An update on increased government intervention in European M&A deals
By Dr. Regina Engelstädter, Ronan O’Sullivan and Dr. Jan Gernoth
Corporate Department,Paul Hastings (Europe) LLP
Europe has long been described as a liberal market. Recently, however, a number of high-profile mergers and acquisitions involving foreign investors have been called into question by politicians, and the involvement of politics in the economic arena seems to have increased. Examples include the legislative reactions of the French government toward the proposed takeover of Alstom S.A., which culminated in the passing of the highly protectionist Foreign Investment (Preliminary Approval) Order1, dubbed le Décret Alstom by the French media, in May 2014. Cross-border M&A deals have seen increased scrutiny, and politicians and other stakeholders have exerted more influence on the outcome of such deals, adding another layer of complexity to their planning and execution, particularly at the higher end of the market. And not just non-European purchasers have had to face this additional scrutiny.
Increased economic patriotism drives FDI policies
The United Nations Conference on Trade and Development has been monitoring the global foreign direct investment (FDI) regulatory environment since the beginning of the 21st century. The UN’s World Investment Report 2014 points to a pronounced tightening of the FDI regulatory framework over the last decade and a half. By and large, though, FDI policies still remain fairly liberal and open; national policy is very much shaped by—and reacts to—domestic trends and emotions, and regulation is used by governments as a key tool for protecting strategic national interests. In Germany, for example, the Foreign Trade and Payments Act (Außenwirtschaftsgesetz, or AWG) has been amended several times in recent years in response to public pressure. At the end of 2008, as the world found itself in the midst of a financial and economic crisis, several politicians in Germany saw a chance to push for reforms to the AWG in order to position themselves as “the guardians of German companies”2 who would protect the German economy from the growing influence of sovereign wealth funds and the “swarms of locusts” that many felt were responsible for the economic crisis in the first place. It was claimed that Germany was “under attack” from foreign countries “looking to buy up everything in sight.”3 The 13th act amending the AWG introduced provisions giving the German government the power to investigate and veto individual foreign-backed takeoversof German companies in the event such a takeover was deemed to pose a threat to “public order or the security of the Federal Republic of Germany.”4
Public opinion makes or breaks deals
As a country that has seen its fair share of inward FDI in recent years, the UK has actively pursued a deregulated agenda since the Thatcher era. However, even traditionally very liberal markets are not immune from political opposition. In 2009, the hostile bid launched by the U.S.-based company Kraft Foods, Inc. to acquire the iconic Birmingham-based chocolate producer Cadbury Plc generated a huge public outcry, complete with fears of union rebellions, significant job losses and factory closures. After five months of wrangling and tense negotiations, including repeated requests for the CEO of Kraft to appear before a parliamentary select committee, the deal was finally concluded. However, the political backlash had left its mark. Following the acquisition, the UK’s Panel on Takeovers and Mergers, an independent body established in 1968 to issue and administer the City Code on Takeovers and Mergers (the Code) and to supervise and regulate takeovers and other matters to which the Code applies, undertook a review of the Code in light of possible risks posed to UK economic and public interests by the acquisition of UK companies. The review led to the amendment of the Code that included provisions aimed at strengthening the hand of the target company, in particular, especially with regard to the disclosure of a purchaser’s post-completion intentions and enforceability of any precompletion commitments. The UK government also stated that it would “take a greater interest in mergers and acquisitions” 5 in the future. This intention became a reality in 2014 when, for instance, the secretary of state for business suggested the consideration of new legislation imposing “tough financial penalties” to prevent companies from reneging on premerger promises. 6 The most recent examples clearly demonstrate that investors cannot rely on purely economic arguments to realize their objectives. Public and political opinion indeed has a direct impact on the regulatory environment.
The impact of economic patriotism on M&A transactions
Despite this correlation, investors must remember that the general tightening of the FDI regulatory environmentdoes not necessarily equate to an overall rejection of all types of FDI. Indeed, the increased levels of regulation are merely indicative of a more “nuanced approach,” 7 whereby governments use FDI policies to pursue certain political objectives or accommodate the concerns and pressures of civil society. Much of the new regulation in Europe has been a response to concerns about investment from emerging economies, including Russia, the Middle East and China. In fact, a recent study by Nathan Jensen and René Lindstädt entitled “Globalization with Whom: Context-Dependent Foreign Direct Investment Preferences” found that individuals also rely on “non-economic contextual heuristics” 8 to determine the impact of foreign-backed takeovers while looking in particular at the investor’s country of origin. With such reactionary investment policies driven by public opinion, the European Union must be careful to ensure that the different responses of individual member states do not lead to a so-called “regulatory race to the bottom,” 9 in which the interests of one member state are threatened by the actions of another. A prime example of this would be a case in which an investor who has been denied access to one country on the grounds of national security is welcomed in another thanks to a more liberal FDI framework. With 27 different regulators, this is an almost logical certainty. Recent political changes and business headlines give rise to the impression that prime acquisition targets in certain jurisdictions are now out of reach. Nevertheless, it would be naive to assume that this is a new phenomenon. Politics has always played a role in the takeover of large corporations. Political influence on the acquisition of other, non-blue chips remains limited. While there are, indeed, a number of formalities to be observed in many countries, such as notification of the proposed takeover to the relevant regulatory authorities, the risk that a transaction will be blocked is very small. This is particularly true in the case of takeovers involving EU and U.S. corporations. Moreover, recent transactions involving Chinese investors in Europe and the United States (for example, the acquisition of a 25 percent stake in the German forklift and industrial truck manufacturer KION Group AG by Weichai Power Co., Ltd, a subsidiary of the Chinese stateowned industrial giant Shandong Heavy Industry Group Co., Ltd, or the $4.7 billion takeover of U.S. pork producer Smithfield Foods, Inc. by its Chinese competitor Shuanghui Group, now WH Group) have shown that politicians and regulators adopt a fairly liberal, nonprotectionist approach to such M&A activities.
Conclusion and outlook
Inevitably, it will be necessary to consider the potential political impact of any cross-border transaction—especially one within a strategically important sector. Engaging in appropriate PR and lobbying activities early on can play a crucial role in ensuring that a deal goes ahead successfully. Nevertheless, Europe is still seen as a liberal market in which political interference is relatively limited and often viewed as more of a distraction than a deal-breaker. In addition, it is expected that the impact on small and midsize M&A transactions will not increase. Therefore, investors should be careful to remember that the shareholders are the real decision-makers.