The European Parliament approved on 14 February 2019 a new Regulation, aimed at harmonizing and coordinating the various national foreign investment screening mechanisms across the economic bloc. The Regulation does not foresee screening at EU level. However, Member States will be encouraged to share information and cooperate when scrutinising foreign investment, whilst the European Commission will orchestrate the communications and provide opinions on specific projects.
Questions remain on the practical impact on business of this new framework. Whilst on the one hand it may create opportunities, on the other it risks expanding the scope of FDI screening in the EU, adding complexity and potentially lengthening approval timelines.
At a time of turbulent trade relationships around the globe, and increasing concerns about the fairness of commercial dealings between nations, the European Union (the EU) is acting to create a stronger, coordinated approach on investments affecting the European economy.
The European Parliament approved on 14 February 2019, by an overwhelming majority, a new Regulation aimed at establishing a framework for the screening of foreign direct investments into the EU (the FDI Regulation). It is expected that the text will be formally adopted by the Council (representing the EU Member States) in early March and that the FDI Regulation will start to apply in approximately 18 months’ time.
The FDI screening framework is based on two core principles: EU Member States should maintain responsibility for assessing the impact on security and public order in their respective territories of foreign investments, but they should cooperate with other Member States and the European Commission (the Commission) to collectively address risks posed by foreign investments.
The FDI Regulation falls short of putting in place a comprehensive mechanism such as the one run by the Committee on Foreign Investment in the United States (CFIUS) or a number of EU Member States such as Germany1, or equivalent to the EU Merger Regulation (the EUMR). This would have been legally difficult and politically unpalatable. Yet a number of the FDI Regulation’s features, coupled with the evolving sentiments on foreign investments into the EU, have the potential to alter the business and legal landscape in the coming years.
THE FDI REGULATION: A SHORT HISTORY
The debate surrounding foreign direct investment entering the EU became a preeminent issue in February 2017 when the French, German and Italian ministers for the economy requested action at the European level. Subsequently, on 13 September 2017, Commission President Juncker spoke before the European Parliament and confirmed that the EU would remain open to FDI but should devise “vigorous and effective policies” to ensure a level-playing field with the rest of the world, and to “protect critical European assets against investment that would be detrimental to legitimate interests of the Union or its Member States”.
The Commission’s proposal was a response to the EU’s de-centralized and fragmented system of monitoring FDI inflows, as well as Member States’ concerns about the lack of reciprocity with EU trade partners. Member States had pointed out the imbalance created by increased flows of FDI by non-EU investors with strong ties to their home governments and which often target sectors considered of strategic national and EU importance, such as energy, telecommunications and technology.
Despite fears of significant delays and complications, as well as scepticism and resistance by several Member States, when the initial proposal was made in September 2017, the legislative process leading up to the adoption of the FDI Regulation was actually rather quick.
FDI SCREENING AT NATIONAL LEVEL
Half the EU Member States currently have a mechanism in place to screen foreign investment in their territories. These review mechanisms vary in many respects, e.g. in terms of duration of the process, the nature of the public authority screening investments, voluntary or mandatory filing, type of transactions triggering a review, and sectors concerned.2 The FDI Regulation does not aim to put an end to this diversity of approaches. On the contrary, it will allow Member States to retain a significant degree of freedom within the procedural and substantive boundaries set out in the FDI Regulation.
First, and foremost, the FDI Regulation does not foresee any centralised screening mechanism at EU level by which an EU institution would have the final say on foreign investments. Rather, the final decision will be taken by the Member State undertaking screening.
Second, Member States will remain free to decide whether or not to put in place a national screening mechanism. Therefore, Member States without a review mechanism will not be under an obligation to adopt one. Nevertheless, it seems likely that the FDI Regulation will lead to additional regimes being adopted. Those that have such a mechanism in place, or choose to adopt one, however, will have to ensure that it complies with a number of basic substantive and procedural requirements. The key principles set out in the FDI Regulation are:
- Certainty, for instance on the circumstances triggering the screening and the grounds for screening
- Transparency, including with respect to procedural rules and timelines
- Non-discrimination between investors of different foreign (non-EU) states; and
- Accountability, with recourse against screening decisions.
In addition, Member States with a screening mechanism in place must ensure that it cannot be circumvented by foreign investors.
A WIDE LIST OF RELEVANT SCREENING FACTORS
Although Member States’ screening mechanisms should focus on protecting security and public order, rather than mere threats of an economic nature, the FDI Regulation gives the following extensive (yet non-exhaustive) list of factors that Member States may (but not must) take into account in determining whether a foreign investment is likely to affect security or public order in their territory:
- critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
- critical technologies and dual use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies;
- supply of critical inputs, including energy or raw materials, as well as food security;
- access to sensitive information, including personal data, or the ability to control such information; or
- the freedom and pluralism of the media.
That these factors resemble a long laundry list should not come as a surprise. The FDI Regulation is the result of a compromise between Member States which have historically taken different views of what constitute strategically significant sectors of the economy.
In addition to these listed sectors, the FDI Regulation provides that Member States should be able to take into account whether a foreign investor is controlled, directly or indirectly, by a foreign government, including through ownership or significant funding, and whether a foreign investor has already been involved in activities affecting the security or public order of a Member State.
INFORMATION AND COOPERATION BETWEEN MEMBER STATES AND WITH THE COMMISSION
The current significant variation in Member States’ FDI regimes, coupled with a lack of coordination and transparency runs counter to the EU’s objective to form a credible, reliable and homogeneous economic bloc.
In addition to setting the boundaries within which national FDI screening should operate, the FDI Regulation also aims to increase cooperation between Member States as well as with the Commission.
First, Member States undertaking screening of foreign investment must notify other Member States and the Commission of this, even if a specific investment is not foreseen to have effects outside the territory of the reviewing Member State. Other Member States and the Commission then have the right, in cases of potential risk to security or public order or if they have relevant information, to ask the reviewing Member State for additional information and provide reasoned comments on the particular foreign investment (in the case of Member States) or issue a reasoned opinion (in the case of the Commission, when the investment affects more than one Member State). A Member State that considers that a foreign investment on its territory is likely to affect its security or public order, may request an opinion from the Commission or comments from other Member States. The Commission will be obliged, where justified, to issue an opinion if at least one third of the Member States express concerns.
The Member States’ comments and the Commission’s opinions will not be binding on the Member State reviewing a foreign investment. The FDI Regulation makes clear that the final decision will remain the prerogative of that Member State. However, “due consideration” must be given by the reviewing Member State to the comments and opinions received.
Moreover, in the case of foreign investments likely to affect projects or programmes of EU interest (i.e., which involve significant EU funding or are covered by EU legislation regarding infrastructure, critical technologies or critical inputs and are listed in an annex to the FDI Regulation, e.g. the Galileo satellite programme), the reviewing Member State shall take “utmost account” of the Commission’s opinion and provide an explanation if the opinion is not followed. This will require a greater degree of consideration than foreign investments which do not have an EU interest.
Second, even in the absence of any formal FDI investigation, any Member State and the Commission will be able to draw attention to a planned or completed foreign investment in another Member State. This possibility will remain open up to 15 months after completion of the investment. As in the case of foreign investment under screening, a Member State may receive comments from other Member States or opinions from the Commission, and will have to give them “due consideration”. The FDI Regulation does not prescribe what consequences this process will have on Member States where no screening regime exists or where no ex-post scrutiny is foreseen. However, the recitals to the FDI Regulation, referring to Member States’ general duty of sincere cooperation, exhort Member States to consider measures available under their national law or in their broader policy-making.
Coordinating the scrutiny of foreign investment across the EU is both new and ambitious. It should therefore not come as a surprise that, despite the best efforts of the legislator, the FDI Regulation leaves a considerable number of questions open. It is to be hoped that critical operational aspects of the common framework will become clearer before it starts to apply, in particular those set out below.
The impact on the timing of reviews and the effect of this on closing, as well as the ultimate fate, of transactions will be closely observed by market commentators. The FDI Regulation provides that Member States’ comments and the Commission’s opinions should be delivered within 35 days of a Member State notifying other Member States and the Commission that it is screening an investment. However, the FDI Regulation also provides that Member States and the Commission can request additional information within 15 days of that notification, and that their comments or opinions will then have to be delivered within 20 days of receiving that additional information. This means that, in practice, requests for information can effectively stop the clock until the response is delivered (similarly to delays in providing information under the EUMR) and the Commission and Member States will be able, to some extent, to extend deadlines. Given the potential lack of clarity around the timelines foreseen, companies may initially experience less certainty than today. Moreover, the possibility of post-closing scrutiny of completed transactions will inevitably raise considerable questions about legal certainty.
Foreign investors and undertakings concerned will also be apprehensive about publicity and the protection of confidential data in the multiple exchanges of information that the new system will entail. The FDI Regulation contains provisions on confidentiality and the protection of personal data (including through the use of encrypted communications systems) but, in practice, this will likely be a point of contention. The amount of sensitive information that Member States are obliged to communicate on a specific investment project and on the parties involved could be significant. It is conceivable that, based on information from a Member State, another Member State would open a parallel investigation ex officio (assuming this is possible under applicable national laws) in case of a failure to file an allegedly reportable foreign investment.
Perhaps more significant is the question of due process: whilst the recitals to the FDI Regulation foresee that Member States and the Commission might consider relevant information from economic operators, trade unions etc, the Regulation is silent on whether foreign investors and undertakings concerned will get access to the comments and opinions communicated to the reviewing Member State. The security aspect of FDI screening may lead to materially reduced transparency for companies than under the EUMR clearance process, for example.
Another area of concern is the interplay with merger control.3 Article 21 of the EUMR recognises the right of Member States to take appropriate measures in relation to transactions requiring notification to the Commission to protect legitimate interests other than competition. These include, in particular, public security, plurality of the media and ‘prudential rules’ (in effect, financial stability), as well as other public interests that the Commission, upon request of a Member State, may recognise as ‘legitimate’. The FDI Regulation’s recitals indicate that the relevant provision of the EUMR and the FDI Regulation should be interpreted in a coherent manner but does not provide more clarity on what is intended in that respect, in particular whether all of the screening factors listed in the FDI Regulation could justify a Member State’s intervention under the legitimate interests’ provision in the EUMR in the absence of a domestic FDI regime.
The impact in practice of enabling the Commission and Member States to issue opinions and comments to a Member State which is not carrying out screening of a particular investment where they consider that security or public order may be affected or they have relevant information remains to be seen but non-screening Member States may be encouraged to modify or, ultimately prevent foreign investments using other policy means than defined FDI regimes. This may in turn lead to less predictability and transparency for business. It also seems likely that the FDI Regulation may encourage additional Member States to adopt national regimes.
STILL OPEN FOR BUSINESS?
The key question for the international business community is whether the FDI Regulation will constitute an obstacle to investments in Europe. There is no reason to doubt that EU policymakers retain their strong belief that openness to foreign investment is a key principle and major source of economic growth. Further, they are keen to ensure a level playing field for international businesses investing in the EU.
The FDI Regulation is very different from the screening mechanisms at national level in the Member States or other jurisdictions, such as CFIUS. This is because no formal control will be exercised by any centralised EU institution. However, whilst the final decision rests with the Member State in which an investment is made, it nevertheless seems inevitable that peer pressure will force that Member State to take other Member States’ interests into account.
In any event, the FDI Regulation creates another layer of collective scrutiny of foreign investment activities. Indeed, the practical ramifications of the FDI Regulation could turn out to be more significant than initially contemplated. International investors and European businesses looking for new sources of capital will need to be on their guard and closely monitor the initial implementation steps of the FDI Regulation. Only time will tell whether the FDI Regulation constitutes an innocuous administrative hurdle or whether it could become a real game-changer in the European investment landscape.
1To read more about developments on FDI screening in Germany, the UK and the US, see our previous alerts here:
"German government lowers FDI screening thresholds for certain industries"
"UK Government proposes far-reaching national security investment powers"
"CFIUS Creates New Pilot Program for Mandatory Declarations"
2To read more about trends and developments in foreign investment scrutiny around the world, see our report:
"National interest screening: a growing challenge for international transactions?"
3To read more about global trends and developments in merger control, see our report:
"Global trends in merger control enforcement"