Telecoms and national security rules – facing increased scrutiny on “foreign” investments

The context – protecting national interests in a globalised world

The combination of globalisation, which has given rise to a group of “new investors” including state-owned enterprises and sovereign funds from a diverse group of countries, and increasingly protectionist political agendas has led many governments to review their powers to regulate investments and, in many cases, bolster those powers. Foreign direct investment (FDI) controls – not necessarily aimed only at foreign or direct investments – have long been in place in countries such as the US, Canada, and Australia. Recent years have seen many other countries, including France, Germany, the UK and several smaller jurisdictions, follow suit and either adopt or tighten FDI regimes. FDI controls are an increasingly complex regulatory issue for operators to navigate and present a potential deal risk to strategic investments and the execution of transactions.

The focus – critical infrastructure including communications

Many FDI screening regimes are focused on protecting “critical infrastructure”, which typically includes communications infrastructure. In addition to this sector-specific focus, telecoms operators also need to consider whether their role in military, public services, or government supply chains could trigger FDI scrutiny. Another potential trigger may be the operators’ ability to access or control personal data conveyed across communications networks.

As such, many telecoms deals (including network sharing transactions) will likely be in scope for FDI screening and in order to get over the line, deal-makers will need to be prepared to navigate this complex area of law.

The problem - potential uncertainties in FDI screening

Navigating FDI screening is not straightforward. Foreign investment control is much more political in nature than other regulatory processes (such as merger control). Politicization tends to affect the transparency of the process and the predictability of the outcome.

Expansive and flexible scope

Merger-control thresholds tend to rely on a narrow set of specific factors such as turnover, asset value, or market shares. The jurisdictional tests for FDI controls are typically complex, detailed, and open to interpretation, giving authorities significant scope to decide that the relevant tests are met. In addition, certain FDI regimes affect transactions such as internal restructurings or licensing of knowhow or IP rights not typically within the purview of merger control. Also, even though lower-value deals may often escape merger control reviews, this may not be the case for FDI approvals. Parties therefore need to conduct careful analysis of the identity of all direct and indirect investors, the transaction structure and the sector to which a transaction relates so they can map the FDI rules of relevant jurisdictions onto their deals.

Voluntary or mandatory

In a number of jurisdictions (for instance the US, UK and Germany), the relevant authorities have broad powers to call in and review deals that are not subject to mandatory notification requirements. To mitigate the risk of unexpected review (and its potential impact on a deal post-completion), parties may wish to consider voluntary filings. They should not assume that only investors from higher-risk jurisdictions will face scrutiny. Recent examples in the UK have shown that US and EU buyers can be looked at just as closely.

Review period and timing

Foreign investment approvals can take significant time to secure and are typically subject to reviews that are less transparent and efficient than those in the merger-control area. As the review process is largely political, generally conducted directly by a core part of government as opposed to an independent arms-length regulator, predicting whether a deal may attract closer scrutiny can be challenging. Lengthy in-depth investigations may therefore be launched to review deals that seem unlikely to raise national security concerns. This impacts on any long-stop dates and conditionality.

The solution - structuring for success

The proliferation of FDI regimes, their relevance to telecoms deals and the complex assessments often required to navigate the regimes mean that devising an effective filing strategy as early as possible is key to mitigating the significant impact FDI screening can have on telecoms-related transactions.

Aside from assessing whether a transaction may trigger formal FDI approvals, parties must consider, particularly in deals which may attract scrutiny, whether the proposed structure and operation of the target entity post-completion will comply with the regulator’s substantive national security requirements and still satisfy investment objectives.

Protecting deal value

If national security concerns arise, FDI authorities will not hesitate to block a deal or require the unwinding of a deal closed without prior approval. Even if a deal is ultimately cleared, a protracted review process and remedies imposed by FDI authorities can undermine deal rationale for the acquirer. Remedies may affect the target’s decision-making process and ownership structures or restrict the commercial independence of the target business. When negotiating the acquisition agreement, in addition to conditions precedent, parties should consider matters such as long-stop date, information restrictions, cooperation obligations between the parties and obligations surrounding possible commitments or remedies.

Proactive engagement with stakeholders

Parties might also consider proactively engaging with the relevant authorities to pre-empt foreign investment concerns. Aside from offering voluntary undertakings, parties may want to consider how best to engage with government bodies to provide information and reassurance. FDI authorities engage extensively with other arms of government when reviewing transactions, so ensuring government stakeholders understand the benign nature of any transaction is important.

Exit strategy

FDI controls also have an impact on exit strategies, since they may narrow the pool of potential buyers for a business involved in activities perceived to be critical to national interest. This impact may be further complicated by the interplay with merger control – a sale to a domestic buyer may address foreign investment concerns but raise competition concerns that may attract separate scrutiny.

The bigger picture – increased requirements as regards security for telcos

The increased focus on FDI screening for telecoms deals sits alongside a recent uptick in policy-maker concerns about the security of communications networks. Governments worldwide have introduced tightened security requirements for communications networks, including prohibiting or limiting use of certain equipment in some jurisdictions.

For example:

The US has banned the sale and import of communications equipment from a number of Chinese companies due to security concerns.
In the EU, the European Electronic Communications Code includes detailed security requirements for providers of electronic communications networks.
The UK introduced similar rules in the Telecoms Security Act 2021.

Such requirements must also be borne in mind when structuring network sharing deals, including allocating responsibility for compliance with such rules, and apportioning risk of any breach of these regulations.

Authors

Jacqueline Vallat

Partner

London

Claire Barraclough

Associate

London

Liam Maclean

Senior Associate

Edinburgh