FDI Considerations in Competition
Competition Focus
FDI restrictions in competition law, like those in sectors such as security and telecoms, safeguard national interests. Compliance with ownership rules is vital to avoid penalties. Contact Omar Obeidat for details.
Law Update: Issue 367 - Saudi Arabia & Competition Focus
Omar ObeidatPartner, Head of Intellectual Property & Competition
Second to Merger Control, the most question being asked nowadays in the area of Competition Law is about Foreign Direct Investment (“FDI”) restrictions. So, what role does FDI restrictions play in the context of Competition? And how significant is FDI screening in the course of merger control review? What areas of ownership/nationality restrictions have an impact on investment? are there approvals or notifications required for a transaction to take place? In this article, we aim to answer these questions and shed light on this ever developing area that has recently become an integral part of most competition practices.
Second to Merger Control, the most question being asked nowadays in the area of Competition Law is about Foreign Direct Investment (“FDI”) restrictions. So, what role does FDI restrictions play in the context of Competition? And how significant is FDI screening in the course of merger control review.
While FDI is usually beneficial to economy, it can carry risk of decreasing competition either because it results in creating barriers to market entry or creates a market power with dominance or one that may harm competition. Apart from competition consideration, there are national security risk considerations. Countries tend to regulate investment in certain ‘strategic’ sectors in order to safeguard the national sovereignty over these important sectors and protect industries from foreign influence. As one may appreciate, globalization has led to multinational entities gaining commercial interest across multiple sectors. Therefore, depending on what constitutes ‘strategic’ in a given jurisdiction, economic sovereignty, through FDI restrictions, would safeguard against foreign dominance in such sector. Not only does the sector list vary from one country to another, but also percentage cap on foreign ownership may vary depending on the sector. In the UAE for example, the list of restricted sectors include, among other areas, investing in
Security and Defense Activities and Activities of Military Nature
Telecoms
These restricted activities are subject to controls for licensing companies that engage in any of these activities by requiring a minimum shareholding of UAE nationals or requiring relevant Governmental authority approval for foreign investment in such activities. If follows from hereon to identify which activities may fall under ‘defense activities or telecom services. Do cloud services, voip services or other services regulated by the telecom regulator also fall under this area? Are software for use by security agencies classified as a security services? Many subcategories of services would fall under the broad sectors of telecom and defense and must therefore be appropriately studied in order to clear through FDI restrictions. The purpose of restricting foreign domination in certain sectors is to safeguard national interest and prevent foreign control of a vital sector and therefore, these activities would remain under continuous review.
Another area to consider is Ultimate Beneficiary Owner “UBO”. FDI restrictions may apply on the indirect acquisition of a local entity through acquiring shares in the holding/parent company. Furthermore, depending on the jurisdiction, there may be notification requirements for reporting purposes only or there may be a substantive review carried out by the relevant authorities to approve a transaction. These notifications may be post transactional or in advance of a transaction. Even addressing this aspect may vary in one jurisdiction such as Qatar, where the rule applies differently in the financial free zone compared to acquisitions related to onshore businesses.
Risks of failing to adhere to UBO requirements or Restricted activities depending on the jurisdiction may include fines and cancellation of licenses.
As such, the FDI considerations remain a key area for clearing acquisition transactions and its reglations will continue to change taking into consideration the list of sectors important to an economy and impact of change of ownership at the direct or indirect level.
For further information,please contact Omar Obeidat.
Published in April 2024
