The Impact of Foreign Investment Control on Cross-Border M&A Transactions

In light of strategic foreign investments from a range of countries, an increasing number of jurisdictions are adopting foreign direct investment[1] (FDI) scrutiny mechanisms and measures in response to potential threats to national interests and security. Nobles' lawyers Alexander Weigelt, Volodymyr Yakubovskyy, and Denis Vergeles have prepared an overview of regulatory trends around the world, development of screening mechanisms in Ukraine, and their effect on cross-border transactions.

Foreign Investment Screening Regimes

In recent years, there has been a global tendency to implement new and stricter investment screening regimes. Given geopolitical factors, national security concerns and the need to protect strategically important industries, more and more EU and other market economy countries have been taking steps to enhance their ability to screen and review foreign investments for compatibility with national interests, and to prohibit investments that they perceive as hostile or unwanted. Those policies are largely instigated by the increasing volume of inward investments from authoritarian countries, mainly China.

Foreign investment control regimes have been implemented or tightened recently in the United States (­FIRRMA, 2018) and Australia (FATA, 1975; FATR, 2015). In 2019, the EU adopted Regulation (EU) 2019/452, which sets a legal framework for EU member states to address foreign direct investments. However, the decision on whether to set up a general screening mechanism or to screen each particular FDI on a case-by-case basis remains the sole responsibility of each EU member state.

As of May 2021, 18 out of the 27 EU member states had established national FDI screening regimes, and many of them are taking further steps to apply an even stricter approach to FDI. For example, Germany, where Chinese investors had acquired robotics and factory automation specialist KUKA in 2016, has since repeatedly revised its FDI control regime, with the latest strict rules applicable to all transactions signed after 1 May 2021.

As regulation of FDI flow has become common practice in many jurisdictions with the intention of protecting national and security interests, there is growing concern regarding its chilling effect on cross-border M&A activities. FDI screening regimes typically provide for assessment and investigation procedures, require authority approvals, set conditions, thresholds and other barriers to foreign investments. The growing level of complexity of regulations can adversely affect the attraction of FDI and discourage the readiness of investors to subject themselves to complicated screening measures and procedures that are costly and time-consuming. This is particularly true for cross-border transactions that require approval by more than one national screening authority. As a result, FDI screening regulation may cause substantial discouragement and uncertainty for potential foreign investors contemplating multijurisdictional M&A deals.

FDI Screening Regime in Ukraine

The global trend of increasing FDI scrutiny is particularly challenging for Ukraine: On the one hand, external political and security threats require that Ukrainian authorities carefully monitor investment from abroad and, if necessary, prohibit it. On the other hand, the Ukrainian economy depends a great deal on foreign investment for its further development.

At present, no special legislation exists in Ukraine that regulates the screening of international investments of strategic importance from the perspective of state security. A quasi-control function is partially performed by the Antimonopoly Committee of Ukraine, which exercises FDI control on a case-by-case basis in the context of concentration procedures.

The Motor Sich investment case has outlined deficiencies in FDI regulation, and triggered moves towards the development of a comprehensive, more consistent foreign investment screening regime. The frustrated acquisition of a controlling stake in Motor Sich, one of the world’s largest producers of engines for helicopters and planes by Chinese investors, has demonstrated the lack of legal regulation in Ukraine related to strategically-important sectors of the national economy. It has also shown the destructive potential of sensitive foreign investment for international relations.

Subsequently, the government of Ukraine has developed a draft bill that foresees the establishment of a foreign investment screening regime for the purpose of protecting Ukraine`s national security. This Draft Bill No. 5011 On Foreign Investment in Commercial Entities of Strategic Importance for the National Security of Ukraine of 3 February 2021 intends to implement foreign investment impact assessment systems and prevent excessive foreign capital in industries of strategic importance, in light of best international practices and Regulation (EU) 2019/452. Draft Bill No. 5011 is currently being considered by the Ukrainian Parliament. Once adopted, this law will not only regulate the mechanism of attracting foreign investments in enterprises of strategic importance but also release the AMCU from its uncharacteristic quasi-control functions in this area.

Key Aspects of Ukraine’s Proposed FDI Screening Regime:

  • Notification and approval. Foreign investment in strategic industry enterprises will be possible only upon notification and approval of transactions underlying such investments by the newly-established Interagency Commission on Foreign Investments Impact Assessment (Commission) after an assessment (screening) has been carried out.

  • List of strategically important and critical industries for the purposes of FDI screening. Draft Bill No. 5011 provides an extensive list of more than 30 industries that are considered strategically important, including encryption technology, space, nuclear energy, production and sale of weapons and military equipment, extraction of mineral resources, etc. The government will separately determine the monitoring procedure of enterprises in such industries for assessment of FDI impact and their compatibility with the national security interests of Ukraine.

  • List of transactions subject to scrutiny. Draft Bill No. 5011 introduces seven groups of transactions involving entities in strategic spheres that will be subject to screening.

  • Two-stage procedure. The screening procedure will be divided into two stages: (i) Review of the investor’s request for FDI by the Ministry of Economy of Ukraine, which shall determine within 10 days whether the foreign investment requires further screening by the Commission; and (ii) Screening by the Commission (if deemed necessary by the Ministry of Economy), basically assessing the FDI’s potential impact in accordance with criteria to be further introduced by the government. Upon completion of the said screening, the Commission will either approve or deny the intended foreign investment. In the latter case, the potential foreign investor must refrain from any further actions related to the investment.

Procedurally, the current text of Draft Bill No. 5011 links the foreign investment screening mechanism to the AMCU’s existing control mechanism of mergers (concentrations). In particular, the AMCU will only issue its merger (concentration) approval if the Commission has first cleared the respective FDI.

Ukraine’s attempt to establish systematic state control over the flow of foreign investments into strategically important industries is considered crucial for national security. However, the screening regime foreseen in Draft Bill No. 5011 requires further sophistication. For example, the following are necessary: precise screening criteria; realistic screening timelines (both for state and non-state-owned assets); clear powers of state authorities in FDI control measures; pre-court legal remedies to challenge negative decisions of the Commission (besides going to court); streamlining assessment measures with other Ukrainian laws, etc.

Finally, there is a considerable risk that insufficient implementation tools under Draft Bill No. 5011 may significantly impede foreign investment in Ukraine. Therefore, it is essential to balance out the introduction of restrictive FDI screening instruments with the creation of favorable conditions and opportunities for unproblematic foreign investments. The recent adoption of the Law of Ukraine No. 1116-IX On State Support for Investment Projects with Significant Investments in Ukraine on 17 December 2020 is a step toward reaching this objective.


The global trend of introducing and expanding foreign investment screening regimes requires potential investors in cross-border M&A deals to contemplate additional aspects, timelines, and measures required by applicable FDI screening rules in all affected jurisdictions. Increased attention needs to be paid to the due diligence and deal structuring stages so as to address regulatory risks. To minimize deal risks and avoid frustrated costs, potential investors will need to involve specialized legal advisors at an early stage.

In a best case scenario, effective FDI screening mechanisms can, if reasonably implemented, provide foreign investors with consistent rules, predictable procedures and legal certainty for their investment decisions, while states are able to protect core national interests.

[1] Concepts of “foreign direct investment screening regime”, “foreign investment control”, “foreign investment screening” are used interchangeably in this article, depending on the jurisdictions where they are applied.


This publication is for informational purposes only. If you would like to learn more or seek legal advice, please contact one of the following or your usual Nobles contact:

Alexander Weigelt (Partner), Volodymyr Yakubovskyy (Partner), Denys Vergeles (Counsel).