On 23rd March 2021, Italian Prime Minister Mario Draghi decided to enforce the Golden Powers regulation to block the acquisition of 70% of the Milan-based LPE S.p.A, a semiconductor company, by the Chinese Shenzhen Investment Holdings. The news caught huge attention both among national and international media since it is the first time the government applies these special powers to block an acquisition of a domestic company.
Since the new EU framework on investment screening became operational in October 2020, many Member states started equipping their legislative bodies with new regulations to support risk assessment on inbound foreign investments. This was also the case for Italy where, with the issuing of the Liquidity Decree, the special powers’ intervention scope has been extended.
But how does these special powers work and why did the attempted takeover brew this much attention worldwide?
What are these Special Powers?
In Italy, the ‘Golden Power’ regulation is at the cornerstone of the national investment screening mechanism. In essence, it provides special authority for the Italian government to block or limit foreign direct investments and corporate transactions which involve national strategic assets. Brought forward in 2012, the law enabled the Italian state to exercise this special authority when detecting threats deriving from foreign direct investments in specific sectors. The original sectors were defence, national security, energy, transport, and communications fields.
As mentioned, in 2020 the Golden Power’s application scope has been enlarged. The legislative tool amendment has been adjusted to the “EU foreign investment screening mechanism”, which fully became operational on 11th October 2020 and provided Member states with a broader regulatory framework at the Union level.
Recently, investment screening was a much-debated topic in the EU due to the shock in the global supply chain brought about by the Covid 19 pandemic. The halt in production left many European companies in a dire economic situation and hungry for external investments. Under these circumstances, the adoption of a coordinative tool on investment screening by the Commission was mainly justified by concerns over a potential loss of Member states’ strategic assets.
The case of LPE S.p.A and the State-Owned Shenzhen Investment Holdings
The Italian ‘Golden Power’, as a legislative tool, was mainly conceived to protect the national economy by preventing the know-how and critical infrastructures expropriation which can happen when a foreign entity acquires a controlling share in a company, especially if it operates into particular sectors.
A recent example of its application is the block of the acquisition of 70% of the Milan-based LPE S.p.A company by the Chinese Shenzhen Investment Holdings by prime minister Mario Draghi. The Milan-based company operates in semiconductor equipment production and, due to recent shortages in the industry, is considered a heated area of competition worldwide. For these reasons, the Italian Prime minister considered the proposed takeover as a “threat for Made in Italy” and blocked the deal.
A Closer Look at the Transaction
Diving into the acquisition at stake, we can see that the Chinese Shenzhen Investment Holdings is part of a large State-Owned Enterprise (SOE) conglomerate called Shum Yip Group Co., Ltd. Shun Yip Group is 100% controlled by the Chinese state through the Shenzhen Municipal State-owned Assets Supervision and Administration Commission (SASAC).
The Italian company LPE S.p.A was founded in 1972 and designs and manufactures epitaxial reactors. With 52 employees, can be considered small in size but, given its cutting-edge manufacturing activities, it is not to be overlooked. Worth to mention, the Milan LPE was already present in the Chinese market with a wholly foreign-owned enterprise established in 2003, called Lopez (Shanghai) International Trade Co., Ltd.
Generally, SOEs don’t necessarily follow market demand and supply logics. When investing abroad, they are mainly geared towards resources-seeking activities or know-how absorption for the attainment of broader national goals. In this case, the Chinese company’s interests seemed to echo China’s national goals. Of important note, at present, China has the largest semiconductor market, but only 16% of the semiconductors it uses are produced within the country itself. Despite the huge internal demand, the semiconductor industry is still a sub-sector in which China still strongly depends on imports. Under the plan of “Made In China 2025”, this share should rise to 70% by 2025.
Balancing the Level Playing Field on Investment
A prompt application of the ‘Golden Power’ regulation by the government is crucial in this context. With the support of our economic intelligence platforms and our FDI radar, we can point out a number of Chinese acquisitions in Italy that either for the transaction value or for the industry in which the target operated could be regarded as distortive.
The most relevant acquisition took place in 2018 when Shanghai’s SARI acquired 90% of the Milan-based NMS Group. The acquirer is a Chinese market-leader biotech investment company jointly established by the Chinese Academy of Sciences (CAS) and the Shanghai Municipal Government, the Shanghai Advanced Research Institute (SARI-CAS).
When looking at the Chinese Negative List on Foreign Investments, we can see that foreign investors cannot establish or exercise any form of control over medical or research institutes in China. Being aware of this, an acquisition like the one of NMS represents a clear example of an unbalanced level-field when it comes to bilateral investment opportunities. The lack of equal bilateral investment conditions is, therefore, an important factor when screening the risk of a company’s takeover by a foreign entity.
Considering the recent events, the ‘Golden Power’ has proven to be an important toolbox for protecting Italian key industries and technologies. The new EU framework has awakened consciences among members on investment screenings practices. It is now up to each country’s responsible unit to deploy their critical expertise when required and wisely apply the powers granted by the tool.