On July 13, 2023, the Court of Justice of the European Union (CJEU) rendered its inaugural verdict regarding the EU's Foreign Direct Investment Screening Regulation (Regulation (EU) 2019/452) in the case of Xella Magyarország (Case C-106/22). This article examines the facts of the underlying case, the judgement issued by the CJEU, its implications for (non-)EU companies and especially for the Belgian FDI Screening Mechanism.


The Hungarian government intervened to block the indirect acquisition by a US-based private equity firm of Hungarian-based Xella Magyarország that possessed a quarry responsible for extracting construction aggregates like sand, gravel, and clay. Remarkably, the quarry's contribution to Hungary's aggregate production was marginal, constituting less than 1%. The other 90% of the quarry's output was channeled to a direct acquirer, a wholly-owned subsidiary of a German entity, while the remaining portion was directed towards Hungarian construction firms.

The rationale provided by the Hungarian government underscored its concern for preventing speculative investments within enterprises that hold strategic importance for the nation's economy. The basis for its decision to obstruct the acquisition resided in the essential role played by the quarry in the extraction and distribution of vital aggregates, coupled with the necessity to ensure a secure and foreseeable supply. The argument put forward was that the transfer of ownership to foreign entities could jeopardize the sustained, long-term availability of these critical construction materials.

Xella Magyarország promptly lodged an appeal against the ruling with the Budapest High Court. In its appeal, Xella Magyarország contended that the ministerial decision displayed elements of arbitrary discrimination and veiled constraints on fundamental principles of EU law, more specifically on the free movement of capital and the freedom of establishment for companies. Recognizing the complexity of the matter, the Budapest High Court sought guidance from the CJEU regarding the interpretation of EU law.

Insignificance of ultimate ownership of the acquiring entities

The CJEU held in its decision on the case that the EU FDI Screening Regulation does not extend its reach to encompass acquisitions made by EU-based purchasers, irrespective of the ultimate ownership by non-EU parties. The notion of "foreign direct investment", as defined in the EU Screening Regulation, includes only investments where the direct investor is "an undertaking constituted or otherwise organized under the laws of a non-EU country". Companies established under Member State law, with registered offices, central administration, or principal places of business in the Union, are considered EU entities for FDI screening, even with non-EU shareholders. Cross-border acquisitions undertaken by EU-based buyers are subject to EU law governing the freedom of establishment and free movement of capital. In this regard, the CJEU reminded that "all measures which prohibit, impede or render less attractive the exercise of freedom of establishment" restrict that fundamental freedom and are prohibited.

The only exception arises in case of such an investor's circumvention attempt by artificial arrangements that do not reflect the economic reality. When questioned about the scope of the FDI Regulation, the European Commission (EC) indicated that a prevalent example of circumvention is when foreign investment into the EU is channeled through an EU-based "shell/letterbox company," which lacks any genuine economic activity and is solely established as a legal conduit for the investment. This viewpoint reflects a stringent stance on investments facilitated via special purpose vehicles. Nevertheless, the EC acknowledges the necessity to assess each unique deal structure on an individual basis.

The ECJ did therefore not follow the Advocate General's Opinion that the Hungarian measure should fall within the FDI Screening Regulation's scope, as it should apply to any foreign investment, regardless of the form or structure.

Conditions under which EU Member States may screen and block FDIs

An additional takeaway from this judgment lies in the balance it strikes. EU Member States retain the autonomy to define their own objectives with regard to investment screening, encompassing public policy, public security or public health, which must be appropriate and necessary for the protection of such interest. Nevertheless, the framework of investment screening mechanisms cannot impinge upon the foundational freedoms of the European Union, unless these mechanisms can establish a genuine and sufficiently serious threat to a fundamental interest of society.

While recognizing that the objective of safeguarding the security of supply for certain products and services can be a valid reason for public security and thus a potential justification for restricting fundamental freedoms, the ECJ has ruled that the objective of securing the supply of raw materials for local construction companies - unlike the objectives in sectors such as petroleum, telecommunications, and energy - does not meet the criteria for a possible basis for a blocking decision. Furthermore, the ECJ has raised questions regarding whether or not the transaction blocked by Hungary could genuinely pose a "substantially serious and real threat to a fundamental societal interest," given that the entity directly acquiring the target had already procured 90% of the target's production capacity in the past.

Moreover, the verdict underscores that any blocking decision taken by EU Member States is subject to a judicial review based on EU law. Hence, the ruling by the ECJ strengthens the procedural position of acquirers in screening procedures pursuant to national legislation. This newfound clarity is poised to streamline legal avenues for challenging governmental decisions that block or restrict FDIs, thereby offering a more accessible route for seeking redress.

Impact on the Belgian FDI Screening Mechanism

Apart from raising an interesting discussion regarding the coexistence between FDI screening rules and the most fundamental EU rules relating to the freedom of capital and the freedom of establishment, the judgment has an impact on national FDI screening mechanisms that in many cases, such as for instance in Belgium, are only very recent.

The Belgian FDI Screening Mechanism identifies three distinct categories of foreign investors. The first category includes individual investors who maintain their primary residence outside the European Union. The second category comprises businesses that have their registered headquarters located outside the EU or are incorporated under the laws of a non-EU state. Lastly, the third category encompasses companies whose ultimate beneficial owner(s) (UBOs), as recognized according to Belgian law, reside outside the EU.

The Xella Magyarország case puts pressure on the application of the FDI Screening Mechanism to the last category of non-EU UBOs. While it states that these do not fall within the FDI Regulation, the primary competence for screening FDIs remains with the national level of EU Member States. National rules may therefore continue to apply to intra-EU FDIs where the UBO is from outside the EU, but their effective application may have to be done even more carefully than in the event of non-EU FDIs. Genuine grounds of public policy, public security or public health will have to be raised to object or amend the conditions of any such investment, and sufficiently motivated, in light of the fundamental EU rules of free movement. The potential implications of this judgment further complicate how investors should anticipate the application of the Belgian FDI Screening Mechanism, which, in its early stage, is still highly unpredictable. National screening authorities may have to spend more time to investigate in detail whether or not the EU company has substance or is an empty shell to circumvent the rules, requesting more information and thereby delaying a deal. While using an EU shell in an EU Member State with less stringent FDI screening rules to complete an investment in another Member States may seem appealing, it may actually lead to more complications and unclarities.

Secondly, it is interesting to note how the CJEU narrows down the scope of the FDI rules in this case to transactions that could genuinely pose a "substantially serious and real threat to a fundamental societal interest". Given the very long list of sectors that are found within the Belgian FDI Screening Mechanism's scope, the question may be raised if they are all genuinely critical for Belgian national security or its national interests. Investors in such sectors (e.g., raw materials supply, personal data processors or the biotech sector) may question this when FDI screening rules are applied to them.

However, this issue is to a large extent mitigated by the fact that the Belgian FDI Screening Mechanism itself only escalates an investment from a preliminary assessment phase to a real screening phase if there is a real potential impact on national security, public order and strategic interests. The mere fact that a target company falls within an in-scope sector does therefore not mean that the investment will be effectively screened. Notwithstanding, the escalation of such investment to the screening phase will have to be done based on substantive reasons, especially in the case of intra-EU investments with foreign UBOs.

Read more on the Belgian FDI Screening Mechanism in our extensive practical FAQ: https://www.mondaq.com/inward-foreign-investment/1336830/frequently-asked-questions-on-the-new-belgian-foreign-direct-investment-fdi-screening-mechanism-as-of-1-july-2023

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.