The impact of the FDI regulation on the HLS sector

In France, the FDI regulation has been enacted via the transposing decree n° 2019-1590 of December 31th, 2019 relating to Foreign Direct Investments entered into force on April 1st, 2023. The above-mentioned decree created articles R. 151-1 to R. 151-3 of the French Monetary and Financial Code (“MFC”) which specify that a foreign investment must be authorised by the French Minister of Economy if three conditions are cumulatively met:

(i) condition relating to the origin of the investment:

Under article R. 151-1 of the MFC, this condition is met when the transaction is carried out by a foreign legal or natural person, or by a French entity controlled by a foreign entity.

(ii) condition relating to the nature of the transaction:

Under article R. 151-2 of the MFC, the transactions concerned are those which constitute an “investment” as defined by law, that is:

• the acquisition of control of an entity governed by French law,
• the acquisition of all or part of a branch of activity of an entity governed by French law, or
• for non-EU and non-EEA investors only, exceeding, directly or indirectly, alone or in concert, the threshold of 25% of the voting rights of an entity governed by French law (as a temporary measure, since 22 July 2020 until 31 December 2023, the threshold has been lowered from 25% to 10% for listed companies).

(iii) condition relating to the nature of the activity of the target company:

Under article R. 151-3 of the MFC, the investment must relate to an activity in France which, even on an occasional basis, participates in the exercise of public authority or is an activity in a sensitive area, i.e. that could affect public policy, public security or the interests of national defence, and activities related to research, production or supply of weapons, ammunition, explosive powders and substances.

Germany had an FDI review mechanism prior to the FDI Regulation coming into force which is stipulated in the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV). The German FDI regime underwent several changes throughout the past years. The latest major amendments were introduced in response to the FDI Regulation.

The German FDI review mechanism covers a variety of transactions and activities. German law establishes two sets of reviews. The first notification requirement is triggered if a foreign investor acquires (directly or indirectly) 10% or more of the voting rights in a German entity engaging in defence-related activities. In this case, any foreign acquirer – even from within the EU – will qualify. Secondly, Germany has a so called cross-sectoral review where the (direct or indirect) acquisition of voting rights in a German entity by a non-EU/EFTA foreigner will trigger a notification requirement if the German entity is engaged in certain critical activities ranging from critical infrastructure to critical technologies and media freedom and pluralism. The law contains an enumerative list of these activities.

Listed critical activities of German targets that are of relevance to the HLS sector are:

• designing or manufacturing of certain personal protective equipment (within the meaning of Art. 3 No.1 of Regulation (EU) 2016/425);
• developing, manufacturing or distributing medicinal products which are essential for ensuring public healthcare, including their starting materials and active ingredients, or companies who are the holder of a corresponding marketing authorisation under pharmaceutical law;
• developing, manufacturing or distributing medical devices which are intended for the diagnosis, prevention, monitoring, prediction, prognosis, treatment or alleviation of life-threatening and highly contagious infectious diseases; and
• developing, manufacturing or distributing in vitro diagnostic medical devices which serve to provide information on physiological or pathological processes or conditions or to determine or monitor therapeutic measures in connection with life-threatening and highly contagious infectious diseases.

With regard to the level of shareholding that triggers a notification requirement in case of an acquisition, the cross-sectoral regime applies different thresholds:

• The thresholds for the activities that largely relate to critical infrastructure is set at acquiring or exceeding 10% of the voting rights.
• The thresholds for other activities deemed critical, including critical technologies, is set at acquiring or exceeding 20% of the voting rights.

For all other business activities which are not specifically defined as critical in the law, voluntary notifications (or also ex officio reviews) are possible and the threshold which allows a review of these by the competent authority is set at 25% of the voting rights. These transactions are not subject to a mandatory notification requirement or a standstill obligation.

The German FDI review mechanism also clarifies that notification obligations exist for foreign investors that already hold voting rights in defined critical companies when they increase their shareholding. Depending on the activity, notification obligations are triggered if subsequent transactions meet or exceed 20%, 25%, 40%, 50% or75% of the voting rights or the full acquisition of the company. In addition, the Federal Ministry for Economic Affairs and Climate Action (BMWK) is authorised to initiate an ex officio review procedure in the case of "atypical acquisitions of control" which are below the thresholds and typically would not trigger a notification obligation, but where the foreign investor gains influence by other means beyond the actual level of shareholding, such as through additional seats in the boards of directors or management, veto rights regarding strategic business or personnel matters or particular information rights.

Beside the acquisition of (direct or indirect) shareholdings, the acquisition of assets can trigger an FDI review namely if the assets represent (i) a detachable business unit of a domestic company, or (ii) essentially all operating resources of a domestic company or of a detachable business unit hereof which are necessary to maintain their operation.

The recently passed Royal Decree 571/2023 of 4 July on foreign investments, approved the regulatory development, with regards to the foreign investments, of Law 19/2003 ("Spanish FDI Regulation") and, in particular, to the suspension of the general liberalisation regime for certain foreign investments.

Although most of the aspects introduced by the Spanish FDI Regulation had already been applied in practice, the FDI Regulation seeks a greater legal certainty by providing a more complete definition on the strategic sectors or investments subject to the investor profile, additionally, the Spanish FDI Regulation reduces the authorisation procedures.

Spanish FDI Regulation defines foreign direct investment as:
(i) investments as a result of which the foreign investor acquires a holding of 10 % or more of the share capital of a Spanish company;

(ii) the corporate transaction, act or legal business as a result of which the foreign investor acquires control of a Spanish company, or of a part of it; or

(iii) only if the investor is a non-Spanish European and until 31 December 2024, transactions involving a listed company in Spain, or if it is carried out on an unlisted company, those whose value exceeds 500 million euros.

Not all foreign direct investments are subject to authorisation, as it depends on the sector of the investment and in the characteristics of the investor:

a) Sectors subject to authorisation are:

(i) critical infrastructures;

(ii) critical and dual-use technologies;

(iii) key technologies for industrial leadership and enablement;

(iv) programmes and projects of particular interest to Spain;

(v) supply of critical inputs;

(vi) sectors with access to sensitive information;

(vii) media sector; and

(viii) other sectors that my affect public security, order or health.

b) Foreign direct investments undertaken by non-European investors who comply with any of the following characteristics are subject to authorisation:

(i) whether the foreign investor is directly or indirectly controlled by the government, including public bodies or the armed forces, of a third country;

(ii) whether the foreign investor has made investments or engaged in activities in the sectors affecting security, public order and public health in another Member State, and especially in the sectors subject to the authorisation, and

(iii) if there is a serious risk that the foreign investor engages in criminal or illegal activities affecting public security, public order or public health in Spain.

In the Netherlands, the FDI Regulation has been enacted via the Investments, Mergers and Acquisitions (Security Screening) Act (the “Vifo Act”), which has been adopted on 8 September 2020 and has entered into force on 1 June 2023. The Vifo Act applies in addition to already existing Dutch acts that restrict investments in critical infrastructures regarding for instance telecom networks and energy networks. Given the open international economy of the Netherlands, the Dutch legislator has taken a restrictive approach in respect of limiting investments in Dutch enterprises. It is expected that the scope of the Vifo Act in respect of Dutch M&A transactions shall therefore be relatively limited.

The Vifo Act applies to investments in an enterprise that is active in the Netherlands (and not only in Dutch legal entities) that is either:

(i) a critical supplier (such as operators of heating networks, the storage, production and processing of nuclear materials, KLM, Airport Schiphol, Rotterdam Port, banks, infrastructure of the financial markets and enterprises that are active in respect of exploration, transport and storage of natural gas);

(ii) an operator of a business campus; or

(iii) active in the area of sensitive technologies. In respect of sensitive technologies, the Vifo Act only applies to strategic goods, such as military goods and dual use goods, that are subject to export control. Certain quantum, photonics and semiconductor technologies as well as High Assurance data protection products have also been made subject to the scope of the Vifo Act. The Dutch government is investigating whether or not to include additional sensitive technologies, such as in respect of the food and healthcare sector within the scope of the Vifo Act.

Under the Vifo Act, an in-scope investment shall be an investment in or any other transaction that results in control, (i.e. more than 50% of the voting rights or appointment rights in respect of managing directors) over a target enterprise. As well as mergers, joint-ventures and acquisitions of essential assets and, specifically for enterprises that are active in the area of high sensitive technologies, the obtaining of significant influence. For such significant influence, a lower threshold of already 10% of the voting rights applies. It is important to note that the Vifo Act does not make a distinction between foreign and Dutch investors.

The Vifo Act has retro-active effect and therefore, it also applies to any in scope transaction that have been implemented in the period between 8 September 2020 and 1 June 2023. Until 1 February 2024, the Dutch authorities can decide to screen any such transactions, following which the relevant parties involved shall need to file a notification of such transaction with the relevant Dutch authority: Bureau Toetsing Investering (the “BTI”).

M&A transactions for the HLS sector in France are particularly exposed to FDI control. Indeed, HLS sector implicates companies that are very likely to be considered as sensitive under article R. 151-3 MFC as they operate in the research and/or public health sector. Moreover, according to the guidelines published by the French FDI Administration, even an activity that is not sensitive by nature is likely to be considered as such by the Ministry of Economy when it is implemented for the benefit of clients which are themselves considered as sensitive, which is for example the case of public and private entities active in the healthcare sector. And in many cases, companies in the HLS sector have such entities (hospitals, medical staff, drugstore etc.) as their main or secondary co-contractors.

If an M&A transaction regarding a French company falls within the scope of articles R. 151-1 and seq. of the MFC, the envisaged transaction will have to be notified timely, (before implementation of the transaction), to the French Ministry of Economy. After notification, the minister of Economy will screen the transaction in two phases:

(i) Phase 1: the Minister of Economy has 30 working days from the date of receipt of an authorisation request to inform the investor whether:

(a) the investment does not fall under the regime and therefore does not require any prior authorisation; or

(b) the investment does fall under the regime and is approved (without conditions); or

(c) the investment falls under the regime but further investigation is necessary to determine whether the preservation of national interests can be guaranteed by subjecting the authorisation to conditions.

In the absence of a reply within this 30 working day period, the application for authorisation is deemed to be rejected.

(ii) Phase 2: in cases where further investigation is required; refusal or authorisation (with conditions where applicable) must be issued within 45 working days from the date of receipt by the investor who filed the request of the Minister's first decision.

In the absence of a response within this additional 45 working day period, the application for approval is deemed to be rejected.

Prior to formally filing an authorization request, the parties to a M&A transaction may choose to approach the Ministry of Economy through a formal comfort process to obtain its position on whether the transaction should be considered strategic in the sense of the regime and thus falls within the scope of the review.

If an M&A transaction concerning a German entity falls within the mandatory notification requirements of the German FDI review, the transaction will have to be notified to the BMWK prior to implementation. The direct acquiring entity has to submit the respective notification even if the foreign investor is only its parent entity. The BMWK has issued a formal note on information and documents to be provided.

The BMWK will review the transaction in two phases:

(i) In Phase 1, the review timeline is 2 months upon receipt of the notification, at the end of which the transaction is either cleared or an in-depth review in phase 2 is ordered.

(ii) In Phase 2, the review timeline is 4 months upon the complete receipt of additional required information, at the end of which the transaction is either unconditionally cleared, cleared but subject to commitments or prohibited.

The timeline in phase 2 can be subject to various extensions either by order of the BMWK or by agreement with the parties. Also, there is a “stop the clock” provision for the review period in case additional information are requested or the BMWK engages in negotiations with the parties to implement safeguards to protect national security interests.
In practical terms, it should be noted that even in phase 1 the BMWK tends to exhaust the full 2 months review timeline as FDI reviews will be shared for comments with other German ministries and also as part of the FDI Regulation’s cooperation mechanism. Hence, careful planning of a transaction timeline is needed to account for the duration of the proceedings. Also, the timeline in phase 2 can be subject to significant uncertainty and can, in practice, be much longer than four months given the various possibilities to extent the timeline.

If an M&A transaction regarding a Spanish company of the HLS Sector falls within the scope of the Spanish FDI Regulation, the envisaged transaction requires prior authorisation by the Council of Ministers (although the person in charge of the Directorate General for International Trade and Investment will be responsible for deciding on those operations whose amount is less than five million euros).

The maximum legal deadline for deciding on the application for authorisation is three months. The deadline may be suspended if additional information is required.

Silence is negative: the investment is deemed not to have been authorised if the competent authority does not issue a decision within the corresponding legal deadline. However, this does not mean that authorisation cannot be granted after this period. Authorisation may be granted after this period has elapsed, so that rejection by silence only has the effect of enabling the investor to resort, where appropriate, to contentious-administrative jurisdiction. The administration will continue to be obliged to issue an express resolution in the authorisation procedure, and may grant authorisation. This is likely to be the scenario in complex procedures or those requiring the adoption of commitments.

If an M&A transaction regarding a Dutch enterprise falls within the scope of the Vifo Act, the envisaged transaction will have to be notified timely, (before implementation of the transaction), with the relevant Dutch authority, the BTI. The obligation to notify applies to both the investor and the target enterprise. If the investor could not have known that the transactions must be notified, (for instance pursuant to confidentiality arrangements), the obligation only applies to the target enterprise. After notification, the BTI will screen the transaction in two phases:

(i) Phase 1: within eight weeks after the notification (with a one-time extension of six months) a decision must be made by the BTI that either:

(a) no further investigation shall have to be made; or
(b) that, in case the envisaged transaction can pose a risk for the national security, a further investigation shall have to be made and a screening decision shall have to be taken.

(ii) Phase 2: this phase commences upon receipt by the BTI of a screening request. The BTI shall have to decide within eight weeks whether or not to allow the investment, which can be extended with another six months (minus the duration of any extension during Phase 1).

If additional information is requested by the BTI, the clock will be stopped until such information shall have been submitted. An additional extension of three months applies if the notification will also have to be sent to the European Commission or other Member States pursuant to the FDI Regulation. During these phases, the transaction may not be implemented.

If a foreign investment has been made without prior authorisation, the Minister of Economy may impose injunctions and interim protective measures. Concerning injunctions, the Minister can order the investor to (1) file an application for authorisation, (2) restore the previous situation at his own expenses, and (3) modify the transaction. Injunctions may be combined with a penalty payment of up to EUR 50,000 per day of non-compliance. Concerning interim protective measures, the Minister may take such precautionary measures as he considers necessary (such as suspending the investor’s voting rights, appointing an agent, preventing the investor from disposing of assets or receiving dividends).

If the investor fails to comply with the conditions attached to the authorisation’s decision, the Minister may withdraw the authorisation, instruct the investor to comply with the initial conditions or with new conditions, or take any appropriate interim protective measure.

Additionally, in circumstances (1) where a transaction has been completed without prior authorisation of the Minister, (2) of fraud, or (3) where the Minister’s decision or injunction has been violated, the Minister may impose a fine of up to the highest of the following amounts (provided they are proportionate):

• twice the amount of the irregular investment;
• 10% of the annual turnover before tax of the target;
• EUR 5 million for legal entities, and EUR 1 million for individuals.

Similar to merger control proceedings, the German FDI review provides for a prohibition to implement transactions triggering a notification requirement; i.e. the planned transaction must not be implemented prior to receipt of an approval by the BMWK.
German law provides several sanctions for violations of the prohibition to implement transactions subject to mandatory review and for failure to notify such transactions. All legal or factual implementation acts are prohibited and invalid during the review procedure. The prohibition to implement is supplemented with bans of specific acts to clarify where factual acts may implement a transaction; in particular, the following is forbidden:

• exercising of the voting rights by the acquirer;
• payment of dividends to the acquirer;
• providing or disclosing sensitive information related to the company to be acquired to the acquirer insofar as this information relate to business activities which may affect public order and security interests of Germany; and
• providing or disclosing information related to the company to be acquired to the acquirer if the competent authority issues a respective order.

In addition to these sanctions affecting the validity of acts, violations of the specific prohibitions to implement can be met with a monetary fine or imprisonment of up to 5 years .

Foreign direct investments subject to a FDI authorisation carried out without the required prior authorisation will lack validity and legal effects until they are formally approved, which includes that the foreign investor will not be able to exercise economic and political rights in the Spanish company that is the object of the investment until the authorisation is obtained. In addition, a fine shall be imposed at the same time, which may amount to up to the equivalent of the economic content of the transaction.

If an investment is implemented that should have been timely notified, the failure of such timely notification can be penalised by the BTI by imposing an incremental penalty or administrative fine (up to EUR 900,000 or 10% of the worldwide turnover of the enterprises involved). Furthermore, the BTI can impose that a notification must be made, that the voting rights of the investor shall be suspended and that the transaction shall have to be reversed. Any transaction that has been implemented contrary to a decision of the BTI to prohibit the relevant transaction shall be void.