Outbound foreign investment regime on the horizon in the EU

Traditionally, national foreign direct investment (FDI) laws have focused on regulating and controlling foreign investment in domestic companies to protect national security, critical infrastructure, and other sensitive sectors.

It used to be common practice for domestic companies not to export their most advanced equipment and technologies abroad. This was to avoid, among other things, knowledge leakage and copying of their technologies by foreign companies. It was also reinforced by the growing technological competence and competition between domestic and foreign companies.

In recent years, however, many domestic companies have started to open their own research and development departments abroad. This is partly because some foreign markets are becoming increasingly more attractive than domestic markets, and companies want to be able to offer products and services tailored to these attractive foreign markets as well. A local presence can also help improve relationships with customers and business partners and facilitate access to talent and resources.

In the last few years, the impact of outbound investment by domestic companies on their own economies and national security has therefore been a growing concern among some countries. This has led to an increasing interest in regulating and controlling outbound investment by domestic companies.

Rising security concerns in the United States

The United States has been at the forefront of this paradigm shift. This development is, for example, reflected in the so-called America COMPETES ACT of 2022, which testifies to the US’s policy to ensure that the US is leading the innovation of critical and emerging technologies, such as next-generation telecommunications, artificial intelligence, quantum computing, semiconductors, and biotechnology, by modernising export controls and investment screening regimes and associated policies and regulations.

The US Departments of Treasury and Commerce respectively released reports to the US Congress on 7 March 2023 on the status of their work regarding the Biden administration’s consideration of formally establishing such a screening regime.

According to these reports, the administration is considering initiating “a program to address national security concerns arising from outbound investments from the United States into sensitive technologies that could enhance the technological capabilities of countries of concern in ways that threaten U.S. national security.” The reports indicate that the program may focus “on investments that could result in the advancement of military and dual-use technologies by countries of concern.” Furthermore, it is indicated that the focus will be on outbound investments from the US into certain key advanced technologies. Legal consequences may include prohibiting certain investments and/or collecting information about other investments.

According to media reports, the Biden administration is currently working on an executive order to shape its new approach to outbound investments. While concrete details of the scope of this new outbound FDI regime are unclear, media reports suggest that the focus may be on semiconductors, artificial intelligence (AI) and quantum technology.

EU and Germany to introduce new outbound control regime

Similar discussions are being held at both the EU level and within the German government but are still in the early stages. The European Commission stated in its 2023 Work Programme that it will examine whether additional tools are necessary in respect of outbound strategic investments controls. In addition, the Commission is expected to review and revise the provisions of the already existing EU FDI screening regulation in light of two years of experience.

It is expected that the Commission and German federal government will examine closely the new outbound control regime introduced by the US government for their own FDI agenda. This will most likely also affect the shape of the future German political strategy towards China. The strategy has been indicated to be currently under review according to the German Foreign Ministry’s draft document published in 2022.

While the EU and Germany have not provided further details, it is worth noting that the EU's investment control system is currently decentralised. This means that the EU has not unified FDI control provisions throughout the EU member states or established an EU level FDI supervisory authority. Legal developments in this area have often been pursued first by EU member states and later adopted to some extent at the EU level. For example, the German FDI control regime existed long before the EU passed any legislation in this regard and the German Supply Chain Due Diligence Act was adopted in 2021 before the EU Corporate Sustainability Due Diligence Directive in 2022. Therefore, it would not be unusual for the German legislator to come up with new German laws first.

Effects of the new regime for international M&A transactions

The introduction of an outbound investment control mechanism at EU level would certainly add another layer of complexity and cost to international M&A transactions. Parties interested in international M&A would then need to consider from a regulatory perspective not only merger control, inbound FDI control and the new EU Foreign Subsidy Regulation, but also outbound FDI control.

It remains to be seen whether the EU will follow in the footsteps of the US and become more proactive in screening outbound investment. However, if such a mechanism were to be introduced, it could have a significant impact on cross-border M&A transactions involving EU companies. Companies and their advisors would need to carefully navigate through these additional regulatory hurdles and factor in additional time to comply with such new provisions.