M&A in the time of Covid and beyond

What is clear for those engaging in cross-border M&A is that countries around the world are becoming increasingly protective of their economies and industries, with new rules being introduced and existing rules being more widely applied

M&A activity has long required those involved to consider whether the transaction gives rise to any competition or anti-trust concerns which may require approvals from relevant authorities. Cross-border transactions can also involve issues of foreign direct investment (FDI) limitations in certain jurisdictions. In the period following the millennium, barriers to cross-border transactions were generally reducing as globalization powered ahead, and cross-border trade, including M&A and joint venture transactions, became easier.

THE "GLOBAL FINANCIAL CRISIS" EFFECT

With the Global Financial Crisis in 2008, governments around the world were forced to bail out their banks. Unlike the COVID-19 pandemic, the physical effects of the crisis were largely contained within the financial sector. For the rest of the economy, the consequences were felt mostly around the availability of credit and other forms of finance, although governments were left with huge debt piles to service.

Austerity became the buzzword when it came to budgeting. As governments sought to boost their economies, particularly through the mid-2010s, there was an increasing focus on retaining business within an economy and not outsourcing it to other, cheaper jurisdictions. This change in focus is illustrated by Donald Trump's "Make America Great Again" slogan and Narendra Modi's "Make in India" campaign, and the increasing tensions between China and other countries.

THE COVID-19 EFFECT

As countries were becoming increasingly protectionist through the tail end of the 2010s, COVID-19 emerged, and suddenly global supply chains were closed down. Businesses had to rapidly rethink their supply chains having been exposed to what had previously been considered a (very) minor risk.

Virtually all parts of the worldwide economy have been impacted by COVID-19 in one way or another, some positively (such as technology and communication) and others very negatively (such as hospitality and retail).

Governments around the world have extended unprecedented support to economies, severely weakening their financial strength just as the businesses on which they rely have been similarly weakened. This combination of effects has increased the concerns of governments around the world that opportunistic and exploitative acquirers will be able to acquire their domestic businesses and move them off-shore, further weakening the scope for future recovery as jobs and technologies are lost.

INCREASING PROTECTIONISM

The COVID-19 pandemic has led to many countries around the world adopting increasingly protectionist policies. Even before the pandemic hit, such policies were being increasingly adopted around the world. In the US, the Trump administration was increasingly using national security claims as a basis for challenging international trade, perhaps most notably in the automobile sector.

In Europe, countries have increasingly turned to national interest positions, expanding from the historical norms of protection applying in the defense and media sectors to become considerably more expansive.

For example, in the space of a few days, the United Kingdom Government introduced protections to apply in businesses which are seen as critical to a pandemic response, accelerating a process which would normally have taken a couple of months. As well as applying to businesses in the healthcare sector, the UK government has also said that in its view, this new regime could also apply to both businesses capable of retooling to assist a pandemic response (such as manufacturers retooling to make PPE or ventilators) and internet service providers.

The UK government also moved to protect businesses which are involved in advanced manufacturing, artificial intelligence and cryptographic authentication technology by bringing them within the UK's public interest review regime, and has just published the far-reaching National Security and Investment Bill. This would introduce a mandatory screening regime for investments in core areas (particularly infrastructure, energy, finance, advanced technology, health and defense), with retroactive effect from 12 November 2020, and ultimately a right to require the unwind of transactions.

The position is similar in most countries across Europe, with transactions with even small local operations in countries such as Italy being delayed while the necessary approvals are sought. In Germany, investments in specific sectors such as critical infrastructure, media or certain healthcare companies, require mandatory notifications and the triggering threshold has been lowered to 10% of the voting rights. Importantly, German law covers both direct and indirect foreign investments, capturing acquisitions of foreign companies with German subsidiaries. With no less than 10 amendments in the past three years, German investment control remains a moving target. Most importantly, the introduction of a standstill obligation for many transactions will dramatically change the scene, as infringements will be punishable by prison sentences.

Other countries around Europe have been introducing interim foreign investment control legislation applying to 'strategic companies' – in sectors such as telecommunication, media and transportation to healthcare. They are also amending their frameworks for screening foreign direct investments, to implement the EU Regulation on foreign direct investment – with much stricter processes foreseen. Even though the new legislation may bring more clarity and predictability, it will also bring additional obligations, conditions and sanctions.

BEYOND COVID-19

What is clear for those engaging in cross-border M&A is that countries around the world are becoming increasingly protective of their economies and industries, with new rules being introduced and existing rules being more widely applied. It is no longer the case that jurisdictions where there is a small subsidiary operation can be ignored or where the acquirer is from what used to be regarded as a "safe" jurisdiction (such as the US or Canada) – almost any transaction has the ability to fall within the ambit of a local review where there are assets or business in that jurisdiction.

As a result, investors and buyers will need to look closely at a target's operations and take advise in each jurisdiction to understand the risk of a filing or approval being required, both under black-letter law and under the enforcement approach of the relevant authorities. This is likely to lead to additional upfront costs for buyers, but a buyer would be unwise to spend the even greater sums involved in executing a transaction only to find out there are problems later.

Given how this area has developed over the past five years, absent a change in political attitudes to international trade and globalization, we are unlikely to see a rapid relaxation of measures which have been recently introduced, and are more likely to see tightening of regimes continuing. The challenge for governments will be balancing attracting investment into their countries against protecting their domestic industries. For investors and buyers, key will be seeing very clear rules for establishing whether a transaction is subject to the regime and, if it is, having an efficient, fast and inexpensive process for conducting any review.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.