Worldwide: The Traps Of A CFIUS Like EU FDI Screening Mechanism

Finally, the much awaited harmonized screening framework of foreign investments into the EU (Regulation 2017/0224) has been agreed upon on 20 November 2018 by the EU Parliament, the Council and the Commission.

The agreed package will ensure that the EU and its Member States are equipped to protect their "essential interests" while remaining "one of the most open investment regimes" in the world. Protecting an open economy may sound like a comical oxymoron, but the press release of the European Commission on this topics does make for an amusing read!

Before discussing the proposed framework, let's talk about the elephant (or should we say panda) in the room, which is China. Here are some facts about recent Sino-European economic developments. The EU is today China's largest trading partner with over EUR 1.5 billion in daily bilateral trade. In this balance the EU is seeing a massive deficit of EUR 180 billion.  European companies in search for cheap production have, for decades, been the prime investors in China. However, since 2014, the flow of investments has turned, as China is now positioning itself as one of the world's largest exporters of capital. A depressed European economy – post euro crisis – has sparked a Chinese shopping spree for assets on the cheap. From wineries in Bordeaux, to the Piraeus in Athens, Hinkley Point in the UK to the top German tech giant Kuka, Chinese investments are multiplying and European governments often feel defenseless.

Germany recently initiated its own FDI screening mechanism and France and the UK quickly followed suit. Some 14 Member States have some kind of foreign investment screening mechanisms in place. Countries like Italy, France and Germany have increased their pressure on the EU Commission in 2017 to act swiftly and to adopt stricter, harmonized screening rules across the EU. Their main concerns are (1) the increase in Chinese acquisitions in security sensitive industries; (2) the asymmetrical investment restrictions, or a lack of reciprocity in market openness by China; (3) the prominent role of Chinese state-owned enterprises fueling oversees investments; (4) anxiety related to the potential economic harm by Chinese investments, and more broadly; (5) a renewed realism in the relations with China.

Not all EU Member States share those concerns. As a matter of fact, many were quite eager to receive badly needed Chinese investments. Other Member States were more principled about not following the US protectionist example. This EU – Chinese investment dilemma within the EU has now given birth to what we might call a rather watered down FDI review process.

The Commission was originally reluctant to institute a CFIUS-like approach to foreign investments in the EU, for fear of "sending the misleading signal that the EU is stepping back from its commitment to an open investment regime". During the 19th EU-China Summit in 2017, however, it became clear that EU leaders adopted a more assertive tone, notifying China of their discomfort. And EU Trade Commissioner Cecilia Malmström joined their more belligerent statements by adding that "Trade cannot simply be free. It must also be fair".

So what is the new EU screening framework of foreign direct investments into the EU?

The idea behind the new Regulation is that the EU and its Member States should have a say and retain the control over:

  • strategic assets such as nuclear power plants;
  • the production of critical defence inputs (such as military chips)
  • the transfer of sensitive technology or know-how to a foreign country whose hostile intent cannot be excluded; and
  • espionage, sabotage or other actions of a disruptive nature.

The Regulation does not require EU Member States to implement a foreign investment screening mechanism. However, where such a mechanism exists or is to be adopted at the Member State level, the Regulation aims to ensure that it meets certain basic screening requirements, such as judicial review of decisions, non-discrimination between different third countries and transparency. Furthermore, the new Regulation establishes a cooperation mechanism between Member States and the Commission in case a foreign investment could affect the security or public order. It also allows the EU Commission, on the same grounds, to initiate a screening if it deems it necessary to protect against threats posed by the investment to projects or programs of "Union interest". The latter may introduce uncertainty for investors – similar to CFIUS– as the EU Commission will have the authority to review and block investments, and even potentially unwind, closed investment transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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