The coronavirus pandemic’s latest victim: Foreign investors

April 15, 2020, 9:00 AM UTC

The coronavirus pandemic has already dealt a severe blow to the free flow of people. Now it looks poised to take a hatchet to another leg on which free markets stand: the free flow of capital.

In what critics might regard as protectionist policies, countries around the world are increasingly tightening the rules on foreign investment in prized firms and sectors based on their soil.

The European Union, as well as member states Germany, France, Italy, and Spain have tightened foreign investment rules in recent weeks. So too has Australia. The United Kingdom, where a new foreign investment law was already advancing through Parliament, has considered taking emergency action against some foreign investments, while in the United States, lawyers say health care–related transactions are likely to receive more scrutiny than in the past.

Traditionally, reviews on foreign investment saw transactions through the prism of national defense, with deals involving military hardware makers the most likely to run into regulatory objections. But in recent years, countries have started taking a broader view of what industries count as strategic.

This trend has been accelerated by the coronavirus pandemic, with medical device manufacturers, pharmaceutical firms, and even the makers of protective equipment likely to receive more scrutiny, says Aimen Mir, a partner in the Washington, D.C., office of law firm Freshfields Bruckhaus Deringer.

“The COVID-19 pandemic has brought into stark relief that for critical supplies, there is a finite amount, and maintaining jurisdiction over a supplier can affect a government’s ability to prioritize where those resources are devoted,” says Mir, a former head of the Committee on Foreign Investment in the United States (CFIUS), the cross-governmental group tasked with reviewing foreign investment in American companies.

Mira Ricardel, a former U.S. deputy national security adviser and official at the Commerce Department who now advises clients on CFIUS reviews as a principal at the Chertoff Group, says that biotechnology and genomics companies were already being scrutinized by the review committee prior to the pandemic. But now, she says, a much wider range of supply chains—for active pharmaceutical ingredients, basic medicines, and personal protective equipment—are likely to be examined.

The coronavirus has also prompted some nations to look beyond health care too as concern mounts that all kinds of businesses whose finances and valuations have been ravaged by the pandemic may now be easy prey for deep-pocketed foreign buyers.

M&A bankers say they have been fielding calls from potential Chinese buyers who are interested in hunting for bargains in Europe, with businesses in Italy and Spain of particular interest. Many of these Chinese companies are state-owned, according to a Bloomberg News report, which will likely add to government suspicion about Chinese intentions.

The European Commission on March 25 issued guidance to EU members, asking them to use their existing laws to prevent capital flows from non-EU countries that could undermine “Europe’s security or public order.”

Margrethe Vestager, who wears two hats as Europe’s top digital policy official as well as its formidable competition regulator, said earlier this week that European countries should consider taking equity stakes in companies to keep them out of the hands of state-backed Chinese buyers. “It’s very important that one is aware that there is a real risk that businesses that are vulnerable can be the object of a takeover,” Vestager told the Financial Times. “The situation now really underlines the need, so we work really intensively.”

In France, the government has considered taking these kinds of equity stakes and said it will not rule out nationalizing “strategic companies” to prevent them from falling into foreign hands, and to ensure the country maintains key medical supplies. In Germany, there is renewed scrutiny on medical and pharmaceutical companies, especially after U.S. President Donald Trump outraged Germans by trying to lure CureVac, a biotech firm working on a coronavirus vaccine, to relocate to the States.

Spain has put in place a temporary foreign investment review system, specifically the result of COVID-19. It will look at any purchase of 10% or more of a company, or any investment that gives a buyer control over the firm. The new rules apply to a broad range of companies, in sectors from health care to technology to finance.

Golden Power

Italy has perhaps gone the furthest in trying to protect whole swaths of its economy from foreign acquirers. Before, the country’s review regulations, known as its Golden Power regime, applied to the defense and national security sectors, as well as energy, transportation, communication and high-technology industries. But on April 8, Prime Minister Giuseppe Conte’s government expanded the scope of the law to include companies involved in water, health, media, electrical and financial infrastructure as well as those vital for food security, banking, credit, and insurance.

Conte has mused about having every company listed on the Milan Stock Exchange categorized as “strategic” and subject to review. What’s more, Italy has said it will bar any foreign entity from acquiring strategic businesses—including investors from other EU nations. (Most other European countries have made allowances for investors from within the 27-nation bloc.)

In the U.K., the coronavirus has heightened worries about the activities and intentions of Chinese investors. Last week, the House of Commons Foreign Affairs Select Committee held an emergency hearing on potential Chinese “asset stripping” of British high-tech firms. The hearing came amid reports that China Reform Holding, a $30 billion Chinese government-controlled venture capital fund, was attempting to take over the board of Imagination Technologies, a British chipmaker that is a supplier to Apple. In the end, U.K. Culture Secretary Oliver Dowden intervened to delay the board meeting at which a slate of directors, allegedly put forward by China Reform, were to have been voted on.

Upping the scrutiny Down Under


Outside Europe, Australia has eliminated monetary thresholds—which had been set at the equivalent of $760 million for businesses in “nonsensitive” sectors and $176 million for those in “sensitive” sectors—for deals to be reviewed. Now any foreign acquisition of more than 20% in a company, or 10% of a land holding, is subject to potential scrutiny.

Samantha Mobley, a partner at the global law firm Baker & McKenzie who specializes in EU competition and trade law, says that the coronavirus has heightened wariness of foreign investment that was already growing before the pandemic. She attributes this to a desire to focus on the national interest arising out of populism, and a general backlash against globalization, that contributed to the election of leaders like Trump in the U.S. and the Brexit vote in the U.K.

Countries were already moving to expand the criteria for reviewing transactions from military defense to a broader definition of national security. Some countries, including Canada, already took overall industrial policy into consideration.

In the U.K., which has lacked a formal review process like CFIUS in the U.S., Mobley notes former Prime Minister Theresa May’s government was already trying to create one. A bill her government introduced would have allowed the government to review any transaction raising national security concerns, no matter the buyer’s nationality.

And, as evidence that the U.K. was already thinking beyond the traditional defense sector, included in a proposed list of target companies that could raise concerns were critical suppliers to emergency services, including the ambulance service, Mobley says. Current Prime Minister Boris Johnson’s government has said it intends to push forward a broadly similar bill this year.

Ricardel says that in the U.S. too there had already been increasing alarm about foreign investment, particularly by Chinese companies. But she said the focus of attention had been on potential intellectual property theft. Now, in the wake of the coronavirus, there would be more attention paid to supply chains and ensuring that in any future crisis, the U.S. has the equipment it needs.

In the CFIUS process, she says, the government has more tools than simply blocking a transaction. It can also impose what are called “mitigation measures” on the companies involved—mandating, for instance, that they keep certain manufacturing in the U.S. or putting in place stricter controls around the transfer of any intellectual property abroad.

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