Introduction: FDI rules
Practitioners working on M&A deals have now become accustomed to dealing with a wide variety of regulatory rules through which they regularly advise their clients to navigate, particularly merger control, the foreign subsidies regulation and foreign direct investment ("FDI") rules. The European Union ("EU") has made much progress in its revision of the FDI Screening Regulation (the "Proposed Regulation") which entered trialogue negotiations in June 2025. As the EU gears up towards finalising the text, a few thoughts on the status of the Proposed Regulation and the implications on M&A deals are merited, particularly where the deals concern targets operating in sensitive sectors.
Background
The EU is now accustomed to FDI rules. Back in 2019, the EU added the FDI Regulation into its regulatory armoury as a tool aimed at addressed the geopolitical and economic shifts in global power distribution and to address risks to security and public order, particularly in certain key areas. The proliferation of screening mechanisms is also a trend which has been observed worldwide.
Although the introduction of the FDI Regulation did not establish an EU-wide screening mechanism, it did set minimum standards that national screening tools must meet. These standards are designed to ensure that investors' rights are protected during the screening process and that the mechanisms remain effective and non-discriminatory. Key requirements include confidentiality, anti-circumvention rules, and access to judicial review of screening decisions. While Member States were encouraged—though not obliged—to implement such mechanisms, the FDI Regulation also created an EU-level framework for cooperation and information-sharing between Member States and the European Commission.
As a result, since 2019, most Member States have moved to introduce their own FDI screening measures, with only a few yet to follow suit. Malta, for example, established its national FDI screening regime shortly after the EU Regulation came into force.
Key principles of the FDI Regulation
The current FDI Regulation targets investments of any kind by a "foreign investor" aiming to establish or to maintain lasting and direct links to an entrepreneur to carry on an economic activity in a Member State, including investments that enable effective participation in the management or control of the target.
The FDI Regulation introduced a non-exhaustive list of sectors which the Member State may consider when deciding whether a transaction should be screened or otherwise. These include critical industrial, infrastructural, technological, supply and data sectors, access to sensitive information, including personal data, or the ability to control such information and the freedom and pluralism of the media.
Although the Member State screening the FDI in question has the final say as to whether the transaction will be allowed or otherwise, through the FDI Regulation's cooperation mechanism, Member States are obliged to notify the Commission and the other Member States of any notifiable FDI transactions in that Member State, giving the other Member States and the Commission the opportunity to comment on the transaction. The Commission is further enabled to issue non-binding opinions where an FDI threatened the public order or security of one or more Member States.
Rationale behind the proposed regulation
In 2023, the EU Commission (the "Commission") outlined its plans to introduce a revision of the FDI Regulation.
This proposal was triggered by the Commission's evaluation of the FDI Regulation which highlighted several shortcomings with the current regime, particularly issues arising from the lack of harmonisation between different member states.
In sum, the Commission identified these main issues:
- No clear guidelines as to the scope of Member States' regimes;
- Different timelines in different Member States leading to difficulties in closing transactions; and
- Different definitions being adopted by different Member States including on certain key concepts such as what constitutes FDI and the substantive test to determine if an FDI is likely to affect security or public order.
Proposed changes to the FDI Regulation
The text of the Proposed Regulation has significantly changed from the original Commission proposal. Following revisions pushed forward by the European Parliament and the Council, the main features of the Proposed Regulation are the following:
- An obligation on all Member States to set up their own FDI screening mechanisms. As noted, there are only a few remaining Member States which have not yet introduced an FDI regime into their laws;
- Indirect acquisitions by foreign investors through EU companies are caught by the FDI regimes;
- An obligation to require that deals cannot be closed prior to clearance;
- A minimum sectoral scope is introduced which includes a list of sectors and 20 EU-wide projects and programs which must be subject to screening; and
- Provisions dealing with EU-wide procedural alignment on timings and deadlines and minimum information requirements.
A significant proposed change is the introduction of a power being given to the Commission to block deals or impose remedies where although the receiving Member State of an FDI has accepted the deal, certain concerns are raised by the Commission or a different Member State. In such cases, the Commission would have the power to block or impose remedies on certain transactions. This proposal pushes for a shifting of influence from the Member States to the Commission. It is anticipated that during the remaining discussions, several Member States will push back on this position leading to a watering down or a complete removal of this power in an effort to have greater discretion and autonomy on FDI in their respective territories.
Among the proposed changes, is the introduction of mandatory sectorial screening in certain industries. Whereas the FDI Regulation adopted a permissive approach by introducing a non-mandatory list of activities which should be considered for screening, the Proposed Regulation proposes a minimum core of sectors which must be reviewed. These include sectors such as artificial intelligence, quantum technologies and space and propulsion technologies. The Parliament has also suggested increasing these to include raw materials, transport and farming land. For practitioners and deal makers, this will require a careful and thorough assessment of the target's activities and the sectors in which it carries out its economic activities.
A notable change involves transactions subject to the FDI rules of several Member States. The Proposed Regulation introduces a mechanism whereby applicants must "endeavour" to file the notifications with the relevant FDI authorities, simultaneously. The idea behind this proposal is for the relevant filing deadlines to be aligned between the different Member States. Should this proposal be retained in the final text of the Proposed Regulation, efforts will have to be made by the various legal counsels involved to ensure that they are able to dovetail the filings. This would require deal teams to carry out an assessment early on during the inception of the deal to have a preliminary understanding in which Member States a filing will be required, should the deal progress.
Conclusion
The legislative road ahead leading to the eventual implementation of the Proposed Regulation is long and complicated and it is unlikely that it will be in force before 2027. Deal makers and investors are advised to keep their eye out for the everchanging landscape that the Proposed Regulation will introduce in the regulatory field of FDI and what impact this will have on their deals.
For dealmakers eyeing Malta, the proposed EU reforms mark an inflection point. With broader sectoral coverage, stricter procedural alignment, and heightened Commission oversight, foreign investment reviews will become even more a prominent feature of cross-border M&A strategy. While the reforms promise greater clarity and harmonisation across Europe, they will also add layers of regulatory scrutiny that could affect deal timelines, structuring, and execution certainty. In Malta's case, where the economy actively seeks external capital, the key will be ensuring that heightened EU security considerations do not undermine competitiveness. Accordingly, evaluating how the proposed rules will eventually be implemented and how such implementation will affect Malta is essential.
This article was first published in 'The Malta Independent' on 20/08/2025.
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.
