Tech Legal Outlook 2022 – Trends in foreign investment

As investments into the tech sector grow, countries are increasingly concerned with protecting their technological sovereignty and are using foreign investment control tools as a defence. In certain countries, such as the UK, whilst the Government has recognised the need to balance reviews with encouraging investment as well as deal certainty, it remains to be seen how enforcement will unfold in practice.

Global trends

The past year saw several trends develop on the global foreign investment stage relevant to players in the tech sector:

•  There has been a rise in foreign investment notifications globally – adding complexity to many transactions – especially those with a cross-border element which are now more likely to trigger multiple filings.
  
  
• Regulators are also increasingly broadening sectors caught – with for example Germany, the UK, the US and China amending their rules to catch more transactions in the tech sector.
  
  
• Increasingly low minority stakes are triggering reviews – with some regimes catching  acquisition stakes as low as 10%. Read more: Foreign Investment and Minority Shareholdings: How low can they go?
  
  
• The battle for technological sovereignty has intensified – particularly in response to semiconductors shortages caused by supply chain disruptions from Covid-19 and increasing political awareness regarding the vulnerability of global supply chains. Foreign investment controls are being used to protect critical tech input and national capabilities, with acquisitions of chip designers and related manufacturers attracting scrutiny in the UK, several EU Member States, China and the US. Read more: The empire strikes back: Foreign investment in semi-conductors, the next frontier in the battle for tech sovereignty, Thoughts on CFIUS’s Review of Wise Road-Magnachip
  
  
• The spotlight on data centre M&A – which has reached record-breaking levels  – is set to continue – Foreign investment regulation of these acquisitions varies across the globe, with Asia seemingly more open to investment. The UK and Australia, however, are explicitly targeting these, with Australia expected to expand its regime to catch more data centre acquisitions. Read more: So hot right now: booming foreign investment in data centres faces regulatory heat (Part 1) and (Part 2)

European Union

Following the EU Foreign Investment Regulation that came into force in October 2020, Member States continue to introduce national screening mechanisms. The Czech Republic and Denmark introduced regimes earlier this year and Dutch, Swedish and Luxembourgish regimes are on the horizon. 

The regimes also target more tech sectors, include minority stakes as trigger points and set out severe penalties (some including criminal charges) for non-compliance.

Read more: New FI regimes in the Czech Republic and Denmark – what you need to know, New Dutch FI regime on the horizon – what you need to know

Germany

Germany continues its role as European foreign investment frontrunner. Further to significant reforms in 2020, in April this year Germany significantly expanded the scope of its regime, focusing on high-tech and next generation technologies. Germany intentionally deviated from the EU approach by specifying sensitive activities beyond the broad categories listed in the EU Regulation. 

The reform has led to a significant increase in the annual number of filings which is expected to triple. The update also adds triggers for “atypical control” and “add-on” acquisitions, whilst providing a narrow safe harbour for internal restructurings. It also refines previously broad categories and provides greater certainty for investors. 

The German regulator has significantly expanded its resources including the introduction of a second unit for foreign investment controls. The impact of the current regime will be evaluated by July 2022. We anticipate that the new German Government will make certain adjustments to industry policy objectives, which are likely to impact review processes and upcoming reforms.

Read more: The future of German foreign investment control is here… Part I, Part II and Part III

UK 

The UK enacted its National Security and Investment Act earlier this year, introducing a hybrid mandatory/voluntary regime and signifying an overhaul of investment reviews for both foreign and, at least in theory, domestic acquirers.

Around half of the 17 sensitive sectors subject to mandatory notification (which can be updated, if needed) relate to technology, reflecting the Government’s concern around technological sovereignty and cyber-attacks.

The lowest threshold for mandatory notification was increased to 25% from the originally proposed 15%, reflecting the need to screen out certain investments (e.g. venture capital) which are key to the tech sector and the Government’s desire to strike the right balance. Acquiring the ability to block or pass a corporate resolution continues to trigger a mandatory filing, regardless of the shareholding acquired.

Acquisitions of assets such as IP (including  designs, software, databases, source codes and algorithms) are also caught under the voluntary regime.

Non-compliance with statutory obligations may result in fines of up to 5% of worldwide turnover or £10m – whichever is higher – and up to five years’ imprisonment. Missed mandatory filings also risk voiding a transaction. Once the Act comes into force on 4 January 2022, the Government expects to receive up to 1,830 notifications each year (with around 70-95 detailed reviews and 10 deals requiring remedies).

Read more: Changes to forthcoming UK foreign investment rules to make 25% the threshold for mandatory notification, up from 15% and Emerging from the legislative fog: the UK’s transformative foreign investment regime comes into sharper focus

US 

CFIUS has also been focusing its screening efforts on the tech sector. 

In August 2021, it threatened to request a Presidential block regarding the proposed merger between Magnachip’s Semiconductor - a U.S.-listed company with its effective headquarters and all manufacturing facilities in South Korea – and an affiliate of China-based Wise Road Capital. CFIUS used its ‘call-in’ power to review the transaction despite Magnachip claiming to have no employees or tangible assets in the US and the transaction not being subject to a mandatory notification. Magnachip had, however, only recently pulled out of the US, having had an “administration, sales and marketing and research and development” facility in California listed in its 2020 Annual Report. 

Whilst the outcome remains pending, this serves as an example of CFIUS using its broad discretion to review transactions, especially involving a sensitive sector such as semiconductors.

Read more: Thoughts on CFIUS’s Review of Wise Road-Magnachip 

For more on tech trends see our Tech Legal Outlook 2022