How political discretion will define takeover procedures post COVID-19

European governments have responded to the COVID-19 crisis by creating and further enhancing measures enabling them to react quickly to protect strategic companies and public order and security. First looks are now starting to be cast at what comes next, how governments will attempt to safeguard their substantial investments, and how far the unprecedented legitimacy boost of State intervention will go.

Shortly into the crisis provoked by COVID-19 it became increasingly clear that fragile businesses would be ideal targets for hostile takeovers. In reaction, the extraordinary support of European governments to struggling companies has accelerated the implementation of existing deliberations on how to protect national industries from foreign influence.

The French government has openly contemplated acquiring or increasing its stake in national companies to protect them from foreign bidders; in Germany, Ministers for the Economy and Finance, Peter Altmaier and Olaf Scholz, claimed that State acquisitions of equity capital and even re-nationalisation are a real possibility to protect technological and economic sovereignty, while the Italian government – after several unsuccessful attempts – finally took full ownership of Alitalia to save it from collapse amid the crisis.

After a laying low in the beginning of the crisis, the European Commission has meanwhile seized its chance and is actively calling on Member States to make full use of their screening mechanisms for foreign direct investment, while simultaneously working on extending the Temporary Framework for State Aid measures to allow Member States to recapitalise companies badly affected by the crisis and thus expand control over them.

In implementing these instruments, several governments have been quick to start attaching first political conditions to financial aid, demonstrating their willingness to use their forced interventions for furthering indirectly related items of their wider policy agenda. As a striking example, the French Government emphasised openly that its €13 billion loan programme to AirFrance/KLM will be conditional on the airline becoming “the most environmentally respectful […] on the planet”.

In terms of rebuffing unwanted (read: foreign) takeovers in the immediate term, common authorisation procedures will likely be an increasingly employed instrument to protect key strategic national interests, and the main embodiment of this has come in the form of the rediscovery – or introduction – of screening measures for foreign direct investment (FDI), as recently seen in countries like Spain, France and Italy. While this trend pre-dates the crisis, COVID-19-sparked mayhem is likely to act as an accelerator for not only having these measures in place, but also sporting the political assertiveness to put them to use.

When confronted with a takeover of a domestic company, governments will consider two criteria in their deliberations on how to employ the instruments at their disposal: the first is technical, related to the strategic nature of the asset coveted by the investor; the second is political, depending on who the investor is and where they come from. While the former is not set in stone, certain sectors – such as health in the past weeks, but also tech-adjacent or enabling ones – will become subject to a lot of attention. The latter, meanwhile, will be determined based on bilateral public and geopolitical considerations.

What is clear is that European governments are even more unlikely to be passive observers to unwelcomed transactions, and they will deploy the full suite of available tools to ensure their interests are protected. Thus, COVID-19 has marked the dawn of political discretion which will profoundly shape competition and market dynamics.

Therefore, as they examine the value of European assets, investors and market actors should ensure they have a thorough understanding of this new regulatory and political setting.

Learn more in our publication „The New Course – How political discretion will define takeover procedures post COVID-19“ or get in touch with the authors Henriette Peucker and Grégoire Verdeaux.