Beyond the usual suspects; the new era of universal FDI scrutiny

Whilst Liberation Day tariffs and Greenland's sovereignty have grabbed headlines, the trend since these regimes were introduced has been one of consistent expansion. What began as a targeted effort to protect defence and critical infrastructure has grown into a broad mandate covering activities in sectors ranging from transport to synthetic biology and critical minerals.

The UK’s National Security and Investment Act (NSIA) is no longer a new hurdle; it is a well-trodden feature of the transaction process. In the 2024/25 reporting year, the Investment Security Unit (ISU) handled 1,143 notifications (a 26% increase from the previous year) and issued 56 call-in notices to enable a more detailed review (a 36% increase).

Crucially, the risk for investors is shifting from considering the low risk of prohibition to the potential impact of intervention. While blocked deals remain rare (although official statistics don't capture transactions that never leave the board room or those in which one or both parties withdraw due to NSIA concerns) and typically involve adversarial states, "friendly" acquirers (including from the US) are increasingly subject to UK Government orders imposing behavioural remedies.

Recent orders imposed on US acquirers in the aerospace and semiconductor sectors have mandated the maintenance of UK-based R&D, strict continuity of supply guarantees, and prior notification of any future asset disposals. There is also perhaps the beginning of a trend towards greater use of economic commitments (involving job guarantees, continued investment in local infrastructure, or participation in national economic projects) which could serve to balance national security needs with economic growth imperatives, fostering an environment where foreign investment bolsters rather than compromises the national interest.

The EU is moving towards a more harmonised FDI review model. The revised EU FDI Regulation mandates that all 27 Member States will need to maintain active screening mechanisms across a list of defined sectors and will explicitly bring intra-EU transactions within the scope of review if the acquiror is ultimately controlled by a non-EU entity (aimed at preventing the circumvention of screening rules). Whilst all Member States will still retain individual discretion over their final screening decisions, the revised framework aims at increased consistency across national mechanisms.

France's decision to block US-based Flowserve's proposed acquisition of Velan underscored the regulatory philosophy that the concern is not necessarily the acquiror's intent, but rather the potential for a third-party government to exert influence over critical European infrastructure (in that case the production of valves for nuclear submarines and power plants). Similar considerations have been borne out in recent challenges to NSIA divestment orders before the UK courts.

In practice we are seeing longer gap periods, more FDI-specific condition precedents and complex "hell or high water" undertakings, as well as more parties willing to test the waters on NSIA / FDI clearance prior to even entering into a transaction agreement.

This shift has moved FDI review from a back-office compliance check to a critical path item that can dictate not only the timing but also the viability of a deal.

Whilst we do not expect dramatic changes in approach due to recent events, the direction of travel is clear and outright clearance cannot simply be expected, even where deals do not involve investors based in or linked to potentially 'hostile' countries. As governments prioritise resilience and seek to protect against the risk of vulnerability to leverage by other states, the focus on scrutinising all types of buyers has sharpened.

Investors must consider FDI risks at the early stages of a transaction. Even where a block is unlikely, if the target is active in a sensitive/critical sector then behavioural remedies (such as maintaining a headquarters or manufacturing in a high-cost jurisdiction) can materially impact the post-completion value story. For financial sponsors, they will also need to consider the potential impact of these regimes on the viability of potential future buyers on an exit.