2022 Foreign Investment Review And What To Expect In 2023 – Terrorism, Homeland Security & Defence

Key Points

Reviewing inbound foreign investment for national security risk
continues to be a high priority for governments worldwide. Key
developments and trends include the following:

  • Countries continue to strengthen existing mechanisms, and at
    least four new mechanisms are expected to come into force in

  • Countries are increasingly leveraging their authority to review
    and in some cases mitigate more transactions. Along those lines,
    businesses should expect to see greater enforcement and more
    transactions “called in” by authorities.

  • In most cases, parties can negotiate mitigation conditions to
    address identified risks. At least 20 transactions were blocked or
    abandoned due to national security concerns1 in 2022 and
    most reported blocks involved Chinese investors.

  • Transactions involving sensitive technology, including
    semiconductor development and production, and energy, continue to
    be seen as posing higher risk, with a growing focus on personal
    data and mining.

  • Authorities are increasingly sharing information across
    borders, which could lead to further convergence in identifying and
    mitigating risks.

In addition, it is likely that the United States (U.S.) will
take action to address perceived risks from outbound investment to
countries of concern such as China, and the issue is expected to be
debated in Europe.

United States

The U.S. Government remains focused on risks from foreign
investment and leveraging the full authority of the Committee on
Foreign Investment in the United States (CFIUS).

CFIUS closely scrutinizes key risks. In
September 2022, President Biden issued Executive Order 14083 (EO), “Ensuring
Robust Consideration of Evolving National Security Risks by
[CFIUS],” which is the first presidential direction on
national security risks since CFIUS was established over three
decades ago. While the EO largely memorializes CFIUS's current
practice, it does signal the importance this Administration places
on investment screening and highlights a few points that are
particularly noteworthy, including an emphasis on whether the
transaction (i) involves a sector identified as
“fundamental” to U.S. technological leadership, including
microelectronics, artificial intelligence, biotechnology and
biomanufacturing, quantum computing, advanced clean energy and
climate adaptation technologies and (ii) whether the transaction
will afford the foreign investor access to large sets of sensitive
data. [See Client Alert “Executive Order
Outlines Expansive National Security Considerations for
] As an example, CFIUS scrutiny of TikTok has
been ongoing and primarily focused on the personal data that this
social media application collects regarding U.S. citizens.

Investors must understand third-party
. The EO also highlights that CFIUS
considers not only the foreign persons who are acquiring interest
in U.S. businesses, but also foreign investor's third-party
ties, including commercial ties, to foreign adversaries or
countries of special concern, which is understood to include China
as well as Russia.

CFIUS is reviewing an increasing number of cases, but
mitigation remains more common than blocking.
2022 CFIUS Annual Report, covering 2021, shows
an increase in reviews from 249 in 2018 to 436 in 2022. CFIUS
continues to mitigate roughly 20 to 30 transactions per year. [See client alert “CFIUS Reports
Significant Uptick in Filings and Non-Notified
] While there have only been six
presidential blocks in 30 years, around 10 transactions are
withdrawn and abandoned by parties annually due to CFIUS being
unable to identify mitigation conditions or the parties being
unwilling to accept proposed conditions. For example, a Chinese
investor recently announced that its investment in a U.S.
company with expertise in a novel flow chemistry would be abandoned
due to CFIUS concerns.

Businesses should expect increased enforcement.
In October 2022, the U.S. Department of the Treasury, which chairs
CFIUS, published its first enforcement guidelines regarding mandatory
filing requirements, including those related to U.S. businesses
critical technologies, and compliance with mitigation agreements,
and Assistant Secretary for Investment Security Paul
Rosen stated
that CFIUS “will not hesitate to use all of
its tools and take enforcement action.” Penalties can be
imposed up to the value of the transaction. CFIUS also continues to
expand its resourcing to call in transactions that parties have not
filed, especially those involving Chinese or Russian investors. For
example, in 2022, CFIUS reviewed a 2021 Chinese acquisition of
majority ownership in a U.S. energy storage company (with a market
segment focused multi-family dwelling units including military
housing), and reportedly identified risks related to critical
technology transfer; the company is now divesting its interest.

CFIUS is increasing engagement with allies and
. CFIUS continues to advise allied
countries in establishing and implementing their own investment
review mechanisms and is increasing its tactical engagements. While
CFIUS rarely shares information that has been filed by parties due
to confidentiality limitations, it can share a range of information
about threats and vulnerabilities and alert partners to
transactions that CFIUS has discovered other than through case

Expect decisions on Excepted Foreign States (EFS) and
potentially expansion of real estate
. Prior to February 13, 2023, CFIUS
will have to determine whether the United Kingdom (U.K.) and New
Zealand have sufficiently robust investment review mechanisms to
remain EFS (joining Australia and Canada for which such
determinations were made in 2022). Investors from EFS that meet
specified criteria are excepted from part of CFIUS's
jurisdiction and from mandatory filing requirements. Following a determination by CFIUS that it did not have
jurisdiction over a purchase of real estate near a government base
by Chinese investor Fufeng, CFIUS and/or Congress also could take
action to expand CFIUS's jurisdictional reach over real estate
transactions to capture additional transactions going forward.

United Kingdom

The UK Investment Security Authority (ISU) was established
pursuant to the UK National Security & Investment Act
, which entered into force January 2022. The ISU has not
shied away from using its call-in powers although most deals
reviewed have been proactively notified to the ISU. There have been
14 mitigation cases to date, including five effective
blocks/reversals.2 Judicial reviews are starting to be
brought, with final judgment not expected typically for 9-12
months. High-level statistics on notifications and called-in
transactions are likely to be published in the next annual report
of the ISU at the end of March 2023.

Investors must file notifications in a range of
. Mandatory notification is required for
investments of greater than 25 percent in qualifying entities
active in one or more of 17 sensitive sectors, including among
others, Advanced Materials, Quantum Technology, Advanced Robotics,
Artificial Intelligence, Military and Dual-Use, Data Infrastructure
and Energy.3 So far, notifications have largely involved
targets in the Defense, Dual Use technology, Energy and Advanced
Materials sectors.

Most transactions are reviewed quickly. The
majority of cases reviewed by the ISU have been reviewed within the
first 30 working days. Voluntary notifications have been limited
largely to asset deals, the acquisition of a material influence
over policy, and borderline cases (where it is not clear whether
target's U.K. activities fall within one or more of the
mandatory sectors).

Call-ins have been relatively uncommon. The
Secretary of State for Business Energy and Industrial Strategy
(SoS) can call in a transaction for review, and potentially block
or mitigate it, if he reasonably suspects the acquisition or other
covered arrangement has given, or may give, rise to a risk to
national security. There are three main risk factors that will be
considered by the SoS in the exercise of the call-in
4—target risk, acquirer risk and control
risk—which are similar factors to those used by other
authorities such as CFIUS.

The U.K. is exercising its blocking authority.
The SoS has effectively reversed or blocked five transactions so
far, with targets active in the development of products with
military/dual-use, owning and operating a semiconductor fabrication
plant, and a fiber optic broadband network. In fact, two of the
five prohibitions relate to targets involved in producing
semiconductors. For example, the ISU prohibited the acquisition of
Pulsic Limited by Super Orange HK Holding Limited, a Chinese
chip-design software developer based on concerns that Pulsic's
“dual-use” technologies could be exploited without user
knowledge “to build defence or technological
s.” Four of the five prohibitions involved
Chinese acquirers.5

Businesses should expect more active enforcement this
. We expect the U.K. to actively utilize its
authority to protect its national security, which is interpreted
expansively to include a wide array of U.K. security and industrial
policy interests.

The U.K. shares information with
The ISU and SoS confer with key U.K.
government departments and authorities, including the Ministry of
Defence, FCDO, DCMS and the Competition & Markets Authority, as
well as their allied counterparts, in particular the other
“Five Eyes” countries (the U.S., Canada, Australia and
New Zealand). Although the U.K. is not part of the cooperation and
information-sharing under the European Union (EU) Regulation on
Foreign Investment Screening discussed below, in appropriate cases
and with the requisite consents, the ISU may reach out to certain
EU-based bodies.

European Union

The number of EU Member States with a foreign investment review
authority increased from less than half in 2018 to two-thirds by
2022, and currently all but two Member States (Bulgaria and Cyprus)
have or are in the process of establishing mechanisms. The
authorities differ, however, in terms of the scope of jurisdiction,
voluntary versus mandatory requirements, and timelines for review.
The EU Commission has called for all Member States to have
investment review authority.

More investment review mechanisms are coming into
. Review mechanisms are expected to come into effect
this year in Belgium, Ireland
(with retroactive effect to any transactions completed in the 15
months prior) and Estonia. The
, which currently has targeted authority, also
is expected to launch a new, broader review system, which among
other things will give it greater authority over transactions
involving sensitive technology and energy (with retroactive effect
to call in transactions that have taken effect after September 8,
2020). The entry into force of the Swedish regime
is expected in 2024. In recent years, Czech
, Denmark and
Slovakia established new regimes.

Countries with existing mechanisms continue to expand
their authorities
. For example,
France, where the investment screening process was
introduced over 50 years ago, has since 2019 been strengthening its
enforcement powers and introducing new strategic sectors, extended
through 2023, that, among other things, lowered the threshold to 10
percent for reviewing foreign investment in certain companies with
research and development in sensitive technologies, including for
the production of renewable energy. France also issued new investment review guidelines in September
. Germany, which had traditionally adopted
a less interventionist approach toward foreign investment, starting
from 2017 began tightening its screening in strategic sectors. In
2022, Germany amended its Ordinance Designation of Critical
Infrastructure and, among other things, lowered the threshold for
screening foreign investments in certain strategic sectors (such as
energy) to 10 percent. In Italy, where the foreign
investment regime was introduced in 2012, new permanent amendments
came into force on January 1, 2023, replacing temporary amendments
which followed the spread of the COVID-19 pandemic. The scope of
the regime has been particularly widened during the last years by
covering transactions carried out by European—and notably, as
of January 2023, also Italian—investors, in some particularly
strategic sectors. Because of the complexities and uncertainties
raised, in 2022 the procedural framework was simplified, including
by establishing an investment screening unit for non-problematic
transactions. In 2022, Romania published a
proposal to expand the scope of application of its regime. In prior
years, Austria, Hungary,
Latvia and Lithuania expanded the
powers of their authorities, as did Spain, which
also extended certain changes introduced during the pandemic.

More transactions are being reviewed given expansions in
authority and mitigated
.The EU Commission's Annual Report on
Investment Screening, published in September 2022 and covering
2021, states that 23 percent of decided cases entailed mitigation
measures, representing a significant increase compared to 2020,
with 12 percent. France appears to mitigate the
most transactions. In its 2022 Annual Report, covering 2021, France
disclosed that it mitigated roughly half the transactions it
reviewed (67 of 124) and also reported a 32 percent increase in the
number of filings between 2020 and 2021.

Blocks are still relatively rare and often involve
Chinese investors
. According to EU Annual
Reports, authorities have blocked about 1–2 percent of
transactions, showing that most transactions are cleared or cleared
with conditions.6 Blocks reported in the press have
often involved China. For example, in the fall of 2022,
Germanyblocked two semiconductor transactions involving
Chinese investors.
In the spring of 2022,
Italy annulled the 2018 acquisition by a Chinese investor of 75
percent of the shares in a military drone company, which was the
fourth Italian block of the attempted acquisition of strategic
assets and technologies by a Chinese investor in the last two years
(Russia accounts for one of the five total blocks of acquisitions
by non-European investors). As in the U.S., some investors may
choose to abandon their transactions rather than have authorities
block them. The EU Annual Report disclosed that three percent of
transactions were withdrawn.

The EU Regulation on Foreign Investment
(the “Regulation”), which
requires information sharing, may be
. This 2019 Regulation set certain
minimum requirements for Member States that operate an investment
review mechanism, created a cooperation procedure to share
information between the Commission and Member States, and allows
the Commission to issue Reasoned Opinions to a Member State when an
investment threatens the security or public order of more than one
Member State or when an investment could undermine a strategic
program of interest to the whole EU. While the Commission does not
publish the fact of a Reasoned Opinion, the Annual Report disclosed
that it issued Opinions in about 3 percent of cases, which is
thought to include opinions in the semiconductor/wafer fabrication
space. While Member States retain final authority to block or
mitigate transactions, the Commission has been active in
identifying and analyzing risks, sharing information, and acting as
a convening authority for Member States. The Commission also has
been working closely with the U.S., including through a
EU-U.S. Trade and Technology Council working
group. After two years of operation, the EU Commission is
undertaking a review of the Regulation, which will be completed by
October 2023, and a further strengthening of the Regulation and
additional standards to increase convergence among national
authorities seem likely.

Authorities are expected to call in more
. The EU Commission is beginning to
monitor transactions that have not been filed in Member States and
alert national authorities.

Rest of World

Canada is increasing scrutiny and potentially expanding
its authority
. In March 2022, Canada issued a policy statement that it would
apply heightened scrutiny to transactions involving Russian
investors due to its invasion of Ukraine. Its
Indo-Pacific Strategy
, in a section on China, says that Canada
is reviewing and modernizing its investment screening authority and
will act “decisively when investment from state-owned
enterprises and other foreign entities threaten [its] national
security, including … critical mineral supply chains.” In
the fall of 2022 alone, Canada ordered Chinese firms to divest from
three lithium mining companies.

Other countries continue to expand and implement review
. In 2022, The
launched a new investment review mechanism. In
2022, in Switzerland the Federal Council presented
a preliminary draft of a foreign direct investment law, which is
still currently being revised and it should take more than one year
before being adopted and enter into force. In recent years,
countries such as Australia,
Japan, India,
Israel, New Zealand,
Norway and South Korea have
strengthened or created mechanisms. Taiwan, which
has a special focus on China, also remains active.

Outbound Investment Review

Action is expected in the U.S. Congress and the
Biden-Harris administration have been actively considering new ways
to limit U.S. investment in China and Russia. Along those lines,
there were multiple bills introduced in the last Congress to
establish an outbound investment screening process. The most
prominent of these proposals—the National Critical
Capabilities Defense Act—passed the House in February 2022 as
part of the CHIPS and Science Act, but it did not survive the
conference. Meanwhile, National Security Advisor Sullivan,
Secretary Raimondo and other Biden-Harris administration officials
have publicly indicated that they are considering similar measures,
but have not released specific details.

In 2023, there is a significant chance that Congress, the
Biden-Harris administration, or both, will move forward on outbound
investment regulation. In particular, the Biden-Harris
administration is reportedly considering a fairly narrowly scoped
EO focusing on investment in critical technologies like
semiconductors, quantum computing and artificial intelligence, and
could release the EO in the coming months. Meanwhile, a bipartisan
group of members in the House and Senate are expected to focus on
outbound investment this year as well. However, views on the
specifics of any such mechanism vary widely, suggesting that the
process for passing it into law could be drawn out and

Increasing focus on this issue internationally is
. A limited number of countries currently have
authority to screen outbound investment, including
Taiwan which has broad authority with respect to
investments in China and South Korea which has
authority more narrowly focused on sensitive technology. The European Commission's 2023 work program
calls for an examination of “whether additional tools are
necessary in response of outbound strategic investment
controls.” A draft German China
prepared by the German foreign ministry provides that
Germany will also “examine” the possibility of creating a
legal authority to allow the government, or the EU, to scrutinize
“security-critical” foreign investments by German or
European companies in China.


With a proliferation of investment review mechanisms worldwide,
corporates and financial institutions must increasingly perform due
diligence and plan for multi-jurisdictional review—as they
already do in the merger control context—in order to avoid
such reviews delaying closing timetables. Engaging with foreign
investment authorities, including government departments
responsible for investment screening, for frequent investors in
particular should also dovetail with their broader government
affairs strategy.


1. See “FDI screening killed at least 20
mergers globally totaling over USD 6bn in 2022 –
Analytics,” by PaRR, available at https://app.parr-global.com/

2. In addition, while the ISU approved the acquisition of
Electricity North West Limited by Redrock Investment Limited, the
extensive nature of the conditions imposed on the acquirer operated
as a constructive veto as the acquirer pulled out of the deal
following the ISU's decision. See

3. The sectors include (i) Advanced Materials, (ii)
Advanced Robotics, (iii) Artificial Intelligence, (iv) Civil
Nuclear, (v) Communications, (vi) Computing Hardware, (vii)
Critical Suppliers to Government, (viii) Cryptographic
Authentication, (ix) Data Infrastructure, (x) Defense, (xi) Energy,
(xii) Military and Dual-Use, (xiii) Quantum Technologies, (xiv)
Satellite and Space Technologies, (xv) Suppliers to the Emergency
Services, (xvi) Synthetic Biology and (xvii) Transport.

4. See the SoS Statement for the purposes of
Section 3 NSIA (the so-called Section 3 Statement): National Security and Investment Act 2021:
Statement for the purposes of section 3 – GOV.UK

5. See (i) Acquisition of know-how related to
SCAMP-5 and SCAMP-7 vision sensing technology by Beijing Infinite
Vision Technology Company Limited: notice of variation of final
order, (ii) Acquisition of HiLight Research limited by SiLight
(Shanghai) Semiconductors Limited: notice of final order, (iii)
Acquisition of Pulsic Ltd by Super Orange HK Holding Ltd: notice of
final order and (iv) Acquisition of Newport Wafer Fab by Nexperia:
notice of final order.

6. Five Member States, namely Austria, France, Germany,
Italy and Spain, were responsible for 70 percent of transactions
reported to the Commission, down from 85 percent. See EU
Annual Report.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

Cap Expand Partners sharing news from: news.google.com

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