New regulatory challenges in international transactions: FDI, FSR and outbound investment screening

FDI

The number of national FDI regimes that allow governments to scrutinise and regulate investments in certain sectors by specific (mostly foreign) investors has significantly increased in recent years. Not only have more regimes been introduced, but they have also expanded in scope to include activities in potentially vulnerable sectors, such as advanced technologies.

Since the EU's FDI Screening Regulation came into force four years ago, about 1,500 transactions have been screened within the EU. Currently, 24 EU Member States have an FDI regime, with Bulgaria being the most recent to adopt FDI legislation in June 2024, and only Croatia, Cyprus and Greece not having a screening regime in force.

In January 2024, the EU Commission published a proposal to reform the current EU FDI Screening Regulation, which has the potential to significantly alter the regulatory landscape across the EU. The proposal aims to tackle the issues arising from a colourful patchwork of national FDI regimes with varying processes, timeframes and degrees of transparency. This aligns with the recent report of former ECB president Mario Draghi, which calls for close cooperation on FDI to enhance the EU's global competitiveness. Additionally, the proposal envisions minimum standards for the scope of these regimes, which, if adopted, will effectively lead to a significant sectoral expansion of some national regimes. While alignment among EU Member States is desirable, it may come with increased bureaucracy, delays and potential barriers to investment in the EU.

FSR

To address foreign subsidies that undermine the level playing field in the internal market, the FSR introduced a new layer of regulatory oversight for transactions in the EU in July 2023. The FSR mandates a pre-closing review of broadly defined financial contributions from non-EU states. In addition to the standard notification model, where parties must seek clearance if they meet certain turnover and financial contribution thresholds before closing a transaction, the FSR also allows the EU Commission to call in transactions for review if they do not meet these thresholds. This introduces increased uncertainty for companies.

The FSR puts a heavy administrative burden on companies. To comply with the FSR, companies must be prepared for increased scrutiny of their financial arrangements and subsidies received from non-EU governments. This necessitates enhanced due diligence processes to identify and disclose relevant foreign subsidies. Additionally, parties need to carefully assess the probability of being called in if the thresholds are not met and reflect this eventuality in the transaction documentation and timing expectations. In practice, we are seeing that FSR proceedings add an unpredictable factor to the transaction timeline, potentially causing significant delays due to regulatory uncertainties.

Outbound investment screening

In 2024, the EU Commission began to consider an EU-wide outbound investment screening mechanism aimed at monitoring and potentially restricting investments by EU companies in certain foreign countries, particularly in sectors deemed critical for national security and public order. This mechanism is intended to prevent the transfer of sensitive technologies and intellectual property that could be used to undermine the EU's strategic interests or enhance the military capabilities of adversarial nations.

Generally, outbound screening is to be welcomed as a necessary step to protect national security, maintain technological sovereignty in the EU, safeguard critical industries and prevent strategic assets from falling into the hands of potentially hostile entities.

While the EU is not alone in developing a screening regime for outbound investments, this would again come at a price, potentially increasing regulatory burdens for parties and negatively impacting the global competitiveness of EU companies. The introduction of this tool may also slow down investment decisions and create additional uncertainty on the business side.

Key takeaways

The regulatory jungle that transaction parties face today has rapidly expanded in recent years, drastically increasing the due diligence and information-gathering efforts required of companies.

For companies active in M&A, compliance with these various layers of regulation requires robust compliance programmes, best practices for interacting with regulators and contingency planning to mitigate risks. Additionally, pre-transaction planning must consider not only the statutory time limits for clearance procedures, but also potential delays caused by information requests and discussions with authorities, which may incur additional costs. Therefore, it is more important than ever to remain informed and proactive when navigating regulatory challenges.