The rise of political and regulatory due diligence

Translated from an article co-authored by Simmons & Simmons and FTI Consulting for Fusions-Acquisitions Magazine's special IPEM edition.

The erosion of the boundary between high-risk jurisdictions and predictable economies

Taking political risk into account before investing in a country is nothing new. Companies and investors have always sought to assess the stability of the institutional and regulatory framework in their target markets and have developed tools to protect themselves: political risk insurance, contractual stabilisation clauses, maintenance of the legal framework for the duration of the contract, non-alteration provisions preventing the state from unilaterally changing its terms, and preservation of the economic balance in the event of adverse developments. Until now, these mechanisms were reserved for jurisdictions regarded as politically or regulatorily volatile, while economies offering a predictable institutional framework appeared protected from developments capable of significantly affecting investment conditions. That distinction is now beginning to fade. Instability simply takes subtler forms in those markets. In Investment and National Security¹, the OECD notes that rising geopolitical and geoeconomic tensions, accelerating technological change and the accumulation of sensitive personal data are fuelling growing national security concerns.

Investment screening, or the state as a party to the negotiation

Against this backdrop, many governments have strengthened their scrutiny of investment in sensitive sectors. Screening, understood as the case-by-case review of transactions, has become the principal instrument used by states to manage this growing risk of instability, particularly in developed economies. The European Union illustrates the scale of the shift: following Regulation (EU) 2019/452 of 19 March 2019, which established the first EU framework for the screening of foreign investments, Regulation (EU) 2026/1386 of 17 June 2026² now requires every Member State to establish a screening mechanism covering a common minimum set of sensitive sectors. Investment control is no longer optional and left to each state's discretion; it is becoming a harmonised obligation across the Union.

France, which has long had one of Europe's most developed regimes, has tightened its own rules. Decree No. 2026-718 of 30 July 2026³, published in the Official Journal on 2 August, lowers from 25% to 10% of voting rights the threshold triggering review of investments by non-European investors in French companies listed outside the European Union and operating in a sensitive sector. This aligns their treatment with the regime applicable since 1 January 2024 to companies listed on a European regulated market. Matignon has justified the measure as necessary to guard against opportunistic shareholdings amid heightened geopolitical tensions, while retaining an expedited ten-working-day procedure so as not to impede issuers' access to capital markets. The scope of screening is now expanding more than once a year and is no longer limited to transactions that confer control. A minority investment or gradual increase in a shareholding may be enough to bring the state into the equation.

The approach nevertheless remains clearly supportive of foreign investment: the aim is not to obstruct it, but to regulate it where activities considered sensitive are concerned, in practice by attaching conditions. The state therefore no longer merely sets the general framework; it enters the negotiation, with the power to rewrite its terms or, more rarely, oppose the transaction. The healthcare sector has provided some of the clearest illustrations in recent years.

In 2024, pharmaceutical group Sanofi began the sale of Opella, its consumer healthcare subsidiary, which produces Doliprane among other products, to the US private equity firm Clayton, Dubilier & Rice. The French government entered the negotiation: it initiated the foreign investment review procedure and required guarantees concerning the retention of the headquarters and production sites in France, as well as security of paracetamol supplies. Bpifrance acquired a 1% to 2% stake (equivalent to €100 million to €150 million) and obtained a seat on the board, while the commitments were backed by financial penalties: €100,000 for each job cut and €40 million if production ceased.

The sale of Biogaran, the Servier's group's generics subsidiary, followed the same course, under even closer public scrutiny. An initial transaction, opposed by the state in 2024, was abandoned because no buyer was deemed to meet its criteria. The process was relaunched in July 2025 with the British fund BC Partners and made subject to authorisation under the foreign investment screening regime: the state acquired a 15% stake through Bpifrance and secured robust guarantees with no time limit. The sale was completed in early 2026.

These two cases are revealing: neither involved defence nor critical infrastructure, but purely commercial targets in the pharmaceutical sector whose sales were renegotiated under state pressure and treated as matters of "health sovereignty".

The clearest precedent outside the healthcare sector, however, remains the case from January 2021. Approached by Canadian group Couche-Tard in a deal worth approximately €16.6 billion, Carrefour—the country's largest private-sector employer and a major food retailer—saw the proposed transaction halted within days by the Minister for the Economy on grounds of "food sovereignty". This basis for intervention had been introduced by the 2019 PACTE Law, which extended the foreign investment screening regime to agriculture and food. The proposed tie-up was immediately replaced by a simple commercial partnership.

Even in countries governed by the rule of law and regarded as offering a wholly stable investment environment, the outcome of a transaction therefore depends, at least in part, on a political decision. For investors, this is a new source of uncertainty affecting the feasibility, timetable, price and structure of a transaction. It calls for political due diligence well in advance of the investment and, for the target's shareholders, before the sale process begins.

Understanding the origins of this instability

This growing political intrusion into the economic sphere is no accident. It results from a series of shocks that, within a few years, have made "economic security" a priority for Western governments. The Covid-19 crisis first exposed advanced economies' dependence on globalised supply chains, particularly in healthcare, with shortages or risks of shortages affecting medicines such as paracetamol and medical devices. The OECD notes that many states tightened their screening regimes during the pandemic, particularly by broadening the list of sectors considered sensitive⁴. Indeed, the need to guarantee supplies "even in the event of a pandemic" was invoked to reject the Carrefour offer. The health crisis therefore helped redefine what constitutes a strategic sector.

The war in Ukraine, which began in February 2022, was a second shock to the global economy, reminding European governments of their vulnerability in energy, raw materials and critical technologies, and encouraging greater state protectionism at the expense of international cooperation. Fractures now also come from within the system. According to the Munich Security Report 2026⁵, the United States has made extensive use of economic coercion to secure bilateral agreements, rejecting the rules-based trading system it had itself championed: "Liberation Day" on 2 April 2025 raised its average tariff rate to a level not seen since the 1930s, while China responded by weaponising its own chokepoints, beginning with export controls on critical minerals.

These upheavals have stripped political risk of its geographical character, making it an almost automatic consideration before every transaction. A Bayes Business School study (City St George's, University of London) covering more than 3,000 US acquisitions completed between 2002 and 2019⁶ concluded that political risk now influences every stage of the M&A process and that acquirers would benefit from reassessing their entire approach. This is true not only in the United States, but also in the United Kingdom and EU Member States. The researchers note in particular that, where a target is highly exposed to political uncertainty, transaction returns are on average around one percentage point lower and synergies three percentage points lower.

What the exercise contributes to the investment decision

Political and regulatory due diligence examines the likely evolution of the framework within which the asset will operate. It develops reasoned scenarios, estimates their probability and timing, and identifies the risks and opportunities associated with each. The exercise is based on a detailed understanding of the institutional ecosystem, enabling, for example, an assessment of a legislative proposal’s true priority within a constrained timetable and an understanding of the public and unofficial positions of the stakeholders who will influence its outcome.

For an investment committee, its added value lies in three areas.

• It prioritises the risks that could affect the investment thesis, whether they relate to the target—such as changes to the regulatory framework or revisions to the pricing, funding or support mechanisms on which its revenues depend—or to the transaction itself, from political or social opposition to the blocking or conditioning of the deal.
• For each risk, it then assesses the likelihood of occurrence, the realistic timeframe and the impact on the target, allowing the valuation to be adjusted, the structure to be adapted or a post-acquisition action plan to be developed.
• Finally, it highlights the corresponding opportunities arising from public policy: grants, calls for projects, incentive schemes and pricing reforms favourable to certain business models.

The investment thesis can then be stress-tested scenario by scenario, together with the sector-specific implications of each.

An exercise of varying intensity

The intensity of the exercise varies according to the stage of the transaction: identifying warning signs before an offer or informal approach, followed by full due diligence ahead of the investment decision. The work does not end at closing and may even begin afterwards, either because it was not undertaken beforehand or because a change in the political cycle warrants revisiting it. Once the investment has been made, the investor must monitor whether the identified risks materialise, remain engaged with key stakeholders and help the acquired company contribute to shaping the future framework applicable to its sector. This monitoring relies heavily on the map of institutional stakeholders—decision-makers, supporters and opponents—prepared during the initial due diligence. A tool that supports decision-making before the transaction thus becomes a management instrument throughout the holding period.

What the exercise covers: three categories of risk

Political and reputational risk

The first area involves identifying the political decision-makers, trade unions and local stakeholders whose support or opposition may affect the viability of the transaction. A deal involving a fragile employment area or a struggling region can become politicised as soon as elected representatives take it up, and may assume national significance within days. This risk is inseparable from public and media perceptions of the parties: the reputation of both buyer and seller shapes how public authorities will receive the transaction and how it will be treated in public debate. Assessing it in advance makes it possible to prevent a reputational crisis during the transaction and, where necessary, prepare an appropriate response.

Risk arising from changes to the legislative and regulatory framework

The next step is to assess how legislation under consideration, a change of political majority or a regulatory development could affect the target’s business model. For an investor, the question is no longer simply whether the target complies with the current framework, but whether it will withstand the framework of tomorrow. The healthcare sector recently illustrated this with Bill No. 2956, tabled on 23 June 2026 by MP Thibault Bazin⁷, which seeks to regulate the financialisation of healthcare provision and could directly affect certain private equity-backed models. This is precisely the type of initiative incorporated into the analysis. First, in terms of substance, it is necessary to determine which provisions affect the target’s model and to what extent. The likelihood and timing of adoption must then be assessed, since a private member’s bill can be considered only if the group sponsoring it allocates time to it during its parliamentary slot or if the Government places it on the agenda. Finally, its wider significance must be evaluated, because even a bill that is not enacted often sets the terms of the debate and feeds into other legislative vehicles, particularly budget legislation or sector-specific laws. A bill may therefore fail to pass yet still produce some of its effects in fragments.

Risk affecting the transaction: sovereignty and economic security

The third area is the one described at the beginning of this article, from which a methodological consequence must be drawn. Before a filing, the issue is not solely legal: it is necessary to assess the political sensitivity of the case in light of sovereignty and economic security imperatives, and then adjust what can be adjusted—the scope and terms of the offer, proposed governance, timetable, and communication and engagement strategy—to avoid a blockage or excessively long or prohibitive review periods. As the Opella and Biogaran cases demonstrate, anticipating the form of the consideration required by the state is one of the principal benefits of due diligence conducted in advance.

Conclusion: mitigating risk throughout the asset’s life cycle

The value of a growing number of assets is liable to be affected by political issues, according to timetables and rationales that may differ from those of the market and the law. Legal advisers establish the current position and translate risk into contractual terms; public affairs advisers anticipate developments and manage engagement with stakeholders when the risk materialises. Combined from the outset of the transaction, these two areas of expertise make it possible to mitigate risk on a lasting basis. As the 2027 presidential election approaches, an asset is no longer valued solely on its fundamentals, but also on its ability to withstand a new political cycle.

This article was co-authored by Alexandre Regniault and Simonetta Giordano, Partners at Simmons & Simmons LLP, together with Guillaume Granier, Senior Managing Director and Head of Strategic Communications in FTI Consulting’s Paris office, and Estelle Forfert, Senior Director, Public Affairs and Government Relations at FTI Consulting. This article was originally published in French in the special IPEM edition of Fusions-Acquisitions Magazine. Find the original, French version of this article here.

We extend our sincere thanks to Ms Alice Rampoldi for her assistance with conducting research and preparing this article.

^{1 Organisation for Economic Co-operation and Development (OECD), Investment and National Security, OECD, 2026.
2 Regulation (EU) 2026/1386 of the European Parliament and of the Council of 17 June 2026 on the screening of foreign investments in the Union and repealing Regulation (EU) 2019/452, Official Journal of the European Union, 26 June 2026; applicable 18 months after its entry into force.
3 Decree No. 2026-718 of 30 July 2026 relating to foreign investments in France, Official Journal, 2 August 2026; an implementing order (arrêté) was published on the same day.
4 OECD, Investment and National Security, op. cit.
5 Julia Hammelehle and Nora Kürzdörfer, “Global Economy: Trade Conditions”, in Tobias Bunde and Sophie Eisentraut (eds.), Munich Security Report 2026, pp. 79-87.
6 Chris Mahony, “M&A dealmakers can ride out the geo-political storm, study suggests”, City St George's, University of London News, 2 March 2026.
7 Bill No. 2956 introducing measures to combat the excesses of financialisation in healthcare, submitted to the French National Assembly on 23 June 2026.}