Investment screening put to the test of the Covid-19 Pandemic: typology, legality and externality

ABSTRACT

The Covid-19 Pandemic has introduced or revived a concern in the foreign direct investment (FDI) context that was less emphasized pre-Pandemic, namely public health. This article discusses the typology of Covid-19 related FDI screening, expounds on the legality of these measures in the context of both national investment law and international investment law, and identifies the potential negative externalities to foreign investors and to the host state. Newly promulgated FDI screening measures intensify governmental intervention and scrutiny in cross-border takeovers in the health sector and beyond to protect domestic companies from being taken over by predatory foreign buyers. FDI screening during Covid-19 has become more comprehensive and inclusive in its scope than what was already considered a system capable of excessive and arbitrary use pre-Pandemic. FDI screening on grounds of public health may be justified for its legality under both national and international investment law, nonetheless certain conditions need to be satisfied. The negative externality of FDI screening during Covid-19 pertains to a concern that, if applied aggressively in practice, FDI screening might potentially result in a deterrence effect on the cross-border capital flow that is much needed for market revival after a global economic shutdown.

KEYWORDS:

• Covid-19 Pandemic
• foreign direct investment screening
• international investment law
• national security
• public health

I. Introduction

The global outbreak of the Covid-19 Pandemic since the first quarter of 2020 is far more than a mere health crisis. The global economy is suffering from stagnation and an economic recession may be confronted. As a barometer of the world economy, global FDI is facing a dramatic decline as all stakeholders, i.e. investors, regulators, recipient states, and home states, are navigating through uncharted territory. According to the United Nations Conference on Trade and Development (UNCTAD), global FDI flows dropped by 35 per cent in 2020 compared with that in 2019, which brought FDI flows back to its 2005 level.¹ The most drastic decline took place in developed countries, where FDI fell by 58 per cent compared to that pre-Pandemic.² Empirical studies have been done to demonstrate the causality between Covid-19 measures and declined FDI flows.³

To tackle the devastating consequences of the Pandemic in FDI, national investment policies have been evoked aggressively. Also according to UNCTAD, the number of foreign investment laws and policies that are adopted in 2020 by states rose to 152, which is a 40 per cent increase by 2019.⁴ Fifty-nine per cent of those regulatory changes in domestic law pertained to investment liberalization and promotion, whereas 41 per cent of them involved investment regulation and restriction.⁵ In the event of a depressed market, capital liquidity is arguably more desirable than ever for reviving the economic growth. Consequently, states have adopted measures that attract and facilitate newly proposed or existing FDI.⁶

In addition to investment laws and policies which states adopt to facilitate and encourage FDI during times of crisis, measures that are restrictive in nature, namely, reinforced FDI screening measures on the grounds of national security or other analogous alternatives, have been implemented as well. Foreign investment screening in a given state is anything but novel. The instrument was first materialized by the Committee of Foreign Investment of the United States (CFIUS), an agency that was established in 1975, and is mandated to ex-ante investigate, review, and if necessary, block foreign investment projects on the ground of national security. The system has been subsequently emulated by many other states worldwide. The outbreak of the Covid-19 Pandemic has resulted in a trend of ‘slowbalization’ and de-globalization: a retreat from global economic integration.⁷ The Pandemic has exposed fears of policymakers that the global supply chain is vulnerable to abruptly increased demands for critical goods and services such as medical devices, that international cooperation can be unreliable and fragile, and that global economic integration also means economic inter-dependence.⁸ As a result, national security, including public health concerns, reinforces the rationale for protectionist movements, rendering cross-border trade, investment, data, services, technology and so forth to emphasize domestic sourcing.⁹ Hence, a strengthened FDI screening on the ground of public health in a number of host states’ investment policies is manifested afoot. By the end of 2021, 36 countries in the world have adopted FDI screening on the grounds of national security or its alternatives, the majority of which are developed countries.¹⁰

This article examines a juxtaposition of prominent issues concerning FDI screening relating to the Pandemic, namely its typology, legality and negative externality. First, this article identifies and compares four approaches which states have adopted to expand the scope and application of their existing FDI screening mechanism during the Pandemic, namely stand-alone and advisory policy guidelines, lowered quantitative threshold triggering a review, expanded sectors subject to review, and intensified scrutiny over investment of a specific origin. A host state may have adopted one or several of these four approaches, either of a temporary or permanent nature, to safeguard the domestic availability, capacity, and productivity of the health sector, or to protect other strategic sectors from predatory foreign buyers in times of a depreciating stock market.

Second, the legality of public health concerns is also examined. One may argue, within the national FDI screening framework of a given jurisdiction, and as an exercise of sovereign power, that a host state has the freedom to admit FDI in ways it deems appropriate, notwithstanding the different languages used as the legislative objectives in different states. Comparing the national FDI screening mechanisms in Australia, the EU, Germany and Canada as examples, this article contends that public health prima facie do not exceed the semantic reach of security-related concerns of FDI screening in national law. On the other hand, questions have been raised regarding whether national FDI screening measures on the ground of public health may constitute a violation of international investment agreements (IIAs) of which a host state is a contracting party. This might particularly be the case when FDI screening applies to also established investment projects, where foreign investors may raise claims on a number of treaty breaches of investment protection while the respondent state may raise several defenses either at the jurisdiction or merit stage of investor-state arbitration (ISA).

Last but not the least, this article argues that FDI screening during Covid-19 has become more comprehensive and inclusive in its scope than FDI screening pre-crisis, which was already considered a system capable of excessive and capricious use. This leads to an argument that, if implemented aggressively in practice, Covid-19-related FDI screening measures may potentially impose an added deterrence effect on cross-border capital flows which are much needed for a global economic revival.

To build up these arguments, this article engages in both descriptive and normative analysis. The article first provides an inventory of existing FDI screening measures in light of the Pandemic, which then leads to an evaluation of their legality in the context of both national and international investment law, and eventually a critical appraisal on the potentially negative externalities to investors as well as the host economy. Furthermore, a comparative approach is adopted throughout when discussing FDI screening in the representative jurisdictions, aiming at unveiling their disparities, and more importantly, the collective challenges such FDI screening schemes entail with respect to their legality and potential implications. Last but not the least, this article attempts to manifest a possibility of rising investor-state disputes where national FDI screening measures are challenged by investors amid and post-Covid-19.

This article aims to contribute to international investment law by filling a gap in the existing literature. In recent years much light has been shed on FDI screening on the ground of national security in domestic investment law, or separately, on international investment and trade law with respect to state measures alleging to protect public health or to tackle health emergencies such as the Covid-19 Pandemic. There is, however, in general a void of discussion on whether and how national and international investment law are compatible with each other when it comes to FDI screening on the ground of public health, exemplified by the Covid-19 Pandemic. This article attempts to find a state’s margin of appreciation in screening FDI for public health considerations under both domestic and international law regimes.

The remainder of this article is arranged as follows. Section II discusses the typology, and provides an inventory, of newly established FDI screening measures amid the Covid-19 Pandemic in multiple jurisdictions. Section III elaborates on the definition of public health in the FDI context in national law, in order to examine the legality of public health concerns within the FDI screening framework of a given jurisdiction. Following Section III on the issue of legality, Section IV further expounds on public health concerns in international investment law and arbitration, in order to unveil whether and to what extent national FDI screening measures can be challenged by foreign investors at ISA and how the respondent state may counter these investor’s claims. Section V presents the possible negative externality of FDI screening during the Pandemic. Section VI concludes.

II. FDI screening during the Covid-19 Pandemic: a roadmap

The Covid-19 Pandemic has resulted in the promulgation of new measures, in addition to existing FDI screening mechanisms in multiple jurisdictions, which intensify governmental intervention and scrutiny in cross-border takeovers. The aim is to safeguard domestic availability, integrity, and productivity of the health sector such as health care, health-related R&D, pharmaceuticals, and medical supplies. Other host states have revised national FDI screening regimes for heightened scrutiny to sectors beyond public health and to other industries deemed critical or strategic to protect those domestic companies from being taken over by hostile and predatory foreign buyers in times of a depreciating stock market and a declining economy. In principle, these two objectives are achieved by the following four different approaches.

A. Promulgating stand-alone and advisory policy guidelines in addition to existing FDI screening

This approach is characterized by the promulgation of stand-alone and independent policy guidance in addition to existing FDI screening mechanisms, providing directions and ways in which the existing system can be applied to cope with new threats in association with the Pandemic, but still within the legal and institutional framework of existing FDI screening mechanisms. This approach is exemplified by the EU and Canada.

A foreign investment review regime at the EU level has entered into force, envisaged in the EU’s Regulation of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (Regulation 2019/452).¹¹ Following an 18-month probationary period, the EU Regulation becomes applicable since October 2020.¹² Regulation 2019/452 specifies three regulatory objectives: harmonization, cooperation and coordination, and EU screening.¹³ The harmonization objective would allow Member States to ‘maintain, amend or adopt’ investment review mechanisms in their national law on the grounds of ‘security or public order’, but only in a way that is consistent and pursuant to the substantive and procedural requirements set forth in the Regulation.¹⁴ The cooperation and coordination objective involves the Member State’s obligation to notify the Commission and other Member States of any takeovers proposed by non-EU (third-country) investors under the review of that Member State; the Member State’s obligation to file annual reports to the Commission; and the establishment of contact points between each Member State and the Commission for the implementation of Regulation 2019/452.¹⁵ Finally, if the Commission considers that a takeover by a non-EU investor is likely to affect projects of the Union interest on the grounds of security or public order, the Commission may issue an opinion to the Member State in which the investment is made or planned. The Member State in question ‘shall take utmost account of the Commission’s opinion and provide an explanation to the Commission if its opinion is not followed’.¹⁶

On 25 March 2020, the Commission published a Communication as Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation 2019/452.¹⁷ The Commission opines that ‘(i)n the context of the Covid-19 emergency, there could be an increased risk of attempts to acquire healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance developing vaccines)’ via non-EU takeovers.¹⁸ Therefore more vigilance should be allotted to ensure that such non-EU takeovers do not impose a detrimental impact to the public health of the EU. The Commission thus calls upon Member States to ‘make full use’ of FDI screening in national law, and to ‘take fully into account the risks to critical health infrastructures, supply of critical inputs, and other critical sectors’; and those Member States not yet equipped with FDI screening to ‘set up a full-fledged screening mechanism … to address cases where the acquisition or control of a particular business, infrastructure or technology would create a risk to security or public order in the EU … ’.¹⁹ Notably, this very same approach has been adopted during the Russia-Ukraine crisis, whereby the Commission issued another Communication of Guidance that calls for heightened scrutiny on Member States over Russian and Belarusian investments to the EU on grounds of security and public order.²⁰ The Commission’s Communications therefore serve as a supplementary policy document in addition to Regulation 2019/452 that functions as secondary EU law concerning matters on FDI screening. The Commission’s Communications as Guidance do not create new binding rules and do not surpass rights and obligations already envisaged in Regulation 2019/452. The Commission’s Communications merely ‘call for’ Member States to take actions in response to the crisis on a voluntary basis, instead of requesting or mandating Member States to act as such.

Another example in this category is Canada. The Canadian government on 18 April 2020 announced its Policy Statement on Foreign Investment Review and Covid-19, which explained how Canada would apply its FDI screening under the Investment Canada Act (ICA) during the Pandemic.²¹ The government statement clarified that it would not introduce any new or expanded regulatory competence beyond the currently effective screening framework in the ICA, but that the Canadian government would now only ‘apply enhanced scrutiny’ to acquisitions of a Canadian business subject to review ‘until the economy recovers from the effects of the Covid-19 Pandemic’.²² The Policy Statement explained concerns that business devaluations as a result of stagnant economic activities during the Pandemic ‘could lead to opportunistic investment behaviour’; and takeovers proposed by state-owned enterprises ‘may be motivated by non-commercial imperatives that could harm Canada’s economic or national security interests, a risk that is amplified in the current context’.²³ The Statement therefore proposes to ‘scrutinize with particular attention’ foreign takeovers ‘of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the Government’, and to ‘subject all foreign investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments, to enhanced scrutiny’ within the existing framework of the ICA.²⁴

B. A lowered quantitative threshold that triggers a review

Another approach taken by several host states to intensify FDI screening during the Pandemic is an interim or permanent modification of existing FDI screening mechanisms, which substantively and procedurally creates new obligations to investors.

Australia, for example, has announced significant temporary changes to its foreign investment review framework. On 29 March 2020, the Treasurer announced Temporary Measures in Response to the Coronavirus, which provisionally adjust the monetary threshold for determining whether a foreign takeover of an Australian entity falls within the purview of ex-ante approval, from the previous highest 1192 million AUD to now zero.²⁵ The reduction in monetary threshold does not affect the shareholding percentage threshold that works in tandem with the former, ranging from any percentage in land acquisition to 20 per cent or above of an Australian business, depending on the sector of the target company involved and the identity of the investor. Another significant modification in the temporary measures is an extended timeline for government approval, from the previous statutory 30-day timeframe to the current maximum of six months to complete the full procedure by the Foreign Investment Review Board (FIRB).²⁶ On 1 January 2021, the Foreign Acquisitions and Takeovers Act 1975 was revised to permanently solidify those temporary adjustments of a lowered quantitative threshold that triggers a review, among other significant amendments.²⁷

On 29 April 2020, the French Minister for the Economy and Finance announced a temporary lowering of the threshold that triggers a review, from 25 per cent to 10 per cent of acquired voting rights in a French company as the target in prescribed sectors, applicable only to non-EU/EEA²⁸ investors.²⁹ The interim measure had entered into force in the second half of 2020 and was applicable until December 2020, in order to protect those French companies in listed sectors with a dispersed ownership structure from destabilizing minority shares transactions by predatory investors.³⁰

C. More extensive coverage of sectors subject to review

In addition to a temporary lowering of thresholds triggering a review, the French government also introduced a permanent and formal modification to its FDI screening regime that widens the scope of sectors subject to review ex-ante. On 30 April 2020, a Decree was signed by the Minister for the Economy and Finance which adds biotechnology to the list of sectors subject to review.³¹ The law governing the French FDI screening mechanism was last updated in December 2019, which, amongst other major modifications, expanded the sectors and activities subject to review to cover a much wider scope compared with previous versions, with a total of 23 categories, including already the protection of public health and critical technology as two thereof.³² The inclusion of biotechnology as a sub-category in critical technology to the FDI screening procedure is explained by the Minister for the Economy and Finance as a way to give ample regulatory room for manoeuvre to the French government to assess transactions in the biotechnology industry. Had it not been explicitly included in the statute, the protection of biotechnology would be too far-reaching and prospective to be justified on the ground of public health.³³

Germany has introduced official amendments to its two major governing laws on FDI screening, namely, Foreign Trade and Payments Act (AWG), which was last modified on 10 July 2020,³⁴ and Foreign Trade and Payments Ordinance (AWV), which was last modified on 25 April 2022.³⁵ The AWV was modified several times since the outbreak of the Pandemic in 2020, from the onset the Federal Ministry for Economic Affairs and Energy (BMWi) made clear in an Explanatory Note accompanying the amendment draft to the AWV that the changes were mainly Covid-19 driven and focused on the health sector.³⁶ The amended AWV, amongst other major modifications, expands the sectors subject to ex-ante notification requirements to 27, whereby a non-EU/EFTA³⁷ investor aims to purchase 10 or 20 per cent of voting rights in a German business, depending on the sectors involved.³⁸ Prior to this amendment, transactions in sectors subject to ex-ante notification already encompass critical infrastructure, in which public health is a sub-category. Pursuant to the amendment, sectors subject to ex-ante notification requirements and with relation to the health industry now include: personal protective equipment (such as respiratory masks), medicinal products that are essential for ensuring the health care of the population, medical devices for life-threatening and highly infectious diseases, and in-vitro diagnostics for life-threatening and highly contagious diseases.³⁹

In the same vein, the Italian government on 8 April 2020 enacted Decree No. 23/2020, amending Decree No. 21/2012 enacted on 15 March 2012, which first introduced the so-called golden powers of the Italian government in sectors of national defence and security, and other strategic sectors such as energy, transportation and communication.⁴⁰ The ‘golden powers’ bestow on the government special powers to protect the ownership structure of strategic Italian companies, such as the power to oppose, or to impose conditions on, certain proposed acquisitions of a target Italian company.⁴¹ The newly promulgated Decree No. 23/2020 has extended these golden powers to more strategic sectors, which are defined pursuant to Article 4.1 of the EU Regulation 2019/452, including critical infrastructure (where health is a sub-category),⁴² critical technologies and dual use items, supply of critical inputs, access to sensitive information, and the freedom and plurality of the media. Both foreign EU investors and foreign non-EU investors are now subject to notification requirements to the Italian government prior to acquiring an Italian company in above strategic sectors.⁴³

D. Heightened scrutiny to investors of specific countries

This category is rare and the only existing example is India. The Indian government on 17 April 2020 issued a Press Note No. 3 (2020), concerning the modification of its FDI policy ‘for curbing opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 Pandemic’.⁴⁴ The Consolidated Foreign Direct Investment Policy dated 28 August 2017 has required any investment made by Bangladesh and Pakistan investors to undergo case-by-case approval. The new rule has now extended this government approval to any investment to be made by an entity incorporated in a country that is territorially adjacent to India; or to any investment where the direct or indirect beneficial owner of that investment is situated in, or is a citizen of, a country territorially adjacent to India.

E. Covid-19-specific concerns in the FDI context

The above has taken a brief inventory of the new measures adopted by states to counter the actual or perceived threats to FDI on security-related grounds in times of a health emergency. Note that the above inventory serves merely of an exemplary purpose and does not include all states that have taken measures as such during the Pandemic.⁴⁵ These newly adopted measures differ from one another on their severity. Some jurisdictions such as the EU and Canada issue policy guidance that pledges or urges more scrutiny in the application of their existing FDI screening mechanisms during the Pandemic, which does not constitute a formal legislative amendment to their existing systems. Several jurisdictions such Australia, France, Germany and Italy have opted to modify existing FDI screening to either lower the threshold that triggers a review, or expand the list of sectors subject to notification and approval obligations, or the adoption of both. Others such as India impose a case-by-case review of FDI from certain geographic origins. Amongst these newly introduced measures, some are temporary in nature and have been revoked once the expiry date for their application was reached; while others have introduced a substantial overhaul of its existing FDI screening system; and there are states that introduced both interim and permanent modifications to their FDI screening.

The rationale behind the host state’s adoption of new measures in addition to existing FDI screening mechanisms during the Pandemic is a two-fold argument. The first argument is to protect the domestic capacity in the health sector and industries from malicious foreign takeovers, directly relating to health care, pharmaceuticals, medical supplies and equipment, and the R&D capacity of health care such as biotechnology and virology. The second argument pertains to a concern that stricter measures are needed in FDI screening to protect sectors, industries, or technologies other than those in the health sector, but are considered critical and strategic; in times of a depreciating stock market and a declining economy caused by the Pandemic, those sectors, industries, or technologies may be particularly vulnerable to being taken over by hostile and predatory foreign buyers, hence the need for heightened government control in times of a crisis.

III. The legality of public health concerns in domestic FDI screening laws

National laws in principle prescribe a regulatory objective in FDI screening, which means that only the prescribed regulatory objective should be allowed as a legitimate purpose when a host state intervenes in foreign investment projects. Such a regulatory objective may come under several different titles; in addition to national security, other prominent examples include national interest, public policy, public security, public order, and net benefit, among others. It is important to examine the connotation of these various terms because public health can only be regarded as a legitimate concern in FDI screening if it is explicitly included in, or at the very least interpreted into, these regulatory objectives. The following will delve into the legality of public health concerns in the FDI screening of Australia, the EU, Germany and Canada as examples.

A. Australia: the national interest

Under the Foreign Acquisitions and Takeovers Act 1975 (FATA), the Australian Treasurer may determine whether a particular acquisition of an Australian business, assets or land above a certain percentage of voting rights in the target company that is of or above a certain size, should be approved, approved with conditions imposed, or prohibited, based on the ‘national interest’. The concept of national interest is not defined and non-specific in FATA, and as a result, it is at the Treasurer’s discretion, assisted by the FIRB, to determine how the national interest test will be applied on a case-by-case basis.⁴⁶ The national interest test has been criticized for being too wide and uncertain, and includes many matters such as community interest and economic considerations instead of narrow national security concerns.⁴⁷ The review process is criticized for being ‘opaque and difficult to assess’, and decisions of the review remain confidential.⁴⁸ In the context of the Pandemic, it is safe to presume that, being an open-ended term, the national interest test would include public health concerns as a legitimate cause in practice, and if necessary, be applied more aggressively during the Pandemic to protect the national interest of Australia.

B. The EU: public policy, public security and public order

EU Member States make a particular case in FDI screening because, although residing at a Member State’s national competence, as FDI screening mechanisms are already put to use in 14 Member States,⁴⁹ national law governing FDI screening in each Member State shall comply with EU law strictures. This may involve both primary EU law and secondary EU law.

Guaranteed by Article 63 of the Treaty on the Functioning of the European Union (TFEU), the free movement of capital is a fundamental freedom of the EU.⁵⁰ Restrictions on capital movements are only permitted in rare and exceptional circumstances. One of the legitimate derogations to the free movement of capital rule is Article 65(1)(b) TFEU, which stipulates that

the provisions of Article 63 shall be without prejudice to the right of Member States … to take all requisite measures to prevent infringements of national law and regulations, in particular … to take measures which are justified on grounds of public policy or public security.

Regarding what constitutes legitimate measures justified by public policy or security, the TFEU shies away from a further definition except that domestic measures taken on grounds of public policy or security ‘shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63’.⁵¹ The European Court of Justice (ECJ) has developed a rather strict interpretation of ‘public policy or public security’ through its case law. For example, to invoke Article 65(1)(b) TFEU as the exception to the free movement of capital rule, there must be a ‘genuine and sufficiently serious threat to a fundamental interest of society’.⁵² However, it is also in the ECJ’s view that, Member State’s national FDI screening measures, if only applied to third-country (i.e. non-EU) investors and their investment, will not be subject to the free movement of capital rule and its public policy or security derogation.⁵³ As EU Member State’s FDI screening are in principle adopted and applied to third-country investors and exempts EU investors, these national FDI screening are therefore not in particular bound by primary EU law.

As secondary EU law, Regulation 2019/452 ‘remains a patchwork of laws’, as it only ensures that basic principles are met by Member States and encourages cooperation within the EU, but falling short of providing a formal blocking power of foreign investments.⁵⁴ Regulation 2019/452 stipulates that Member States ‘may maintain, amend or adopt mechanisms to screen foreign direct investments in their territory on the grounds of security or public order’.⁵⁵ Regulation 2019/452 does not further define the concept of ‘security or public order’, but only prescribes a number of ‘factors that may be taken into consideration by Member States or the Commission … in determining whether a foreign direct investment is likely to affect security or public order’.⁵⁶ The interpretation of ‘security or public order’ therefore relies heavily on Member States’ own discretion and is based on national needs and interests, which would result in little harmonization effect.⁵⁷ In the list of factors to be considered, Regulation 2019/452 does make clear that ‘in determining whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may consider its potential effects on, inter alia: critical infrastructure, whether physical or virtual, including … health’.⁵⁸ This means that the protection of public health as a factor that may be taken into consideration by EU Member States in their FDI screening has gained explicit legitimacy in secondary EU law.

C. Germany: public order or security

In order to bring compliance with EU Regulation 2019/452, the German FDI screening purports ‘to guarantee the public order or security of the Federal Republic of Germany or of another Member State of the European Union’.⁵⁹ Due to the fact that the fundamental freedoms in primary EU law have only been interpreted by the ECJ in the intra-EU context and that Regulation 2019/452 as secondary EU law have only a ‘non-binding, exemplary’, ‘non-exhaustive and non-barring’ character, Germany (and for that matter any other EU Member State) in fact holds a great margin of appreciation and discretion to determine what constitutes public order or security in its FDI screening laws.⁶⁰ The German FDI screening has explicitly included the operation of critical infrastructure, including (but is not limited to) health, as one of the civil-sensitive sectors which is subject to review ex-ante, pursuant to an Amendment of AWV adopted already in 2017.⁶¹ This means that public health both as a sector and as a regulatory objective has become a legitimate concern for FDI screening in Germany well before the Covid-19 Pandemic. Since the breakout of the Pandemic in 2020, the number of cases reviewed by BMWi have been skyrocketing, especially in the health sector, leading to longer-than-usual review duration, and the system is expected to impose even more increased scrutiny over FDI due to recent geopolitical tensions and vulnerable supply chains.⁶²

D. Canada: net benefit and national security

The Investment Review Division (IRD) of the Ministry of Innovation, Science and Economic Development Canada is the statutory authority to review foreign investment, and the process is governed by the Investment Canada Act (ICA). The ICA involves three types of considerations for a review, namely economic, cultural, and national security. From an economic perspective, a transaction above certain monetary thresholds is subject to review and approval by the IRD, which will determine if the deal brings ‘net benefit’ to Canada.⁶³ The net benefit test is criticized for being arbitrary, subjective, and discouraging to potential investors.⁶⁴ On the ground of national security, a review may be ordered ex officio to any investment if the Minister of Innovation, Science and Economic Development deems that the investment could be ‘injurious to national security’, which is a term left undefined in statute.⁶⁵ It appears that both the economic concern (net benefit test) and national security concern have been cited by the Canadian government to encompass public health considerations in FDI screening.⁶⁶

E. Insights

The afore has demonstrated how public health concerns in several jurisdictions have gained legality in FDI screening within that jurisdiction. These national FDI screening regimes have adopted the vernacular that is, on the one hand, already rather ambiguous in nature, be it national interest (Australia), public order or security (the EU, Germany), or net benefit and national security (Canada), and on the other hand, intentionally left undefined or under-defined in law in order to retain ample manoeuvre for the host state to interpret the concepts on a case-by-case basis. Because these purported regulatory objectives in FDI screening in many jurisdictions have been stipulated to retain a considerable amount of regulatory discretion, it is safe to say that the protection of public health does not exceed the semantic reach of these terms as adopted in national law. This is in addition to the fact that public health is explicitly stipulated either as a sector subject to review or a factor to be considered during a review in the FDI screening of selected jurisdictions. Therefore, newly promulgated Covid-19-related FDI screening measures on the ground of public health, as presented in Section II, do not suggest a creation of new and unprecedented competence, but more of an elaboration or a re-emphasis of the host state’s existing competence in FDI screening.

IV. Public health concerns in international investment law and arbitration with regard to FDI screening

Following the discussion on the issue of legality in domestic law in Section III, it is opportune to proceed to the discussion of the legality of public health in international law with respect to FDI screening. This involves two juxtaposing questions. First, whether investors can raise a claim in ISA against the host state for the latter’s FDI screening measures, and if yes, what treaty breaches specifically the investor can claim. Second, whether and how the respondent state can use public health protection as a justification of its FDI screening and a defence against such investor’s claim, which would exonerate any liability for compensation.

A. Investors’ potential claims against FDI screening measures

Whether FDI screening on grounds of public health is a legitimate state act is not merely a national law issue. More and more jurisdictions have now expanded the application of FDI screening to not only new takeover projects proposed by foreign investors, but also to investments already established and in operation, if the relevant threshold is met. Put differently, these FDI screening mechanisms would have a retrospective effect; if a reviewing authority finds that an established investment poses a threat to national security – which in several jurisdictions also includes public health as depicted in Section III – then the FDI screening process would be triggered ex officio, and investors may face a divesture order upon a rejecting outcome of the review.⁶⁷ Nonetheless, this ex officio power has been used with great self-restraint and cases of divesture is sporadic. One example of a high-profile transaction is the divesture order from President Trump on the ground of national security to the Chinese social media company ByteDance which owns TikTok, a famous social media app, which resulted in the compulsory sale of TikTok’s US business to allegedly Microsoft in 2020.⁶⁸

For Covid-19 measures taken in general, multiple treaty provisions may be invoked by foreign investors to seek compensation via investor-state arbitration. A claim of violation of most-favoured nation (MFN) treatment can be made by investors when such emergency relief measures are targeted to investors of a particular nationality but not all foreign investors.⁶⁹ For fair and equitable treatment (FET) provision, the investor may argue that the host state’s Covid-19 measures (such as the total shutdown of business operations for a period) constitute an unpredictable and abrupt change of the domestic regulatory environment, therefore breaching legitimate expectations of the investor which then lead to a claim of breach of FET.⁷⁰ Expropriation claims may also proliferate due to Covid-19 measures, for instance, when the host government requisite certain medical equipment and facilities of companies in the health sector including foreign-owned businesses.⁷¹

The above claims also apply when the measures taken concerns the divesture power of FDI screening for already established foreign investment projects in a host state, which may pose conflict and violation of commitments to investment protection made in IIAs of which the host state is a contracting party. A divesture order deprives or significantly interferes with the investor’s entitlement of its own property rights, the limitations might involve the sale of assets in a limited time or to a designated buyer, or at a price which the investor may deem underappreciated. Further, the ex officio screening and the subsequent divesture order as a potential outcome may take place at any time after the investor has established and operated the business in the host state, creating an unpredictable and volatile business and regulatory environment. In such an event, if there is a bilateral investment treaty (BIT) in place between the investor’s home state and the host state, the investor may challenge the host state in investor-state arbitration for a possible violation of a number of treaty provisions, namely, national treatment (for FDI screening only applies to foreign investors but not domestic investment); MFN (if the national security assessment is principally based on the investor’s nationality); FET (for a frustration of investor’s legitimate expectations or failure to provide a stable and predictable legal environment); and (indirect) expropriation (for a depravation of or serious limitations to investor’s property rights).⁷²

B. Public health as a host state’s defence

Notwithstanding investor’s potential claims against states, the respondent state may be availed to a number of shields and defences both at the jurisdiction stage and merit stage to justify its FDI screening measures and outcomes. Certain investment treaties explicitly preclude domestic FDI screening from admissible disputes of ISA.⁷³ Some other treaties list national FDI screening laws in an annex as non-conforming measures with respect to some or all investment protection obligations.⁷⁴ In addition, the respondent state, either at the jurisdiction stage or at the merit stage, may invoke the general (public health) exception clause in the investment treaty (provided there is one in said treaty),⁷⁵ the essential security interest exception clause in the investment treaty,⁷⁶ the defence of state necessity in customary international law to justify its FDI screening measures as a legitimate regulatory means in times of an emergency such as Covid-19,⁷⁷ the police powers doctrine,⁷⁸ Force Majeure and distress as provided in Art. 24 of Responsibility of States for Internationally Wrongful Acts.⁷⁹

This article does not intend to elaborate on all available defences at the disposal of a respondent state, but rather focuses on those investment treaties that include an explicit public health exception and ISA cases explicitly invoking a public health defence.⁸⁰ One study found that 240 out of 2574 IIAs globally contain explicit public health exception clauses concluded from 1957 to 2021.⁸¹ This means that just above 9 per cent of investment treaties provide an explicit public health defence to the respondent state. The precise meaning of public health is in principle not defined in the treaty, with a handful of exceptions such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).⁸² For a respondent state to successfully invoke the public health exception, certain prerequisites need to be satisfied according to the provisions of the health exception clause. These prerequisites, which may vary from treaty to treaty, require that measures taken to protect public health must be ‘to achieve legitimate policy objectives’,⁸³ ‘non-discriminatory’,⁸⁴ not ‘so severe in light of its purpose that it appears manifestly excessive’,⁸⁵ ‘designed and applied in good faith’,⁸⁶ ‘not applied in an arbitrary or unjustifiable manner’,⁸⁷ ‘do not constitute a disguised restriction on international trade or investment’,⁸⁸ or ‘not applied in a manner which would constitute a disguised restriction on investment liberalisation’,⁸⁹ among others. Therefore, for a state to successfully invoke the public health exception as a defence against investor’s claims, that state must fulfil the conditions and comply with certain ways in which domestic measures should be adopted and applied, which are laid out in the treaty provisions. Whether these conditions and ways are satisfied is appraised and determined ultimately by an arbitral tribunal, and the state would bear heavy evidential burden in proving that these conditions are met when adopting or applying domestic health regulations and measures.

In arbitration jurisprudence, there is no precedence yet where an arbitral tribunal has dealt with the interpretation of a public health exception provision in an investment treaty. However, one tribunal, namely, the Philip Morris v Uruguay tribunal, proceeded to merits where the respondent state argued that the protection of public health is an act of state sovereignty and police power warranted by customary international law. In this landmark case, the BIT in issue, the Switzerland-Uruguay BIT (1988), does not contain a public health exception clause. The Swiss investor challenged Uruguay for the latter’s tobacco control regulations as expropriation of the investor’s intellectual property rights and brand assets.⁹⁰ Uruguay argued that its regulation was to protect public health, which was a ‘legitimate exercise of the State’s sovereign police power’.⁹¹ The Tribunal ruled in favour of the state, by first stating that the police powers doctrine ‘reflect the position under general international law’,⁹² and the doctrine means that ‘matters as the maintenance of public order, health or morality, excludes compensation even when it causes economic damage to an investor’.⁹³ The Tribunal further stated that, to successfully invoke police powers as a defence, the measures taken by the state must be ‘bona fide’, ‘non-discriminatory’, ‘proportionate’, and ‘adopted in good faith’.⁹⁴ And Uruguay’s tobacco control regulation satisfied these conditions, thus defeating the expropriation claim.⁹⁵ One commentator argues that Covid measures in general should prima facie be justified under the police powers doctrine as long as they are in the public interest, adopted in good faith and in a non-discriminatory manner.⁹⁶

In light of the above, it is opined that Covid-19 induced FDI screening measures affecting established foreign investments in principle can be justified by the protection of public health in the realm of international investment law, notwithstanding under certain circumstances. If the applicable IIA contains an explicit public health exception, the host state could invoke such a treaty exception to exonerate treaty breaches and liability for compensation. Whether such invocation can be successful or not, however, depends on whether the accompanying conditions stipulated in the exception provision of the treaty are met, according to the purview of an arbitral tribunal. Absent of a public health exception clause in the applicable IIA, the state may invoke the police powers doctrine as a defence to justify state measures for a public health purpose. To that end, as demonstrated in Philip Morris v Uruguay, a tribunal may examine whether certain conditions are satisfied, which are not dissimilar to those stipulated in the public health exception provisions in IIAs. In both scenarios discussed above, the states bear the burden of proof by presenting the legal basis and evidential facts that support its public health defence. As demonstrated in earlier arbitration cases such as SD Myers v Canada under NAFTA, where the respondent state sought to justify its measures for environmental and health reasons but the Tribunal found that state measures constituted disguised protectionism, it is important for a host state to have ‘a sound evidential base to support a measure it seeks to justify on the basis of the protection of public health’.⁹⁷ In sum, public health as a state’s defence against investor’s claims in ISA with regard to Pandemic-induced FDI screening measures is plausible, albeit legally onerous to succeed.

V. The negative externality of elevated FDI screening during pandemic

It has become clear that the host states have gained legality in national law with respect to FDI screening on the ground of public health, and are able to cite public health as a legitimate regulatory objective under international investment agreements and customary international law to justify FDI screening measures. The question is whether states are well advised in adopting toughened FDI screening measures during the Pandemic.

A. The negative externality of FDI screening mechanisms

The host state wishes to impose, maintain or heighten government control of FDI and ward off malicious takeovers which would pose various threats and concerns to the host state. These threats and concerns may involve, as a result of a takeover of a domestic company by a foreign acquirer: the loss of strategic and sensitive assets and critical infrastructure to foreign control; the loss of sensitive and cutting-edging technologies and expertise to foreign control; economic espionage, sabotage, infiltration or terrorism acts;⁹⁸ the need to shield foreign competition and protect certain peer domestic industries; the need to retain domestic control of natural resources;⁹⁹ the protection of domestic supply chain; the risk of exposure of sensitive or personal information and data to a foreign entity; and so on.

FDI screening, notwithstanding its necessity as a regulatory means to address security risks associated with foreign investment, also creates a negative externality effect: there might be serious trade-offs when the host state decides to adopt an ex-ante review-and-approval system to alleviate those threats and concerns. FDI screening rules on the ground of national security is notorious for its ambiguity and obscurity.¹⁰⁰ FDI screening of a given jurisdiction ‘comes at the expense of interfering with and restricting commercial transactions, which impedes the free flow of capital and undermines the principles of a market economy’.¹⁰¹ Seen as an extra burden of compliance to investors, FDI screening would impose a significant deterrence effect on potential investors. The long-term and culminative detriments are that the host state might become a less appealing destination of FDI and lose the momentum of attracting foreign capital which is pivotal to domestic development and growth.¹⁰² To be more specific, the deterrence effect of FDI screening of foreign investors can be attributed to the following three reasons.

First of all, as discussed in Section III, the regulatory objectives of these screening mechanisms in national law remain elusive, undefined or inadequately defined.¹⁰³ This ambiguity in definition has given the regulatory authorities room for arbitrary and subjective judgments when assessing a proposed transaction under review, which could end with unpredictable outcomes and even abuse of the regulatory power. For foreign investors, not fully understanding the FDI screening system of the host state leads to uncertainty and added compliance costs and resources, which would eventually contribute to a higher transactional cost of a takeover deal.

Secondly, these FDI screening mechanisms often emanate procedural ambiguity as well.¹⁰⁴ It remains not entirely clear ‘what national security means and how, when and in relation to whom this threat is assessed’.¹⁰⁵ For example, many FDI screening systems of the host state include a list of sectors subject to review, which would appear to cause little confusion as to what sectors require foreign investors to gain governmental approval and what sectors are exempted from it, but this provision frequently demonstrates poor operability in practice. Many host economies, for example, the US,¹⁰⁶ the EU,¹⁰⁷ Germany,¹⁰⁸ and China,¹⁰⁹ include critical infrastructure as one collective sector among others subject to review, but with either no or insufficient definition of the terms. It is therefore highly uncertain for both the investors and the regulators to determine what exactly constitutes ‘infrastructure’ and how ‘critical’ it should be. As a result, a would-be investor may not be able to precisely anticipate whether his proposed transaction falls within the scope of the FDI screening of the host state. And the reviewing authority is often flooded with applications from investors out of uncertainty.

Thirdly, the FDI screening systems are prone to politicization in practice. Often, even though official governmental prohibition of foreign takeovers in a given jurisdiction is made very sporadically, many more undocumented cases were in fact not successful as the investors voluntarily withdrew their application for review because of political pressure.¹¹⁰ These investors are often the victims of politicization: investors choose to withdraw from an ongoing review process and ultimately abandon the proposed deal amid overwhelmingly political opposition (i.e. undue parliamentary interference) and condemnation from populist groups, peer industries, the media, or the general public, of the host state.¹¹¹ An often cited case in this regard is the Chinese CNOOC’s failed acquisition of the US’s Unocal under the CFIUS review in 2005.¹¹²

B. The negative externality exacerbated by Covid-19-induced FDI screening measures

At a time of global crisis and uncertainty such as the Covid-19 Pandemic, capital liquidity is perhaps more desired than ever to boost investors’ confidence, provide financing to the market, and ultimately contribute to the revival of the global economy. But heightened FDI screening measures of the host state as a result of the Pandemic, if aggressively applied in enforcement, might just lead to the opposite. One commentator warns the ‘ripple effect’ of recalibrated FDI screening regimes: they re-align supply-chain dependencies, create competition for attracting foreign capital among developing countries, adversely affect cross-border trade and investment, foment nationalism, impede globalization, and stifle business growth.¹¹³

Apart from the afore negative aspects, these FDI screening measures emphasize public health as a regulatory objective to be pursued in addition to the existing screening framework. The introduction of public health, while may be justified of their legality, raises concerns about its linguistic ambiguity. There is no universal definition on precisely what industries and activities would constitute the public health sector and to what extent an FDI activity would pose an actual risk to public health. The interpretation of public health could be ranging from narrow to expansive, depending on the stance of the interpreter. Investors therefore might be faced with uncertainty in determining whether their proposed transaction is directly or indirectly in relation to the health sector and whether it would require prior government approval under newly adopted FDI screening framework.

The Covid-19 Pandemic also accelerates and arguably exacerbates a long existing trend of expansion of scrutiny in FDI screening.¹¹⁴ States expand significantly the sectors that are subject to review and introduce much lower thresholds that would trigger a review. This is in addition to the FDI screening mechanisms of many host states that already have quite an extensive and inclusive list of sectors and transactions subject to review. Foreign investors now are subject to notification obligations to the host state’s government also in case of minority shareholding acquisitions and in sectors even only indirectly or remotely related to the health sector. Even if the takeover is made outside the public health sector, many host states, as presented in Section II, would now apply heightened scrutiny to every application in general, because of the fear of predatory and aggressive buyers taking advantage of depreciating stock prices. And there are host states, for example, Australia, that have explicitly warned potential investors of a longer-than-usual timeframe that completes the review procedure. For potential investors, the mere prospect of having to undergo rigorous review procedures, a prolonged review period, and potentially a prohibitive or restrictive outcome because of the explicit governmental pledge to impose heightened scrutiny during the Pandemic, is likely to deter them from making an investment, considering the extra regulatory uncertainty and risks at stake. Therefore, these newly adopted Covid-19-related FDI screening measures have the potential to aggravate the existing negative externality by further imposing a deterrence effect to foreign investments.

VI. Conclusion

This article discusses the typology, legality, and potential externality of FDI screening measures pertinent to the Covid-19 Pandemic. It is opined that, although public health-related concerns in FDI screening can be justified for their legality, FDI screening with heightened scrutiny during the Pandemic, if aggressively implemented, may potentially create an additional deterrence effect to investors and their investment. The protection of public health, albeit justified for its legality, should not come at a disproportional cost and as a trade-off where FDI screening hinders cross-border capital liquidity. At a time when globalization and trade and investment liberalization have been questioned more than ever for exposing the vulnerability of the global economy and creating dependence to the global supply chain, to guarantee domestic sourcing of critical infrastructure, assets, technology, services and resources has become a policy priority for states to maintain preparedness for emergencies such as the Covid-19 Pandemic. As a result, hidden protectionist agendas in FDI policies may ensue.

Identifying the typology, legality, and potential externality of FDI screening amid and post-Pandemic has its significance and ramifications to key stakeholders in international investment law, inter alia, foreign investors and host states. From the perspective of a potential foreign investor, heightened government scrutiny in the admission phase entails rising compliance costs, longer period of review procedures, and above all, a potentially downright rejection of market entry. For already established investors, if their economic interests are negatively affected by those FDI screening measures applied retroactively, they may resort to ISA. However, claims of treaty breaches may be difficult to establish or succeed before an arbitral tribunal because the respondent state has a number of defences to be adopted at both the jurisdiction stage and the merit stage, which are based on the treaty at issue or customary international law, and are either public health-specific or more in general. For the host state, a critical point at the moment is to balance between its legitimate public health interests and a welcoming capital market that doesn’t ward off benign investors. To that end, it is advisable that host states should be prudent to the implementation of their Covid-19-related FDI screening measures, and sufficiently distinguish between malicious investments posing threats to the public interests and beneficial investments contributing to the much-needed revival of the economy.

In light of the above, several reform options in investment law may be considered to address the externalities identified and to avoid a possible proliferation of investor-state disputes in this regard. On the national law level, a narrowly defined scope of public health risks and threats vis-à-vis foreign investment should be introduced to bring legal certainty and predictability. Procedural fairness in FDI screening should be observed, such as a delineated screening procedure, and the accessibility to judicial redress to hold the screening agency accountable. In implementing the screening in practice, deference to the principle of proportionality is recommended. On the international law level, sovereign states may opt to refrain an international adjudicative body from reviewing what they consider as a purely national prerogative such as national security or public health in the FDI context. To that end, an explicit carve-out in IIAs which excludes national FDI screening and its outcome from arbitrability may be negotiated by contracting states. Alternatively, and to the contrary, the international investment law and arbitration system could build a more coherent and developed jurisprudence over time concerning the state’s impugned FDI screening measures, by ways such as reference and deference to WTO law and practice which are probably more acquainted with public health-related disputes.

Notes

1 The global FDI inflow in 2020 recorded 1 trillion USD, and 1.5 trillion USD in 2019. UNCTAD, World Investment Report 2021 (UN Publication, 2021) 2.

2 Ibid.

3 Yingjie Fu, Antonio Alleyne, and Yifei Mu, ‘Does Lockdown Bring Shutdown? Impact of the COVID-19 Pandemic on Foreign Direct Investment’ (2021) 57 Emerging Markets Finance and Trade 2792.

4 UNCTAD (n 1) 109.

5 Ibid, 110.

6 UNCTAD has identified six policy practices at the national level to provide various support measures and counter the crisis for foreign investment, including investment facilitation by the removal of administrative bureaucracies, investment retention and aftercare by investment promotion agencies, providing financial or fiscal investment incentives, state bailout in crisis-affected industries, financial or fiscal support for small and medium enterprises, and instrumentalizing intellectual property such as mandatory licensing to support the R&D of pharmaceuticals. UNCTAD, ‘Investment Policy Responses to the Covid-19 Pandemic’ (Investment Policy Monitor, No. 4, May 2020) <https://unctad.org/en/PublicationsLibrary/diaepcbinf2020d3_en.pdf> accessed 26 August 2022.

7 Douglas A Irwin, ‘The Pandemic Adds Momentum to the Deglobalization Trend’ (Peterson Institute for International Economics, 23 April 2020) <www.piie.com/blogs/realtime-economic-issues-watch/pandemic-adds-momentum-deglobalization-trend?utm_source=update-newsletter&utm_medium=email&utm_campaign=piie-insider> accessed 26 August 2022.

8 Ibid.

9 Ibid.

10 UNCTAD, World Investment Report 2022 (UN Publication, 2022) 58.

11 Commission Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 Establishing a Framework for the Screening of Foreign Direct Investments into the Union [2019] OJ L79 I/1 (Regulation 2019/452).

12 Ibid, Art 17.

13 On a critical commentary of the EU Regulation on FDI screening, see Thomas Verellen, ‘When Integration by Stealth Meets Public Security: The EU Foreign Direct Investment Screening Regulation’ (2021) 48 Legal Issues of Economic Integration 19. Chi-Chung Kao, ‘The EU’s FDI Screening Proposal – Can It Really Work?’ (2020) 28 European Review 173.

14 Regulation 2019/452, Art 3.1.

15 Regulation 2019/452, Arts 5, 6, 7 and 11.

16 Regulation 2019/452, Art 8.2(c).

17 Commission, ‘Communication: Guidance to the Member States Concerning Foreign Direct Investment and Free Movement of Capital from Third Countries, and the Protection of Europe’s Strategic Assets, Ahead of the Application of Regulation (EU) 2019/452 (FDI Screening Regulation)’ COM (2020) 1981 final.

18 Ibid, 1.

19 Ibid, 1–2.

20 Commission, ‘Communication from the Commission – Guidance to the Member States concerning foreign direct investment from Russia and Belarus in view of the military aggression against Ukraine and the restrictive measures laid down in recent Council Regulations on sanctions’ COM (2022) 2316.

21 Government of Canada, ‘Policy Statement on Foreign Investment Review and Covid-19’ (The Investment Review Division of Innovation, Science and Economic Development Canada, 18 April 2020) <www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81224.html> accessed 26 August 2022.

22 Ibid.

23 Ibid.

24 Ibid. Although the ICA was not modified to catch the changes reflected in the Policy Statement, the Canadian government in March 2021 updated its Guidelines on the National Security Review of Investments, which essentially incorporate the proposals in the Policy Statement. The updated Guidelines introduce enhanced scrutiny for state-owned enterprises and government-linked investors, and prescribed a non-exhaustive list of 15 technology areas that are considered sensitive, including biotechnology, medical technology, neuro-technology and human-machine integration, among others. See Government of Canada, ‘Guidelines on the National Security Review of Investments’ (The Investment Review Division of Innovation, Science and Economic Development Canada, 24 March 2021) <www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81190.html> accessed 26 August 2022.

25 Government of Australia, ‘Temporary Measures in Response to the Coronavirus’ (Foreign Investment Review Board, Guidance Note 53, 10 July 2020) <https://firb.gov.au/sites/firb.gov.au/files/guidance-notes/GN_53_cv_1.pdf> accessed 26 August 2022.

26 Ibid.

27 Specifically, the revised Act introduced an ex-ante notification obligation to certain types of transactions with a zero AUD threshold. These types of transactions are categorised as ‘Notifiable National Security Actions’, which are loosely defined as to start a new or acquire an existing ‘national security business’, or acquiring an interest in national security land. The revised Act not only applies to newly proposed investment projects but also retrospectively to already established investment projects in Australia. Foreign Acquisitions and Takeovers Act 1975, last amended by Act No. 117, 2020, in force on 1 January 2021, Part 2, Division 4A.

28 European Economic Area, including all EU Member States and Iceland, Liechtenstein and Norway.

29 Minister for the Economy and Finance of France, ‘Covid-19 – Update of the Foreign Direct Investment Screening Procedure in France’ (The Directorate-General for the Treasury, 30 April 2020) <www.tresor.economie.gouv.fr/Articles/2020/04/30/covid-19-update-of-the-foreign-direct-investment-screening-procedure-in-france> accessed 26 August 2022.

30 Ibid.

31 Minister for the Economy and Finance of France, Decree of 27 April 2020 Relating to Foreign Investments in France, Revising Decree No. 2019-1590 of 31 December 2019 Relating to Foreign Investments in France, JORF No. 0105 of 30 April 2020, Text No. 22.

32 Minister for the Economy and Finance of France, Decree No. 2019-1590 of 31 December 2019 Relating to Foreign Investments in France, Revising the Monetary and Financial Code, Regulatory Part, JORF No. 0001 of 1 January 2020, Text No. 35.

33 Minister for the Economy and Finance of France (n 29).

34 Federal Ministry for Economic Affairs and Energy (BMWi), Außenwirtschaftsgesetz (Foreign Trade and Payments Act), Federal Law Gazette I p. 1482, last amended by Art. 1 of Gesetzes of July 10, 2020, Federal Law Gazette I p. 1637 (AWG).

35 BMWi, Außenwirtschaftsverordnung (Foreign Trade and Payments Ordinance), Federal Law Gazette I p. 2865, last amended by Art. 1 of Verordnung of 25 April 2022, BAnz AT 02.05.2022 V1 (AWV).

36 BMWi, ‘Referentenentwurf – Fünfzehnte Verordnung zur Änderung der Außenwirtschaftsverordnung (Draft of the Fifteenth Regulation amending Foreign Trade and Payment Ordinance)’ (27 April 2020) <www.bmwi.de/Redaktion/DE/Downloads/F/fuenfzehnte-verordnung-zur-aenderung-der-aussenwirtschaftsverordnung-referentenentwurf.pdf?__blob=publicationFile&v=4> accessed 26 August 2022.

37 EFTA, or the European Free Trade Association, includes Iceland, Liechtenstein, Norway, and Switzerland.

38 AWV § 55a(1).

39 AWV § 55a(1), 8–11. For a comprehensive understanding of the major amendments in AWG and AWV and their implications, see Teoman M Hagemeyer-Witzleb and Steffen Hindelang, ‘Recent Changes in the German Investment Screening Mechanism in Light of the EU Screening Regulation’ (2021) 2 Central European Journal of Comparative Law 39.

40 Council of Minister of Italy, Decree No. 23/2020 (Decreto Liquidità), Urgent Measures Related to Access to Credit and Tax Obligations for Businesses, Special Powers in Strategic Industry Sectors, as well as Healthcare and Employment Interventions, Prorogation of Administrative and Procedural Deadlines, Official Gazette General Series No. 94, Extraordinary Edition, 8 April 2020 (Decree No. 23/2020).

41 Paolo Ghiglione, ‘Covid-19 Coronavirus: Italian Government Increases Its Special Powers on Foreign Investment Control (“Golden Powers”)’ (Allen & Overy, 14 April 2020) <www.allenovery.com/en-gb/global/news-and-insights/publications/covid-19-coronavirus-italian-government-increases-its-special-powers-on-foreign-investment-control> accessed 26 August 2022.

42 Critical infrastructure is defined in Decree No. 23/2020 to include energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure (including credit and insurance sectors), and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure.

43 The notification obligation for foreign non-EU investors has a permanent applicability, the notification obligation for foreign EU investors is temporary and due to expire on 31 December 2020. Decree No. 23/2020 (n 40).

44 Government of India, ‘Review of Foreign Direct Investment (FDI) Policy for Curbing Opportunistic Takeovers/Acquisitions of Indian Companies Due to the Current Covid-19 Pandemic’ (Ministry of Commerce & Industry, Department for Promotion of Industry and Internal Trade, FDI Policy Section, Press Note No. 3, 2020 Series) <https://dpiit.gov.in/sites/default/files/pn3_2020.pdf> accessed 26 August 2022.

45 For a comprehensive overview of these measures covering more jurisdictions, see Basu Sharma, ‘Covid-19 and Recalibration of FDI Regimes: Convergence or Divergence?’ (2021) 13 Transnational Corporations Review 62, 68.

46 Vivienne Bath, ‘Foreign Investment, the National Interest and National Security – Foreign Direct Investment in Australia and China’ (2012) 34 Sydney Law Review 5, 13–14.

47 Ibid, 16.

48 David Hundt, ‘The Changing Role of the FIRB and the Politics of Foreign Investment in Australia’ (2020) 55 Australian Journal of Political Science 328, 331.

49 Including Demark, Germany, Spain, France, Italy, Latvia, Lithuania, Hungary, the Netherlands, Austria, Poland, Portugal, Romania, and Finland. Commission, ‘List of Screening Mechanisms Notified by Member States’ (10 May 2022) <https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157946.pdf> accessed 26 August 2022.

50 Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C326/0001, Art 63(1) (TFEU). TFEU stipulates that ‘within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited’.

51 TFEU, Art 65(3).

52 Case C-54/99 Scientologie [2000] ECLI:EU:C:2000:124, para 17. For a more detailed discussion, see Steffen Hindelang, The Free Movement of Capital and Foreign Direct Investment (OUP, 2009) 226.

53 Andreas Moberg and Steffen Hindelang, ‘The Art of Casting Political Dissent in Law: The EU’s Framework for the Screening of Foreign Direct Investment’ (2020) 57 Common Market Law Review 1427, 1450.

54 Jason Jacobs, ‘Tiptoeing the Line between National Security and Protectionism: A Comparative Approach to Foreign Direct Investment Screening in the United States and European Union’ (2019) 47 International Journal of Legal Information 105.

55 Regulation 2019/452, Art 3.1.

56 Regulation 2019/452, Art 4.

57 Moberg and Hindelang (n 53) 1448–54.

58 Regulation 2019/452, Art 4(1)(a).

59 AWG § 4(1)4.

60 Hagemeyer-Witzleb and Hindelang (n 39) 45–47.

61 AWV, as modified by Art 1 of the Verordnung of 13 December 2017, BAnz AT 20.12.2017 V1.

62 Tobias Heinrich, Tilman Kuhn, and Thilo-Maximilian Wienke, ‘Foreign Direct Investment Reviews 2021: Germany’ (White & Case, 20 December 2021) <www.whitecase.com/insight-our-thinking/foreign-direct-investment-reviews-2021-germany> accessed 13 October 2022.

63 Investment Canada Act, R.S.C., 1985, c. 28 (1st Supp.), last amended on 1 April 2021 (ICA).

64 D Jeffrey Brown and Michael Kilby, ‘Canada: Still Open for Business? PotashCorp and the Investment Canada Act’ (2011) 2 Journal of European Competition Law & Practice 396, 402.

65 ICA (n 63) Part IV.1.

66 Government of Canada (n 21).

67 Examples of jurisdictions holding this ex officio power in FDI screening include the US, China, Australia, and Germany, among others. China, for example, promulgated new rules in 2020 which state that the government has the power to order the investor to dispose its shares or assets and restore the status quo when the investment has been implemented without a national security review but should have undergone one according to law. See 外商投资安全审查办法 (Measures for the National Security Review of Foreign Investment) (Promulgated by the National Development and Reform Commission and Ministry of Commerce on 19 December 2020, Effective on 18 January 2021), Art 16. For a detailed discussion of China’s national security review, see Yuwen Li and Cheng Bian, China’s Foreign Investment Legal Regime: Progress and Limitations (Routledge, 2022) 102–19.

68 ‘TikTok: China’s ByteDance Agrees to Divest US Operations after Trump Threat’ The Guardian (London, 1 August 2020) <www.theguardian.com/technology/2020/aug/01/tiktok-ban-china-bytedance-divest-microsoft> accessed 26 August 2022.

69 Jaemin Lee, ‘The Coronavirus Pandemic and International Investment Arbitration – Application of “Security Exceptions” Clauses in Investment Agreements’ (2020) 13 Contemporary Asia Arbitration Journal 185, 188.

70 Mao-wei Lo, ‘Legitimate Expectations in a Time of Pandemic: The Host State’s COVID-19 Measures, Its Obligations and Possible Defenses under International Investment Agreements’ (2020) 13 Contemporary Asia Arbitration Journal 249.

71 Lee (n 69) 188.

72 For a comprehensive and holistic discussion on investor’s potential claims in ISA against host state’s Covid-19 measures, see Julien Chaisse, ‘Both Possible and Improbable – Could COVID-19 Measures Give Rise to Investor-State Disputes?’ (2020) 13 Contemporary Asia Arbitration Journal 99, 141–53. For a discussion on the matter in the context of Australia in particular, see Tania Voon and Dean Merriman, ‘Is Australia’s Foreign Investment Screening Policy Consistent with International Investment Law?’ (2022) 23 Melbourne Journal of International Law (forthcoming), at 20 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4062029> accessed 26 August 2022.

73 For example, the Canada-EU Comprehensive Economic and Trade Agreement (CETA) stipulates that: ‘A decision by Canada following a review under the Investment Canada Act, R.S.C. 1985, c. 28 (1st Supp.), regarding whether or not to permit an investment that is subject to review, is not subject to the dispute settlement provisions’ under the investment chapter. See CETA, Annex 8-A.

74 For example, the Australia-United States Free Trade Agreement (AUSFTA) stipulates that provides that national treatment and MFN treatment do not apply to existing non-conforming measures maintained by a party and listed in Annexes, which include Australia’s foreign investment policy and the Foreign Acquisitions and Takeovers Act 1975. AUSFTA, Art 11.13.1(a)(i).

75 Public health exceptions are provided as a part of the general exception clause in IIAs, which is a practice that either cite the WTO’s GATT Article XX (General Exception), or takes inspiration from GATT’s General Exception clause. Other treaties mention public health as a legitimate interest of the host states to be protected in a non-operative manner such as in the Preamble. Julien Chaisse, ‘Exploring the Confines of International Investment and Domestic Health Protections – Is a General Exceptions Clause a Forced Perspective?’ (2013) 39 American Journal of Law & Medicine 332.

76 According to Lee, ‘the (essential) security exceptions clauses in recent IIAs may provide a legal basis for a host state government to attempt to justify its measures affecting foreign investor and investment taken during the COVID-19 pandemic as long as such measures are adopted for bona fide health protection and life-saving objectives.’ Lee (n 69) 200.

77 For a detailed discussion on the necessity defence in international investment law with respect to the Covid-19 crisis, see Federica Cristani, ‘How the Coronavirus Crisis Challenges International Investment (Customary) Law Rules: Which Role for the Necessity Defense?’ (2021) 53 Case Western Reserve Journal of International Law 89.

78 For an overview of the police powers doctrine in defence of state measures adopted during Covid-19, see Janice Lee, ‘Note on COVID-19 and the Police Powers Doctrine: Assessing the Allowable Scope of Regulatory Measures during a Pandemic’ (2020) 13 Contemporary Asia Arbitration Journal 229.

79 Agata Zwolankiewicz, ‘The Brave New World of Foreign Investment in the Wake of Covid-19 Pandemic: Current Situation and Potential Disputes’ (2021) 2 CIFILE Journal of International Law 1, 19–20.

80 For a comprehensive review of state’s defences against investor’s claims over Covid-19 measures in ISA, see Julien Chaisse (n 72) 154–64. Ranjan and Anand argue that, in the context of BITs to which India is a party, available defences for India against claims based on Covid-19 regulatory measures may include: health as the permissible objective in non-precluded measures provisions, essential security interest exception clauses, circumstances of extreme emergency, health-related provisions as an exception to expropriation, and the police powers doctrine. See Prabhash Ranjan and Pushkar Anand, ‘Covid-19, India, and Investor-State Dispute Settlement (ISDS): Will India be Able to Defend its Public Health Measures?’ (2020) 28 Asia Pacific Law Review 225.

81 Guangyi Qu and Wei Shen, ‘Public Health and Investment Protection in the Context of the COVID-19 Pandemic – from the Sustainable Perspective of Exception Clauses’ (2022) 14 Sustainability 1, 6.

82 The CPTPP uses a footnote to define ‘public health’ as an exception to expropriation, which reads: ‘For greater certainty and without limiting the scope of this subparagraph, regulatory actions to protect public health include, among others, such measures with respect to the regulation, pricing and supply of, and reimbursement for, pharmaceuticals (including biological products), diagnostics, vaccines, medical devices, gene therapies and technologies, health-related aids and appliances and blood and blood-related products.’ See CPTPP, Annex 9-B, fn 37.

83 CETA, Art 8.9.1.

84 CETA, Annex 8-A, 3. Regional Comprehensive Economic Partnership, Annex 10B.4.

85 CETA, Annex 8-A, 3.

86 Dutch Model BIT (2019), Art 12.8.

87 United States-Mexico-Canada Agreement, Art 14.10, 3(c) (USMCA). CPTPP, ch 9, Art 9.10.3(d).

88 USMCA, Art 14.10, 3(c).

89 EU-China Comprehensive Agreement on Investment (negotiation agreement in principle, 22 January 2021), sec VI, sub-sec 2, Art 4.1.

90 Philip Morris Brand Sàrl (Switzerland), Philip Morris Products S.A. (Switzerland) and Abal Hermanos S.A. (Uruguay) v Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award, 8 July 2016, para 180.

91 Philip Morris v Uruguay, Award, para 181.

92 Philip Morris v Uruguay, Award, para 301. The tribunal did not use the term ‘customary international law’ or ‘general principle of law’ as defined in Article 38(1)(c) of the Statute of the International Court of Justice to position state police powers. This is presumably because the status of the police power doctrine is still controversial and debatable. See Catharine Titi, ‘Police Powers Doctrine and International Investment Law’ in Filippo Fontanelli, Andrea Gattini, and Attila Tanzi (eds), General Principles of Law and International Investment Arbitration (Brill, 2018).

93 Philip Morris v Uruguay, Award, para 295.

94 Philip Morris v Uruguay, Award, paras 305–06.

95 Philip Morris v Uruguay, Award, para 307.

96 Thomas Lehmann, ‘Police Powers Doctrine: A Reliable State Defense in Times of Covid-19?’ (2021) 18 Brazilian Journal of International Law 73.

97 Elizabeth Sheargold and Andrew D Mitchell, ‘Public Health in International Investment Law and Arbitration’ in Julien Chaisse, Leïla Choukroune, and Sufian Jusoh (eds), Handbook of International Investment Law and Policy (Springer, 2021).

98 Theodore H Moran, Three Threats: An Analytical Framework for the CFIUS Process (Peterson Institute for International Economics, 2009) 1.

99 Andreas Heinemann, ‘Government Control of Cross-Border M&A: Legitimate Regulation or Protectionism?’ (2012) 15 Journal of International Economic Law 843, 861–67.

100 Keyan Lai, ‘National Security and FDI Policy Ambiguity: A Commentary’ (2021) 4 Journal of International Business Policy 496.

101 Cheng Bian, National Security Review of Foreign Investment: A Comparative Legal Analysis of China, the United States and the European Union (Routledge, 2020) 214.

102 Empirical study has found a causal link between restrictive FDI policies and FDI flows. Barriers to FDI have a deterring and curbing effect to foreign investment and the economy of the host state, affecting a wide range of sectors. Fernando Mistura and Caroline Roulet, ‘The Determinants of Foreign Direct Investment: Do Statutory Restrictions Matter?’ (2019) OECD Working Papers on International Investment 2019/01 <www.oecd-ilibrary.org/docserver/641507ce-en.pdf?expires=1661525369&id=id&accname=guest&checksum=7B0B2BF756F31E60EAF4A5A7B5D11317> accessed 26 August 2022.

103 Anastasia Ufimtseva, ‘The Rise of Foreign Direct Investment Regulation in Investment-Recipient Countries’ (2020) 11 Global Policy 222, 224.

104 Cheng Bian, ‘Foreign Direct Investment Screening and National Security: Reducing Regulatory Hurdles to Investors through Induced Reciprocity’ (2021) 22 Journal of World Investment & Trade 561.

105 Carlos Esplugues, Foreign Investment, Strategic Assets and National Security (Intersentia, 2018) 449.

106 The US national security review defines critical infrastructure as ‘systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.’ Section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment Risk Review Modernization Act of 2018, 50 U.S.C. § 4565 (a)(6).

107 Article 4.1(a) of Regulation 2019/452 defines critical infrastructure as to include ‘whether physical or virtual, 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’.

108 The German FDI screening defines critical infrastructure as to include energy, information technology, telecommunications, transportation and traffic, health, water, nutrition, finance and insurance industry, and all other peripheral sectors that provide software, components, or services to infrastructure. AWV (n 35) § 55a(1)1.

109 Pursuant to China’s national security review, when a takeover results in the foreign control of a Chinese company in ‘important infrastructure’, the deal should be subject to review. There is no other definition on what constitutes important infrastructure. Measures for the National Security Review of Foreign Investment (n 67) Art 4(2).

110 Bian, National Security Review (n 101).

111 Ibid.

112 In 2005, the state-owned China National Offshore Oil Corporation (CNOOC) proposed to acquire the US’s Unocal for 18.5 billion USD. CNOOC filed for a CFIUS review, but seeing that the deal was vehemently denounced by the Congress; a rival US bidder, Chevron; and the media, it was pressured to eventually withdraw the CFIUS filing and abandon the deal. As a result, CFIUS was never able to deliver its assessment on this deal, but political opposition instead acted as a major factor to the failure of the deal. Joseph Mamounas, ‘Controlling Foreign Ownership of US Strategic Assets: The Challenge of Maintaining National Security in a Globalized and Oil Dependent World’ (2007) 13 Law and Business Review of the Americas 381.

113 Sharma (n 45) 69.

114 Geoffrey Gertz, ‘Investment Screening Before, During, and After COVID-19’ (2021) 2 Political Economy, Markets, and Institutions 1.