protects its own public commentary on a transaction that a strong deal narrative should explain the understanding of the benefits of the transaction companies against foreign takeovers. The bid 2 can frequently be based on speculation, or transaction’s rationale, convey its benefits and and helped in generating a more thorough triggered initial scepticism by some stakeholders misinterpreted or unconfirmed data. A strong address the concerns of the different stakeholder evaluation of the deal’s strategic rationale. and opposition by certain shareholders and communications plan is, therefore, key to groups in line with the legal strategy. It is Industry leaders also began expressing favourable 3 political leaders keen to preserve a ‘national engage effectively in these discussions and to important to be open and prepared to engage views in support of Midea as a partner, and over champion’. This resulted in calls to examine the allow competition clearance processes to with relevant stakeholders and media in a way time, initial opponents of the deal became more deal under Germany’s Foreign Trade Law review 4 proceed smoothly. that will resonate with the relevant audiences supportive, accepting that Kuka’s growth or explain remedies such as divestments. At the process as well as close examination by CFIUS. In the case of Midea’s investment in Kuka ambitions in China were more achievable under same time, unco-ordinated or poorly prepared (see case study), effective stakeholder engagement The outcome A coherent communications Midea’s ownership. 5 communications could result in an ill-informed was crucial to the successful completion of the programme was implemented in order to: debate around transactions, which in turn can Points to note A thorough communications transaction. A number of German politicians compromise the smooth operation of relevant • organise and prepare meetings between strategy can and should complement the legal 6 were calling for the deal to be examined under regulatory clearance procedures. Midea’s management and the relevant political strategy from the early stages, especially when Germany’s Foreign Trade Law, which can prevent stakeholders to maintain a continuous political debate is expected to have an impact on 7 foreign takeovers of companies in critical open dialogue; the dynamics of the transaction process. industries. Opposing stakeholders campaigned Identifying key issues and engaging with relevant ‘The success of getting a deal • better understand the positions and concerns in support of alternatives to the proposed stakeholders are important to generate through is no longer solely of the relevant stakeholders, including transaction. In this context, strategic stakeholder understanding and endorsement. In addition, politicians, shareholders, the media, industry outreach proved key in anticipating and dependent on a strong legal case. engagement with third parties, constructive leaders and advisers; responding to criticism. Direct engagement In these challenging times of conversations with targeted stakeholders, and with relevant stakeholders allowed the company political uncertainty, businesses • consistently reiterate key messages about the maintaining a transparent approach to to better understand their positions and need to consider the political deal’s rationale and the benefits of the communications are critical to a successful concerns, while constructive conversations with transaction with relevant stakeholders and transaction strategy. political leaders demonstrated the company’s landscape around the transaction correct inaccurate media coverage while willingness to co-operate and work towards an and engage with all relevant communicating accurate facts; appropriate solution for the concerns raised. stakeholders at the right time and with the right tone. Creating a supportive stakeholder environment for the deal can do much to support the successful completion of a transaction.’

Philippe Blanchard, Brunswick Group

50 51 Public interest or protectionism? Navigating the new normal Public interest or protectionism? Navigating the new normal

CASE STUDY

Conclusion

Given the increased scrutiny over Some key points to bear in mind are set out below: 1. Conduct a thorough public interest and public interest and foreign investment, foreign investment assessment early. and some recent high-profile deals that Merging parties should identify possible sensitive sectors early on, and establish whether notifications may be necessary or desirable. Formal notification requirements failed to complete such as Broadcom’s vary significantly across jurisdictions, and can be vague and cover a wide range of transactions, including acquisitions of minority shareholdings and joint ventures, so it proposed takeover of Qualcomm, is particularly important to establish whether, and where, a transaction may trigger a requirement to notify. Even if a formal filing is not required, it may still be prudent it may sometimes seem that large-scale to engage with government authorities or other stakeholders to pre-empt any concerns. In some jurisdictions, authorities can call in transactions to review even after closing. Early assessment allows the parties sufficient time to plan an appropriate risk cross-border deals are simply too management strategy.

risky in the current political climate. 2. Engage constructively with other parties to the transaction. However, in our experience, possible public Recommended bids remove the risk of a target using notification rules to obstruct takeover plans. Indeed, a consensual process can be particularly important for the interest or foreign investment concerns buyer (as compared to ‘traditional’ merger control) given that more detailed due diligence can be necessary where public interest or foreign investment issues may are often not insurmountable. arise. As mentioned above, the triggers for mandatory filings can often be vague, and a buyer may need extensive access to information about the target to establish whether Provided that companies are aware a transaction falls within the scope of a particular regime. In particularly sensitive sectors, the target is likely already to have established relationships with the governmental authorities, and it will be valuable for the buyer to work with the target of the issues in advance, a lot can to present a united front to assuage any concerns. be achieved with good deal planning Conversely, for a target company, it is important properly to perform diligence on potential bidders and the sources of their funding. Many foreign investment regimes and structuring. do not ostensibly distinguish between different types of foreign investor (whether private investors, or state or government controlled, and where they are based), but in practice investors from particular jurisdictions or with particular structures may attract more scrutiny.

‘Public interest and foreign investment issues are not just a matter of national security concerns, and can affect deals across the full spectrum of business sectors. These are issues that only look likely to become even more prevalent over the next few years, and companies will need to take them into account in deal planning as a matter of course.’

Jérôme Philippe

52 53 Conclusion

3. Consider deal structuring and 4. Plan the deal timetable carefully. remedies as part of planning. Public interest and foreign investment reviews can Careful deal structuring may help to limit take significant time and can be hard to predict. concerns and avoid complex or lengthy regulatory Depending on the jurisdiction, statutory timelines processes. Options include dual-listed companies, can be extensive, but we have also found that reverse takeovers or ‘virtual mergers’ created by some authorities are frequently stopping the clock contract only. Buyers may also be able to team up or extending their reviews as they do not have with more acceptable bidders in a consortium. sufficient resources to keep up with the volume of notifications received. Enough time, therefore, Where issues have been identified early on, it needs to be built into the SPA to ensure that may be possible to carve out particularly sensitive all processes can be completed satisfactorily. parts of the business in advance. This approach can provide a clear-cut solution, which resolves Timing also needs to be taken into account in all of the foreign investment concerns in one go. engaging with stakeholders. Starting a political We hear from a lot of clients who have Although there may be advantages in waiting engagement strategy too early could obstruct to offer divestments later in the process, in the deal momentum, but leaving it to later in the concerns over the potential for roadblocks hope that they will not, in fact, be needed, such process might offend key stakeholders and allow a strategy carries the risk that a suitable buyer objections to take root before the parties can in relation to their proposed deals. would not be found, or that more extensive present their positive case. The right balance will remedies would end up being required. depend on the deal. However, in our experience, getting the Any structuring or remedy strategy relies on being able to predict the concerns that will 5. Employ a co-ordinated right advice early on, with a combined legal be raised, which is not always feasible given global strategy. the broad discretion available to authorities. The complexity of a global transaction with and communication strategy that However, taking a proactive approach can public interest or foreign investment issues be particularly beneficial in a public interest requires an integrated team of lawyers and addresses the issues head on, can make or foreign investment context to limit governmental affairs and communications political objections and negative media advisers across jurisdictions. It is vital to have a significant difference. commentary, which can otherwise build up a consistent deal narrative that can be used over time after announcement. with politicians, media and regulators alike. Any remedies plan should also be approached on a global basis, as authorities in different Alan Wang countries may well keep each other apprised of developments, leading to the parties needing to make similar concessions in multiple jurisdictions. In our experience, taking a holistic approach can improve deal certainty and significantly speed up time to closing.

54 Public interest or protectionism? Navigating the new normal

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