Foreign investments and the interplay of merger control, FDI and FSR

January 2026  |  MARKET PULSE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

January 2026 Issue

Foreign investors have traditionally navigated cross-border investment and expansion with relative ease. Today, however, they find themselves at the heart of an intensifying regulatory storm. As the European Union (EU) tightens its grip on regulatory control, these entities are facing unprecedented scrutiny, with foreign direct investment (FDI) screening and Foreign Subsidies Regulation (FSR) review now added to the well-known merger control requirements. The rules are no longer just about market share or consumer welfare; they are about sovereignty, security and the subtle influence of foreign capital. What was once a technical exercise in competition law has become a battleground for industrial policy, geopolitical alignment and economic resilience. Against this backdrop, foreign investments are reshaping – and being reshaped by – the evolving architecture of regulatory law of the EU and its member states.

The rise of the FSR

The FSR, which came into force in January 2023, adds red tape to EU regulatory control. The regulation introduced, among other aspects, a mandatory pre-merger notification regime for transactions involving foreign financial contributions (FFCs) exceeding €50m over three years, where the target, one of the merging parties or a joint venture generates at least €500m turnover in the EU. The European Commission (EC) now has extensive powers to investigate transactions that benefit from FFCs, even if those FFCs are based on market terms.

The first in-depth FSR investigation of an M&A transaction, concluded in September 2024, involved the acquisition of PPF Telecom Group by Emirates Telecommunications Group (now rebranded as e&). The EC found that several foreign subsidies – including a de facto unlimited state guarantee and loans from United Arab Emirates-linked entities – constituted foreign subsidies that could distort competition in the EU post-transaction. Although the acquisition was ultimately approved, it was subject to a 10-year remedy package, including governance reforms and restrictions on intragroup financing. This case underscores the EC’s willingness to intervene where foreign state support may confer an unfair advantage in the EU internal market, even if the transaction itself appears commercially sound.

Companies must now assess not only competition effects but also the origin and nature of their financing. Private equity firms and sovereign wealth funds are particularly exposed, as the EC scrutinises the role of limited partners and the commercial terms of their investments.

National sovereignty and the golden power regimes

While the FSR operates at the EU level, member states continue to assert their own powers through national FDI regimes. Italy’s ‘golden power law’ is a prime example. The Italian government can veto or impose conditions on transactions involving a wide range of strategic sectors such as defence, energy, artificial intelligence, biotechnologies, and so on. These powers apply regardless of the nationality of the investor, but are particularly relevant for non-EU entities.

The golden power regime includes its application to intragroup transactions involving non-EU investors. This means that even internal restructurings or share transfers within multinational groups may trigger notification and review.

The interplay between national regimes and EU law is not without tension. In the banking sector, the EC recently launched informal investigations into Italy’s use of investment screening tools, raising questions about proportionality and compliance with EU principles as the respective Italian authority imposed conditions on a banking merger which was cleared under remedies by the EC.

As member states expand their powers, the risk of colliding with EU law, fragmentation and legal uncertainty increases, potentially deterring foreign investment and complicating cross-border transactions. To improve harmonisation between member states, the EC is currently proposing an amended version of the FDI Screening Regulation as a framework for FDI.

“In an effort to strike a balance between open markets and concerns over foreign influence, regulators are increasingly adopting targeted, risk-based measures,” says Caroline Scholke, counsel at Clifford Chance. “Merger control is now being employed to drive growth and strategic autonomy on a global scale, rather than solely for competition enforcement, by being more permissive in strategic sectors to support the EU’s broader industrial and innovation policy objectives.

“At the same time, the EC applies stricter scrutiny to foreign subsidies, state-backed investors and foreign-controlled entities under the FSR, whereas national regulators follow an increasingly protectionist approach under their national FDI regimes. The challenge lies in ensuring that foreign investment supports innovation and competitiveness without compromising EU and national interests. This reflects a broader shift toward ‘economic security’ as a policy goal,” she adds.

Jurisdictional challenges and policy evolution

The European Court of Justice’s 2024 ruling in Illumina/Grail marked a turning point in the EC’s jurisdictional reach under the EU Merger Regulation (EUMR). The Court held that the EC cannot review below-threshold transactions referred to it by national authorities under article 22 of the EUMR, where those authorities are not competent to review these transactions (for example, because they do not reach the national thresholds). However, the EC and national authorities have signalled their intent to pursue alternative avenues, including referrals from national authorities with call-in powers for below-threshold mergers – such as in the NVIDIA/Run:ai transaction, where the Italian competition authority made use of its call-in powers and referred the case subsequently to the EC – and post-closing investigations under abuse of dominance rules.

The EC is also revising its horizontal merger guidelines to incorporate broader policy objectives such as innovation, resilience and security. The Draghi Report, commissioned by the EC, advocates for an ‘innovation defence’ in merger assessments, allowing parties to argue that consolidation enhances their ability to innovate and compete globally. This reflects a shift toward a more strategic and industrial policy-oriented approach to competition enforcement. This is also reflected in the revised Market Definition Notice, which acknowledges the importance of non-price parameters, including innovation, quality, reliable supply and sustainability.

The convergence of merger control, FDI screening and the FSR creates a complex regulatory environment for foreign investors operating in the EU. Companies must navigate overlapping jurisdictions, evolving thresholds and increasingly politicised assessments. Early engagement with legal and regulatory counsel is essential to mitigate risks and ensure compliance.

Strategic crossroads

As regulatory control evolves into a multidimensional tool of industrial policy, regulatory scrutiny is expanding beyond market dynamics to encompass ownership structures, funding sources and geopolitical implications.

The convergence of merger control, FSR and national FDI screening has created a dense and often unpredictable terrain for dealmakers. Navigating it requires more than legal compliance; it demands strategic clarity, political awareness and a deep understanding of the EU’s shifting priorities plus thorough preparation.

“Foreign investors investing in the EU are facing increasingly complex merger control scrutiny, numerous and diverging FDI regimes and the relatively new FSR,” notes Thurid Koch, a lawyer and knowledge manager at Clifford Chance. “Hence, regulatory aspects continue to be a significant aspect in cross-border transactions and confront companies with partly burdensome proceedings and significant uncertainties.

“Against this backdrop, companies should carefully analyse regulatory risks in advance and take appropriate measures in terms of setting up the transaction structure and drafting the underlying documents, or even the proactive engagement with regulators upfront,” she says. “Notifications must be accurate and complete, and supported by robust internal records in order to handle detailed information requests swiftly. Early planning and coordination are therefore essential to avoid or reduce the risk of negative effects such as delays, conditions or even prohibitions.”

Strategic enforcement and deal structuring in a new era

The EC’s willingness to challenge transactions involving foreign subsidies, even in cases where traditional competition concerns are minimal, signals a broader shift in enforcement priorities – from market concentration alone to the strategic implications of foreign influence.

As a result, deal structuring has become more sophisticated. Legal advisers are now recommending pre-emptive remedies and transparency commitments to mitigate regulatory risk. These strategies aim to reassure regulators that foreign control will not undermine competitive dynamics or strategic autonomy.

According to Ms Scholke, the most significant challenge in coordinating EU-level merger control, FSR and national FDI proceedings is that the assessment of the respective regimes aims at different regulatory objectives: a competitive common market at EU level versus national public order and security interests at national level. “This can result in different outcomes, create legal uncertainty and incur additional costs and delays for investors,” she explains. “Furthermore, national FDI regimes lack harmonisation, as FDI reviews are handled nationally with varying rules, scopes of applications and proceedings, unlike the centralised EU merger control process.

“The administrative burden is heavy and complex, with broad information requirements, so early risk assessment and close coordination between legal and deal teams is essential,” she adds.

In this evolving environment, foreign investors must not only comply with legal thresholds but also demonstrate strategic alignment with EU values and priorities. This requires a proactive approach to stakeholder engagement, regulatory dialogue and public interest framing. The future of regulatory control in the EU will likely be shaped as much by politics and policy as by economics and law.

CONTRIBUTORS:

Caroline Scholke is counsel at Clifford Chance. She can be contacted on +49 211 4355 5202 or by email: caroline.scholke@cliffordchance.com.

Dr Thurid Koch isa Lawyer & Knowledge Manager at Clifford Chance. She can be contacted on +49 211 4355 5202 or by email: thurid.koch@cliffordchance.com.

© Financier Worldwide

WITH

Caroline Scholke and Thurid Koch

Clifford Chance