Global rise of foreign investment restrictions

Accelerated by COVID-19 and potentially the U.S. CFIUS experience, pharma, biotech and other healthcare operations feature prominently on most FDI watchlists and are likely to remain in focus, even as we (hopefully) move into the recovery period. 

In Europe, Member States have introduced a host of new measures over the past 12 months to implement the EU’s FDI Screening Regulation, which captures investments in a range of critical infrastructure, critical technology, critical inputs, and sensitive data.  Member States may share information with each other and with the EC about FDI notifications and investigations in their jurisdiction, which will make the EU a more strenuous environment for foreign investors in the years ahead.  

The UK Government has been working on implementing wide-ranging reforms that will establish a new screening regime for investments in the UK. The National Security & Investment (“NS&I”) Act, which received Royal Assent on 29 May 2021, will introduce the new mandatory and suspensory regime towards the end of the year.  The regime will radically overhaul the screening of foreign investments in the UK, and may even capture domestic investors.

The UK Government has established 17 sector definitions in relation to which a mandatory notification obligation may be required.  The “synthetic biology” sector is especially relevant to the healthcare industry and, as of the today, is expected to capture:

• The research, development and production of synthetic biology, where “synthetic biology” means the process of applying engineering principles to biology to design, redesign or make biological components or systems that do not exist in the natural world.  This includes, but is not limited to:
  • the design and engineering of biological-based parts of (i) enzymes; (ii) genetic circuits and cells; (iii) novel devices and systems;
  • redesigning existing natural biological systems;
  • using microbes to template materials;
  • cell-free systems;
  • gene editing and gene therapy;
  • the use of DNA for data storage, encryption and bio-enabled computing.
• The “formulation” of synthetic biology is also captured, but only where it enables the degradation of materials.
• The following activities should remain outside the scope of the mandatory regime:
  • general services and servicing not related to core synthetic biology, where ‘core’ means those activities without which experiments cannot be conducted, such as DNA synthesis, and cloning;
  • the use of microorganisms to remove harmful contaminants, pollutants, and toxins from the environment (known as bioremediation), including bio-based reagents that allow for testing for contaminants;
  • any approach used to gather clinical information for the purpose of making a clinical decision or making a diagnosis (known as diagnostics) but not the storage or ownership of sensitive human genetic information that enables the identification of an individual;
  • industrial biotechnology research, development and production using enzymes or organisms that have not been modified through the application of systematic biodesign techniques, including the approaches described under “Synthetic Biology” above;
  • the production of substances ordinarily consumed as food or used as feed, including any ingredient or component thereof;
  • gene therapy where it is used solely for the purpose of replacing missing or defective genes to restore phenotypes to achieve a therapeutic effect;
  • cell therapy where cells are modified by genetic engineering and then introduced into a patient to treat disease.

Until the NS&I Act takes effect, the public interest regime under the Enterprise Act 2002 continues to apply. Once adopted, the new UK rules will apply retroactively with effect from 12 November 2020.

Other jurisdictions expected to introduce regimes in 2021 include Hungary, Denmark, Belgium, Ireland and the Netherlands.  The Czech Republic’s regime recently came into force on 1 May.  Some regimes have already seen multiple amendments, with Germany counting 17 in relation to the Außenwirtschaftsverordnung (AWV).  The AWV now captures medicinal products and their starting materials or active substances (insofar as they are essential for health care according to the German Medicinal Products Act), medical devices for life-threatening and highly contagious infectious diseases as well as diagnostic agents for infectious diseases (cf. section 55 para. 1 sentence 2 numbers 9, 10 and 11 AWV new).  Such wide definitions mean that few pharma transactions will remain wholly outside the scope of the regime.

The fast-moving FDI landscape can make potential issues hard to spot in diligence.  Concerns can arise in relation to minor parts of the target’s business, such as small government contracts. This uncertainty should be carefully weighed in risk allocation mechanics and longstop dates because standstill obligations and sanctions for gun-jumping mean that transactions cannot close while agencies are investigating.

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