European Union: A New Regulation On FDI Screening In Europe

I. Introduction

On 5 March 2019, the Council of the EU approved a new framework to screen foreign direct investments ("FDI") coming into the EU. This concludes a legislative process kicked off in 2017. The newly adopted Regulation aims to protect the EU's strategic critical assets against investments that are detrimental to the legitimate interests of the Union or its Member States. It sits well with the more ambitious move by France and Germany to shape a European industrial strategy,1 which acknowledges FDI screening as one of its centrepieces.

II. The new enabling framework

The Regulation does not establish EU-level screening nor does it harmonise existing screening mechanisms or obligate Member States to create an FDI screening mechanism. Instead, it confirms that Member States may maintain, amend or adopt FDI screening mechanisms on grounds of security or public order under the conditions spelled out in the Regulation. It also acknowledges that Member States will retain their final decision-making power on FDI.

Rather, the Regulation seeks to set in place a framework that will enable structured cooperation between the European Commission (EC) and the Member States, while allowing decentralised FDI investment screening by the Member States.

To that end the new framework will:2

  • Create a cooperation mechanism where Member States and the EC will be able to exchange information and raise concerns related to specific investments; this includes a notification obligation of the Member States towards the EC and other Member States regarding FDIs that are subject to their screening;
  • Allow the EC to issue opinions when an investment poses a threat to the security or public order of more than one Member State, or when an investment could undermine a project of EU interest (e.g. Horizon 2020 or Galileo). The EC is obliged to issue an opinion if at least one third of the Member States believe the FDI may adversely affect their security or public order, or upon a request from the Member State in whose territory the FDI is planned.

    The Member State to which the opinion is addressed is required to take utmost account of the EC's position and to provide the EC with an explanation should it decide not to follow the EC's recommendations;
  • Encourage international cooperation on investment screening, including sharing experiences, best practices and information on issues of common concern. The cooperation between the EC and the Member State should be carried out through established contact points. In addition, the Regulation establishes an expert group composed of representatives of the Member States that should support the EC and the Member States in their policy-making.
  • Set certain requirements for Member States who wish to maintain or adopt a screening mechanism at the national level. For instance, Member States will need to put in place effective rules that their screening cannot be circumvented;
  • Take into account the need to operate under short business-friendly deadlines and strong confidentiality requirements.

The attainment of these objectives is centered on the cooperation mechanism. Going forward, Member States and the EC will be able to cooperate on incoming foreign direct investments in the framework of a structured process.

This cooperation process also applies to FDIs in Member States without a screening mechanism. Thus, the Regulation empowers Member States and the EC to comment on FDI that are not subject to an official screening.

The Regulation covers a broad range of investments which aim to establish or maintain lasting links between a non-EU investor (including state entities) and an undertaking carrying out economic activity in a Member State.

It sets out an indicative list of factors which the Member States / EC should consider when determining whether an investment is likely to affect security or public order. This includes effects of the investment on critical infrastructure, critical technologies, supply of critical inputs (e.g. energy or raw materials), access to sensitive information or the ability to control information, and the freedom and pluralism of the media.

The Member States and the EC may also consider the general background of the foreign investor, in particular whether the foreign investor:

  • is directly or indirectly controlled by the government;
  • has been previously involved in activities affecting the security or public order of a Member State; or
  • carries a serious risk that it engages in illegal or criminal activities.

The Regulation will enter into force in the coming weeks following publication in the Official Journal. Member States and the EC will then have a transitional period of 18 months to put in place the necessary arrangements for the application of this new mechanism.

III. Outlook

While the EU will remain an open economy for investments, the new FDI screening is anticipated to increase scrutiny of foreign acquisition. Currently 14 Member States have FDI screening mechanisms in place, while several others are in the process of reforming them or adopting new ones. In Central Eastern Europe, Austria, Hungary and Poland have FDI screening mechanisms. It is anticipated that the new EU-level screening framework will accelerate the convergence of existing FDI review rules, but also may encourage the adoption of new laws in those countries which currently do not foresee FDI screening.

Footnotes

1 Franco-German Manifesto for a European Industrial Policy Fit for the 21st Century

2 See press release of the European Commission of 5 March 2019, Foreign Investment Screening: new European framework to enter into force in April 2019

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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