On September 13, 2017 the President of the EU Commission (Commission), Jean-Claude Juncker, tabled a proposal for an EU regulation establishing a framework for screening of foreign direct investments into the European Union (Regulation).1 The proposal is made at a time where the lack of a coherent EU-wide approach towards controlling foreign direct investment into Europe has been increasingly criticized. It seeks to strike a balance between enabling greater protection against the sell-out of infrastructure and technology that is considered to be of national importance by one or more EU Member States and keeping an open foreign investment environment.
There is no EU legislation on foreign direct investment screening today. While mergers, acquisitions, and certain joint ventures between large companies are subject to review by the Commission under the EU Merger Regulation, that review is limited on competition law grounds. However, almost half of the EU's 28 Member States have put in place a variety of different national procedures enabling them to review foreign investments on national security or other public policy grounds.2
The draft Regulation proposes important steps to achieve greater coherence but falls short of introducing a single unified EU-wide procedure for foreign direct investment control. Under the proposed Regulation, the EU Member States would keep the power to review and potentially block foreign direct investment on security and other public order grounds, but would be required to ensure that their national systems meet certain minimum procedural requirements. Member States would also have to coordinate with each other before taking decisions, and the Commission for the first time obtains the possibility to issue advisory opinions to Member States.
- The proposed Regulation is not expected to come into force before the end of 2018, as it needs the approval of the European Parliament and Council of the EU.
- If adopted, the Regulation foresees that Member States will retain the power to operate national systems to review foreign investments in their home territories if they choose to do so. Member States will not be required to adopt or maintain foreign investment screens. But any national screening mechanisms will need to meet certain procedural requirements, most notably to allow for judicial redress against national authorities' decisions. In practice, this means that Member States might need to amend their respective rules to ensure compliance, but significant substantive changes are rather unlikely.
- The proposed Regulation will enable the Commission to issue advisory opinions to the Member States where an investment is planned or completed, i.e. whether or not the Member States concerned maintain a screening mechanism or are conducting a screening of the specific investment under their national rules. While these opinions do not formally bind Member States, they will carry some political weight.
- The proposal grants the Commission even greater influence in relation to foreign investments in projects that involve significant EU funding or are covered by EU legislation concerning critical infrastructure, technology, or inputs (e.g., Horizon 2020, Galileo, etc.). In these cases, the Commission would be entitled to conduct its own review. While Member States retain the formal decision making power also in these cases, they would have to provide an explanation if they want to diverge from the Commission's recommendation.
- Through the cooperation system set out in the proposed Regulation, it is foreseen that Member States will be able to raise concerns about the effects of foreign investments planned or completed in other Member States (i.e. outside their home territory) on their own security and public order.
- As Commissioner for Competition Margrethe Vestager confirmed in a recent speech, the proposed new framework will not affect the Commission's powers to review and approve concentrations on competition grounds under the EU Merger Regulation.3 If the proposal is adopted, the two processes will continue to run in parallel, most likely by different Commission Directorates (Competition and likely Trade). In practice, however, the potential involvement of the Commission and Member States would add an extra layer of review that in some cases could cause delays in the closing of acquisitions by non-EU companies.
- The initiative attempts to address concerns of some EU Member States about acquisitions of strategic EU assets by Chinese and other non-European investors. But it has already been met with criticism, as there is no consensus vis-à-vis foreign investments within the EU block. Even if the proposed Regulation is ultimately adopted into law, it is far from certain that it will prompt the Member States currently without screening procedures (in particular those relying heavily on investments from countries like China and Russia) to adopt similar rules.
The following section describes the proposed framework in greater detail.
The Proposed Framework
1. Scope of the Regulation
The proposed Regulation covers the screening of foreign direct investments in the EU on the grounds of security and public order.
If adopted, it will capture investments aiming to establish or maintain "lasting and direct links" between the non-EU investor and the target enterprise, including investments which enable effective participation in the management or control of a company. The broad definition in the proposal covers deals that stop short of a "concentration" under the EU Merger Regulation. At the same time, portfolio investments are not covered by the proposed Regulation.
Security and public order concerns cover a broad and non-exhaustive list of economic sectors:
- critical infrastructure, including energy, transport, communications, data storage, space, or financial infrastructure;
- critical technologies, including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space and nuclear technology;
- the security of supply of critical inputs; and
- access to sensitive information or the ability to control sensitive information.
Although recent acquisitions of strategic EU assets by non-EU state-owned enterprises were a key concern underpinning the Commission's initiative, the proposed Regulation also extends to privately funded investments. Under the proposal the Commission and the Member States will be able to take into account whether an investment is backed by a foreign government in their assessment of the effects on security and public order.
Under the proposal, the Commission and Member States will also have the power to screen direct investments carried out by EU-based companies owned or controlled by foreign investors, in order to curb attempts to circumvent foreign investment scrutiny.
2. The Commission's Advisory Role
The proposed Regulation foresees that the Commission will be able to issue opinions on grounds of security and public order on two occasions:
First, the proposal foresees that the Commission will be entitled to review foreign direct investments that may affect projects or programmes of Union interest. The term refers to projects or programmes that involve significant EU funding, or that are covered by EU legislation regarding critical infrastructure, critical technologies, or critical inputs. Examples of such EU projects are Horizon 2020 (research), Galileo and Copernicus (space), Trans-European Networks for Transport (TEN-T), Energy(TEN-E), and Telecommunications. The Member State will be required to "take utmost account of the Commission's opinion and provide an explanation to the Commission in case its opinion is not followed."
Second, the proposal foresees that the Commission will be able to issue a (nonbinding) opinion addressed to the Member State where a foreign direct investment is planned or has been completed, where it considers that a foreign investment is likely to affect security or public order in one or more Member States.
3. Close cooperation between Member States
The proposed Regulation foresees a cooperation mechanism between the Member States and the Commission that allows them to inform each other of foreign direct investments that may threaten security or public order. In the context of this proposed cooperation:
- Member States will need to inform each other and the Commission of any foreign direct investment that is undergoing screening by their national authority.
- A Member State is entitled to provide comments where it considers that a foreign direct investment planned or completed in another Member State is likely to affect its security or public order.
- All Member States must collect and make available certain information upon request of the Commission or other Member States, including inter alia the ownership structure of the foreign investors, value of the foreign direct investment, source of funding, and relevant products/services.
4. Basic procedural requirements for national screening mechanisms
The proposed Regulation does not require Member States to adopt or maintain a screening mechanism for foreign direct investments, but existing and new mechanisms will need to meet some basic (largely procedural) requirements. Specifically, they need to:
- be transparent and not discriminate between third countries;
- clearly define the triggering circumstances, the grounds for screening, and the applicable procedural rules;
- establish timeframes for the issuing of decisions;
- ensure the right to judicial redress against national authorities' decisions; and
- protect confidential information.
The Commission's initiative is in line with an emerging international trend of heightened scrutiny of foreign investments. The proposed Regulation was announced on the same day that US President Trump blocked the acquisition of US-based chip maker Lattice Semiconductor Corp. by the Chinese private equity firm Canyon Bridge Capital Partners, on grounds of national security.4
The proposal comes as a reaction to growing concerns among some EU Member States about acquisitions of strategic European assets by foreign (mainly Chinese) state-backed investors, and the uneven playing field created due to the limited access of European companies to the Chinese market. In a joint letter to the Commission in February 2017, Germany, France, and Italy urged the Commission to take action. A few months later, the European Parliament's Committee on International Trade called for a common EU approach on the screening of foreign investment in strategic sectors, because existing national measures "cannot guarantee reciprocity and fair competitiveness."5
These concerns have also sparked tightening of existing foreign investment regimes in some Member States. For example, in July 2017, Germany significantly expanded the scope of its German Foreign Trade Regulation to a larger set of industries.
Not all EU Member States share the same views, however. Southern and Eastern countries, in particular, rely heavily on foreign investment, whilst others, like the Netherlands, have traditionally endorsed liberal trade policies.
At the same time, the Commission is careful not to close the door on foreign capital, which is seen as a source of growth and jobs in Europe. Its Reflection Paper titled "Harnessing Globalisation" and published in May 2017, echoed the Member States' concerns, but at the same time stressed that openness to foreign investment remained a key principle for the EU. The Reflection Paper called for "careful analysis and appropriate action."6
With this legislative proposal the Commission thus seeks to compromise opposing views within the EU block, and strike a careful balance between the stated openness of the EU economy to foreign investment and the calls for greater protection of essential interests of the EU Member States.7
The Regulation is expected to spark debate within the Council of the EU. A number of countries, including the Netherlands, Spain, Portugal, Finland, and Denmark have already expressed their skepticism towards the Commission's proposal. The Estonian presidency at the Council of the EU has referred the legislative proposal to a panel of trade defense experts, which will probably delay approval. It remains to be seen whether the new Regulation will be ultimately adopted into law.
© 2017 Arnold & Porter Kaye Scholer LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
1 Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, COM(2017) 487 final; See also European Commission - Press release, State of the Union 2017 - Trade Package: European Commission proposes framework for screening of foreign direct investments, September 14, 2017.
2 The Member States are Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the United Kingdom. See Commission Staff Working Document accompanying the document Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union, p. 7.
3 Speech from Margrethe Vestager, Commissioner for Competition, Getting the best out of globalisation, EPC Policy Briefing, Brussels, September 26, 2017; See also Speech from Johannes Laitenberger, Director - General for Competition at the Commission, Enforcing EU competition law: Principles, strategy and objectives, Fordham University, 44th Annual Conference on International Antitrust Law and Policy New York City, September 15, 2017.
4 See Arnold & Porter Kaye Scholer Advisory, New Presidential Order Blocking Chinese Acquisition of Semiconductor Firm Flags a Trend of Heightened CFIUS Review of Chinese Investments, September 22, 2017.
5 Proposal for a Union act on the screening of foreign investment in strategic sectors (B8-0302/201726), April 26, 2017, discussed during the Committee's meeting of June 19, 2017.
6 European Commission, Reflection Paper on Harnessing Globalization, COM(2017) 240, May 10, 2017.
7 Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions Welcoming Foreign Direct Investment while Protecting Essential Interests, COM(2017) 494 final, p. 5; See also Speech from Johannes Laitenberger, Enforcing EU competition law: Principles, strategy and objectives, op. cit. fn 3.
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