SA FDI framework remains on hold despite global screening regimes taking shape
The global trend to either introduce or enhance foreign direct investment (FDI) screening mechanisms in the wake of the Covid-19 pandemic has shed a different light on the adoption of the SA FDI framework as part of the SA merger control regime. When the framework was adopted in February 2019, it was roundly criticised as further promoting political intervention in the SA merger review process. While the global trend does not necessarily legitimise the SA developments as the move for greater global FDI screening is itself not without criticism, it does provide a wider context in which the SA framework must be evaluated. Moreover, given that more international FDI regimes are coming online, there may be calls for the SA framework to become operational as implementing measures are still required.
The number of global FDI screening mechanisms has dramatically increased since 2016 with now over half of the OECD countries having a mechanism in place compared to only a third a decade earlier. The economic shock arising from the Covid-19 pandemic has prompted the adoption of broader and additional mechanisms in some cases, while in others, it has accelerated the implementation of existing policies. The tightening of existing policies in certain countries have been made on a temporary basis whereas other countries have made permanent adjustments to their regimes.
For example, in March 2020, the European Commission issued guidelines to protect critical European assets and technology in the current crisis. As part of these guidelines, EU Member States with existing screening mechanisms were called upon to make full use of existing tools to prevent capital flows from non-EU countries while the remaining EU Member States were urged to introduce such mechanisms. Further, in October 2020, the EU FDI regulation became fully operational establishing a coordination framework between the European Commission and the EU Member States on the application of the national screening mechanisms.
It is against this backdrop that the incorporation of the SA FDI framework into the SA merger control regime must be evaluated. While the framework was part of legislative reforms adopted in February 2019, it has not yet become operational as implementing regulations still need to be adopted.
Once it becomes operational, the SA FDI framework will require foreign acquirers in notifiable mergers under the SA merger control regime to also notify a presidentially appointed committee where the transaction relates to a list of national security interests. The review by the committee on national security grounds will be conducted in parallel to the review on competition and public interest grounds by the competition authorities. To the extent that the committee has prohibited the transaction, the competition authorities will no longer have any jurisdiction to adopt a decision. As the committee has 60 days to adopt a decision, it is possible that, in practice, the competition authorities in all mergers involving foreign acquirers will wait for the committee to first adopt its decision.
The list of national security interests, including the markets, industries, goods or services, sectors or regions in which such mergers must be notified will be published. It is anticipated that the list will be relatively wide due to the broad factors that will be used in identifying national security interests (e.g. the supply of critical goods or services to citizens, or the supply of goods or services to government, services essential to the health, safety, security or economic well-being of citizens and the effective functioning of government, SA's economic and social stability). In order to give effect to the SA framework, a list of national security interests as well as the procedural aspects (including the necessary filing requirements) will need to be published.
When the framework was adopted in February 2019, it was roundly criticised as further promoting political intervention in the SA merger review process and further distorting the role and function of the SA merger control regime. In hindsight, some of these criticisms failed to take cognisance of the global trend for FDI screening and that, in many ways, SA was still aligning with the actions of many trading partners.
The global trend does not necessarily legitimise the SA developments as the move for greater global FDI screening is itself not without criticism as indicative of inward-looking international relationships including concerns of protectionism. At the very least, however, the global move for FDI screening provides a wider context in which the SA framework must be evaluated. In addition, in terms of practical impact, the increased trend for global FDI screening may hasten implementation of the SA FDI framework.
* The author would like to thank Uzair Bulbulia for his assistance in writing this blog.