A key feature of foreign direct investment (FDI) regimes is that where a regulator identifies concerns with an acquisition or investment, it will have powers to impose or agree remedies to resolve those concerns. In this chapter, we consider the various remedies that can be employed by FDI regimes. We discuss the typical process for negotiating and agreeing remedies, as well as the merits of taking potential remedies into account at an early stage in transactions (if necessary) and building potential remedies into deal strategy, which can in some cases avoid the need for formal remedies or commitments.
Given that FDI regimes tend to focus on national security or public order issues (and other sensitive issues), it is perhaps not surprising that many regimes do not publish details of their FDI decisions. In most cases, regulators tend to publish high-level summaries of their work and an overview of the types of remedies imposed. Details of specific remedies required in particular cases are usually not made public. This chapter therefore focuses predominantly on those jurisdictions where details of cases involving FDI remedies are more transparent.
Although the approach does vary from jurisdiction to jurisdiction, it is clear that:
- remedies are usually required in only a minority of the transactions notified;
- where remedies are required, outright prohibition is unusual;
- FDI regimes are more commonly open to behavioural remedies than, for example, is traditionally the case in the context of other types of regulatory investigations (e.g., antitrust or merger control);
- remedies typically seek to address a combination of FDI concerns in relation to (1) the identity of the buyer or investor, (2) the nature of the target’s business and (3) the level of control acquired.
However, FDI is rapidly changing. In recent years, we have seen a proliferation and expansion of FDI regimes. Many of these regimes are still in their infancy. As such, a key question will be how these more recently instituted or expanded regimes approach remedies, whether remedies will become more commonplace and whether these regimes change the nature of remedies required in an FDI context.
Context is key: remedies are required in a minority of cases
Although an increase in the number and scope of FDI regimes globally has led to (and will continue to lead to) an increasing number of transactions being notified to regulators, in the vast majority of cases remedies are not required. For example, The Committee of Foreign Investment in the United States (CFIUS) typically applies mitigation measures in about 10 to 14 per cent of covered transactions. Similarly, the UK Department for Business, Energy and Industrial Strategy (BEIS) estimates that, under the new National Security and Investment Act 2021, between 1,000 and 1,830 notifications will be submitted each year under the new mandatory regime created by the new Act. However, BEIS has estimated that remedies will only be imposed in about 10 cases each year.
This is in part because governments and regulators need to balance the need to protect a country’s interests (e.g., on national security issues) with the potential chilling effect on investment that may arise should the regime be viewed as one that routinely prohibits investment or imposes burdensome conditions on investment.
For the relatively small set of transactions that raise FDI concerns, remedies provide a means to ensure that a deal can go ahead (in the case of an ex ante review) or that it will not be unwound (in the case of an ex post screening).
Typically, FDI concerns arise from a combination of (1) the identity of the buyer or investor, (2) the nature of the target’s business, and (3) the level of control acquired. Remedies are thus quite often a combined response to a number of different concerns, including the need to encourage investment and innovation, while protecting critical infrastructure or technologies and the continued supply of certain services. Against this backdrop, divestment may often not be the most appropriate solution.
Behavioural remedies are often preferred
Structural remedies (i.e., one-off measures such as divestment of all or part of a business) are a feature of FDI regimes. For example, divestments have been required in the United States in a number of cases, such as the iCarbonX/PatientsLikeMe or the Pamplona Capital Management/Cofense Inc transactions, more details about which are set out below.
However, behavioural remedies (i.e., continuing measures designed to regulate the behaviour of the parties to a transaction) are more commonly favoured in an FDI context. This is because remedies tend to be tailored to the specific concern arising in a case; for example, a concern about the management of classified information can be met with controls on the flow of information. Equally, a concern around security of supply can be met with, inter alia, a requirement to continue with supply contracts. For some governments, behavioural remedies can also have an advantage in that they are typically viewed as being less intrusive than a requirement to sell a business. In this sense, behavioural remedies provide a mechanism for those FDI regulators and governments that want to encourage inward investment in their jurisdiction to allow foreign acquisitions that may otherwise raise concerns, without prohibiting them or imposing burdensome divestment remedies.
This provides a clear point of distinction with merger control and antitrust regimes. In a merger control context, competition authorities typically prefer structural remedies over behavioural remedies. This is primarily because selling a business often provides a clear-cut remedy to resolve a competition problem (i.e., it retains a competitor in the market that would otherwise be lost). In addition, regulators tend not to favour the continuing monitoring and enforcement that can often be needed with behavioural remedies. As such, behavioural remedies are used relatively rarely as compared with structural remedies in the merger control sphere.
Overview of typical remedies
Historically, national security cases have tended to focus on the protection of critical physical infrastructure, meaning that remedies may have focused on regulating access to infrastructure, for example. However, with the proliferation of FDI regimes globally and the expansion in the concepts of national security and public order that underpin these regimes, the scope of remedies required in an FDI context has substantially expanded. FDI regulators are increasingly focused on the protection of critical supply chains, and of classified or sensitive information and intellectual property rights.
Structural remedies (divestment)
FDI regulators do require total or partial divestment of a business as a remedy when concerns are such that behavioural remedies will not be effective. This will generally be the case in a small number of transactions, where the relevant government’s concerns are quite fundamental and cannot be alleviated on the basis of behavioural remedies.
By way of example, in December 2020, the German government reportedly prohibited the acquisition of communications technology company IMST GmbH by Addsino Co Ltd, a subsidiary of the Chinese state-owned defence group China Aerospace and Industry Group Co Ltd (CASIC). In this case, the German government’s concerns included that IMST had substantial research and development activities and public funding, and supplied the German armed forces. According to the press reports, the parties offered mitigation measures. However, these were not deemed sufficient to address the government’s concerns in relation to what it regarded as Germany’s essential security interests.
Similarly, in 2019, the Committee on Foreign Investment in the United States (CFIUS) stepped in on two deals in quick succession to require Chinese investors to divest their interests in US companies, attracting the attention of the global press and emphasising a focus on access to personal data as a national security issue. CFIUS required the Shenzhen-based iCarbonX to divest its majority stake in PatientsLikeMe, an online service that helps patients find people with similar health conditions. CFIUS also required the Chinese gaming and technology company Beijing Kunlun Tech to sell its majority stake in the Grindr dating app, which collects personal data. Both acquisitions had been made a number of years previously, and it is understood neither was actively notified to CFIUS. In cases such as this, the imposition of behavioural remedies may well be viewed by governments as a matter of closing the stable door after the (data) horse has bolted.
Again, in 2019, CFIUS expressed concerns about the acquisition by Pamplona Capital Management of a minority stake in Cofense Inc, a US cybersecurity firm, reportedly based on the fact that Pamplona’s funds were partly backed by a Russian billionaire, Mikhail Fridman, who was on a February 2018 ‘oligarchs list’ published by the US Treasury Department. As a result of CFIUS stepping in, Pamplona agreed to sell its stake in Cofense Inc in 2019.
Remedies relating to maintenance of strategic capabilities
The aim of remedies is often to ensure continuity of the supply of products or services that are fundamental to the state’s strategic capabilities. Although the majority of cases tend to concern defence-related activities, this may also extend to the maintenance of critical infrastructure, emergency services, and so on.
Typical remedies that may fall within this category include the following:
- Continuity of supply restrictions: for example, a requirement to comply with current contractual obligations for a certain period or requirements to refrain from withdrawing any relevant product or service for a certain period. Remedies may also include a forward-looking requirement to enter into good faith negotiations as regards the supply of products or services in the future, and notification obligations in the event of any material change to the supplier’s ability to supply, or material changes to the products or services themselves. The notification obligation is often accompanied by requirements to have assessed the implications of such a change and to offer arrangements to mitigate against any material adverse effects.
- Geographical restrictions: for example, a requirement to ensure that any relevant activities are under, and remain under, the control of an entity registered in the state, a prohibition on restructuring the supply chain such that supply of the product comes from outside the state, and (where relevant) a requirement to maintain a stock exchange listing within the state.
- Staffing restrictions: for example, requirements that home nationals are appointed to particularly sensitive positions, that the members of boards or committees include a certain number of home nationals (to allow for decision-making to proceed in respect of sensitive matters), that employees hold certain security clearances, and to appoint a security officer from a panel of officers put forward by the state.
- Notification obligations relating to any possible sale or disposal of part or all of the business or assets engaged in activities with national security implications: for example, a requirement to notify the FDI regulator within a set notice period prior to entering into any sale agreement. FDI regulators will also usually be concerned to understand how due diligence material is being presented to any potential purchaser. Similar notification obligations may be imposed relating to the winding up or dissolution of any relevant company.
Remedies for the protection of information and intellectual property
A further concern may arise if a state’s strategic capabilities are dependent on access to highly classified technology and information, or where a state is concerned, to ensure that such technology or information does not fall into the hands of an acquirer from a hostile state.
Typical remedies to deal with this concern include:
- complying with that state’s particular national security requirements, and to be aware of and bound by the rights of the relevant government agency (e.g., the UK’s Ministry of Defence) in respect of intellectual property (IP) and classified information;
- requirements that operational management is handled by personnel with appropriate security clearances;
- restrictions on the transfer of sensitive information, such as agreeing to ensure, including by means of technical measures, that no transfer or disclosure of sensitive information will be made other than within a ring-fenced group within the business (usually a national entity), or transferred to locations outside the state;
- restrictions on the transfer of IP, such as notification requirements in respect of any agreement on the transfer of IP that may be entered into in respect of the protected activity; and
- limiting the information rights of investors to financial reporting and restricting their involvement in the day-to-day operations of the business.
Other remedies include requirements that spending on research and development is maintained at current levels for a specified period. The remedies imposed may include a requirement on the target to maintain its research and development activities in the relevant state, including research laboratories and related production facilities.
The remedies outlined above are often accompanied by additional undertakings to ensure compliance. These can include:
- providing the relevant authority with information as to the fulfilment of the undertakings on a continuing basis;
- appointing a security officer or compliance officer to facilitate and oversee compliance with the national security regulations and security undertakings. The officer may be appointed from a panel proposed by the state; and
- providing the regulator with audit rights to monitor compliance on a continuing basis.
Different jurisdictions have taken different approaches to the extent of regulator or government involvement in respect of these compliance undertakings. For instance, the Italian government has previously set up inter-ministerial committees to monitor compliance, whereas in the United Kingdom, in some cases the Ministry of Defence has been responsible for monitoring compliance with remedies.
Process and procedure
Although FDI regulators may negotiate remedies with the parties, ultimately they tend to have the power to issue orders unilaterally to mitigate concerns arising from a transaction. A negotiated remedy is, of course, generally a better outcome for an acquirer or investor.
Timing of these discussions can be crucial. FDI regulators will tend to welcome early engagement on remedies in problematic cases, to give them sufficient time within their statutory deadlines to agree workable remedies. However, understandably, acquirers and investors may be reticent to offer remedies to address a potential issue before that issue is proactively raised by an FDI regulator. Acquirers and investors may have a relatively clear idea of the likely concerns that may arise, including through conversations with various government departments. If not, there is a balance between holding remedies back versus constructive early engagement on potential solutions.
In certain cases, where the issue is clear and the solution is relatively straightforward, it may be appropriate to approach the FDI regulator with an upfront remedy to avoid a drawn-out or problematic review period.
Either way, it will be extremely helpful for an acquirer or investor to have considered in detail the potential avenues to deal with concerns before commencing a formal notification process. Some considerations to be taken into account include:
- the types of remedies that have been accepted in previous similar deals in that jurisdiction. If a certain national authority tends to favour structural remedies, this might even negate the entire purpose of the transaction. Hence, an investor must give careful consideration to the likelihood of a structural remedy, such as a divestment, being imposed;
- at what stage in the process such remedies were offered and accepted (e.g., following an initial or in-depth review);
- the level of engagement of the relevant national authority with investors and how receptive the authority is to solutions offered by the parties;
- how difficult it will be in practice for the parties to implement the measures adopted and monitor their compliance on continuing basis. Although certain remedies may be appropriate to alleviate national security concerns, they may be prohibitive for particular investors;
- the workload of the relevant authority and how easy it will be in practice for the authority to monitor the parties’ compliance with behavioural remedies; and
- the consequences of a failure to comply with remedies (i.e., whether clearance can be withdrawn or the transaction unwound).
Remedies are generally required to be submitted in writing and approved as undertakings. Unlike in many merger control cases, in which proposed undertakings are subject to public consultation, the nature of the case and the remedy in many cases will mean that a public consultation is not appropriate.
A global approach to remedies?
There will of course be jurisdictional differences in the remedies process. For example, in some jurisdictions it may not be possible to agree remedies unless and until an in-depth review has commenced (e.g., Austria, Germany and France). In others, such as the United Kingdom or Australia, remedies may be discussed and agreed at an earlier stage (or, indeed, to avoid the opening of a formal investigation altogether).
These differences in timelines for review, and the varying degrees of transparency involved in some regimes, are likely to present challenges in a multi-jurisdictional transaction that raises national security or public order issues in more than one jurisdiction. FDI regulators will also necessarily be focused on their own national security concerns and potential remedies, which may not align with those of another FDI regulator, and may in fact be contrary to another state’s concerns.
With that in mind, cooperation between regulators, and perhaps a global approach to remedies, is less likely in an FDI context than compared with, for example, merger control or antitrust, where competition authorities regularly seek waivers from companies to work together, including in relation to remedies.
A key exception to this is the European Union’s FDI screening framework. The FDI Screening Regulation (the Regulation) introduces a mechanism that is intended to encourage cooperation between EU Member States on and standardisation of FDI screening. The main characteristics of the Regulation are:
- although the Regulation does not oblige Member States to adopt screening mechanisms, it does provide a set of minimum requirements for national foreign investment control regimes;
- a cooperation mechanism in relation to FDI, which allows for information exchanges between Member States and the European Commission; and
- where the European Commission considers that a transaction is likely to affect projects or programmes of EU interest on grounds of security or public order, the Commission may issue an opinion addressed to the Member State where the foreign direct investment is planned or has been completed.
The Regulation is still only a relatively recent development. It does not refer explicitly to remedies, that is to say there is no requirement in the Regulation for Member States to cooperate with each other or with the European Commission specifically in relation to remedies either generally or on a particular transaction. A key question will be the extent to which the Regulation is successful in enabling and encouraging cooperation and whether, in practice, this leads to EU Member States cooperating on remedies in particular cases (or whether Member States’ individual national interests make co-operation on remedies difficult to achieve).
1 Peter Harper and James Lindop are partners, Claire Morgan is a principal associate and Erasmia Petousi is an associate at Eversheds Sutherland.
2 Differing terminology is used for remedies (e.g., ‘conditions’ and ‘undertakings’) across different jurisdictions; we refer to ‘remedies’ throughout for ease of reference.
3 See, for example, the European Commission’s Notice on Remedies Acceptable, paragraph 15: ‘commitments which are structural in nature, such as the commitment to sell a business unit, are, as a rule, preferable from the point of view of the Merger Regulation’s objective’.
4 See, for instance, Enterprise Act 2002 Undertakings in anticipated acquisition by Connect Bidco Limited of Inmarsat Plc; and Enterprise Act 2002 Undertakings in anticipated acquisition by AI Convoy Bidco Limited of Cobham plc.
5 Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union.