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Coping with Covid-19 - the Business Response

Will Covid-19 crisis boost M&A opportunities?

by Weronika Achramowicz radca prawny (legal counsel admitted in Poland), Partner at Baker McKenzie
Header achramowicz weronika kolor new


It sounds odd, but many market experts suggest a steep increase in post-pandemic or pandemic-related acquisitions. The deal hunt is likely to be one of three types:

  • Swift takeovers of short-in-cash or insolvent businesses representing growth potential by cash-rich financial investors, or industry buyers aiming to acquire complementary businesses, ensuring the supply chain remains solid, or just taking a chance in taking over a limping competitor

  • Telecoms, cybersecurity and, generally, online/digital industry

  • Pharmaceuticals and healthcare-related assets or cutting-edge new technologies.

Anticipating this, the European Commission has issued guidance to member states concerning foreign direct investment (FDI) from third countries into the EU and the protection of Europe’s strategic assets. The document, issued in March, states specifically that a result of the Covid-19 outbreak could be an increased risk of attempts to acquire healthcare capacities or related industries such as R&D centres or technology via FDI, and that member states need to stay on high alert and prevent such buyouts by implementing comprehensive screening mechanisms.

The Commission's call for action precedes the full application of Regulation (EU) 2019/452 (FDI Screening Regulation) that began to enter into force 10 April 2019, and will apply fully from 11 October 2020. It has, however, been welcomed by many EU countries. France, Italy and Spain have already started working on legislation aimed at implementing the guidance.

Although not officially said, one common perception is that the CFIUS-like EU FDI-screening mechanisms target Asian investors, in particular the Chinese. CFIUS stands for the Committee on Foreign Investment into the United States. It oversees the national-security implications of foreign transactions and recently became famous for blocking the Broadcom deal with Qualcomm, the US tech giant, or Chinese Alibaba's attempt to buy the US money-transfer company MoneyGram.

Regulation 2019/452 sets out its areas of interest (‘deals subject to a potential screening mechanism’) in broad manner. The bottom line is security or public order. Yet in determining whether an FDI is likely to affect security or public order, member states and the Commission may consider its potential effects on the following:

  • Critical infrastructure, physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure

  • Critical technologies and dual-use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies

  • Supply of critical inputs, including energy or raw materials, as well as food security

  • Access to sensitive information, including personal data, or the ability to control such information

  • Freedom and pluralism of the media

Interestingly, one of the hallmarks that member states should, under the Regulation, take into account in their screening procedures is whether a foreign investor is directly or indirectly controlled by the government of a third country, including through the ownership structure or significant funding. This may put a large number of state-backed private-equity funds or sector investors off their pursuit of European targets.  

At the same time, particular member states have taken different approaches to the new FDI screening procedures. Some tend to strictly monitor where the funds come from, whilst others apply a more relaxed approach, welcoming investors regardless of their country of origin, which may result in a new criterion in investors' potential assessment of targets. A new item on investors’ investment checklists could be to find out what FDI screening mechanisms might apply and prepare for the same at the outset of the deal.

Poland, for example, has notified to the Commission an FDI screening mechanism based on the Act on Control of Certain Investments of 24 July 2015, which applies to both national and foreign entities. There are, however, rumours are that the government has been working on a new FDI screening framework.

Businesses that are protected under the Act are listed in a regulation by the Council of Ministers. Currently there are only nine such protected entities, but that list may be changed overnight, depending on what the Polish government finds appropriate. A number of other sector specific restrictions may also qualify as an indirect FDI screening mechanism. The only FDI rule that is openly addressed to foreign investments in Poland, is, however, the one that applies in the direct acquisition of real estate or shares in companies holding real estate.

Poland may serve as an example of a wider political trend though. In times of crisis and uncertainty, chances are that governments will use 'legal security values' to any investment regardless of where an investor comes from, to protect what it sees as its national interest. To be fair, such protection may be justified and beneficial to all stakeholders, provided that it is done wisely and transparently, without leaving businesses behind.

Weronika Achramowicz heads International Commercial & Trade and co-heads Mergers & Acquisitions in the Baker McKenzie Warsaw Office. Weronika advises on M&A and broader corporate and commercial strategy matters, with a focus on businesses operating in complex global environments. She leads clients from the early stages of their investments, through commercial alliances, deal negotiations and completion to post-acquisition integration. She also actively supports Polish businesses expanding abroad, focusing on FDI.

Legal facts in brief:

  • the EU introduced a new law (Regulation (EU) 2019/452) that established a framework for screening FDI into the EU (see it here); the Regulation entered into force on 10 April 2019 and will fully apply from 11 October 2020

  • the list of screening mechanisms implemented by particular members states can be reviewed here

  • anticipating a steep increase in interest in Covid-19 related acquisitions in healthcare capacities, the Commission issued guidance to member states urging them to set up FDI screening mechanisms; the Commission's communication can be accessed here

More in Coping with Covid-19 - the Business Response:

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