Investment control in transactions in the life sciences and healthcare sector

The regulatory complexity of transactions is constantly increasing. Particularly for transactions in the life sciences and healthcare sector, investment control is often relevant in addition to merger control. Why is this the case and how should it be handled?

The aim of investment control is to ensure that foreign investment in domestic companies and assets does not pose a threat to national security and public order. During the coronavirus pandemic and due to ongoing geopolitical tensions, there has been a significant expansion and tightening of investment control systems worldwide. The current political trend of focusing on the national protectionism and the associated distancing from foreign influences suggests that investment control will become even more important in the future.

Sector-specific relevance

Investment control is particularly relevant in the life sciences and healthcare sector. For security reasons (strategic importance, sensitive data, critical infrastructures), this sector regularly falls within the scope of protection of investment protection regimes. 
Every sector-relevant transaction – which, in addition to traditional acquisitions, can also include financing rounds, mergers, collaborations and license deals – must therefore also be assessed from an investment control perspective.

Effects

Investment control means that additional regulatory approvals may be required, which can have a negative impact on the timeline, complexity and costs of a transaction and consequently on the competitiveness of the (foreign) acquirer (compared to domestic competitors) and thus the selection of suitable acquirers for the seller. 

At first glance, "domestic" acquirers can also fall under the investment control regime. This is because the "nationality" of the acquirer is determined not only by the direct acquiring company, but also in particular by the ultimate beneficial owner and, under certain circumstances, by every company along the ownership chain. The consequence of investment control is generally the prohibition of completion or only subject certain conditions. Completion without regulatory approval can lead to the invalidity of the transaction and severe fines, among other things.

Practical recommendations

In view of its significant impact on the entire transaction cycle, investment control should be included in the structuring and planning of transactions in the life sciences and healthcare sector, not least because it has an impact on all other processes (and documents). 

In addition to the regulatory procedure, provisions on the allocation of regulatory risk from the perspective of the target company or the seller are essential in the purchase agreement. If consent is refused, the sales process must be reopened or reconsidered, often with consequences for the company valuation.

This article was first published in the 4/2024 issue of |transcript in German.