European framework regulation on foreign direct investment now in force – Foreign investors must prepare in particular for further delays in screening

By Dr. Max Helleberg & Dr. Bärbel Sachs | Noerr LLP

As previously reported, the European Union has adopted a framework regulation for the screening of foreign direct investments into the Union. It entered into force on 11 April 2019. However, the Regulation will not apply until 11 October 2020. Unusually for an EU Regulation, it merely provides a legal framework to be completed by the Member States. The decision on whether to set up a screening mechanism or to screen a particular foreign direct investment is to remain the sole responsibility of the Member States. The Regulation essentially contains four elements which are important for the control of direct investment from third countries. 

Firstly, the Regulation contains primarily constitutional requirements for the structure of the screening mechanism for direct investment from third countries for reasons of security or public order (transparency, setting a time frame for checks, confidentiality of information, opportunity for legal protection). The Regulation lists the factors which may be taken into account by the Member States or the European Commission in the screening process. These essentially match the criteria to be observed within the German foreign direct investment screening procedure under Germany’s Foreign Trade Regulation (AWV). It is interesting to note that industry and labour market policy reasons were not included, unlike initially discussed. 

Secondly, the Regulation provides for an annual report by the Member States to the European Commission on foreign direct investment in their territory. Member States are also required to report on the application of their screening mechanisms. This obligation could certainly have a disciplinary effect. 

Thirdly, the Regulation contains a framework for a cooperation mechanism between the Member States and the European Commission. The Regulation provides that the European Commission or other Member States may make comments or submit opinions to which the Member State undertaking the screening “shall give due consideration”. This gives the European Commission and the other Member States (only) a somewhat proactive right to provide comments. The Regulation provides for certain deadlines for the cooperation mechanism. These deadlines will certainly have repercussions on the timing in practice. 

As the fourth essential element, the Regulation contains requirements for projects or programmes of Union interest listed in the Annex to the Regulation (for example, the European GNSS programmes). In this case, the European Commission has a right to comment.

The Regulation is expected to have at least two effects on the practice of controlling foreign direct investments. Firstly, the obligation to disclose information on planned or already implemented investments – in particular in the case of Article 6, i.e. foreign direct investment undergoing screening – to the European Commission and all other Member States, significantly increases the risk of disclosure of trade and company secrets. This should apply in particular if an investment concerns key industries in another Member State. Secondly, the cooperation mechanism envisaged will most likely lead to investment screening taking longer in the future than today. In particular, it will no longer be easily possible for the competent national authorities to take account of the time limit of the closing condition which is often provided for in purchase contracts, or of a longstop date according to which a clearance certificate must be available within a certain period. This must be taken into account in future when drafting appropriate clauses.

Do you have questions? Please contact: Dr. Max Helleberg or Dr. Bärbel Sachs

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