New EU Direct Foreign Investment Screening Rules

The proposed EU Regulation on Foreign Direct Investment Screening (the “Regulation”) was approved by the European Parliament last February 14, 2019. This development is intended to strengthen the EU and member states legal framework for foreign direct investment (“FDI”). The Regulation introduces numerous procedures and criteria for cooperation among Member States and with the European Commission which is enabled to intervene with an official opinion on the grounds of “public order and security”.

The Regulation targets FDI covering any type of investment by a foreign investor which aims to establish or maintain “lasting and direct links” between the investor and the other party receiving the funds. The scope of “strategic sectors” specifically captured by the Regulation’s screening mechanism has been expanded. Such scope previously included: energy, transport, communications, and data storage; it now also covers: water, health, media, data processing, aerospace, defense, electoral infrastructure, and investments in land and real estate crucial to that use. The new scope includes: quantum aerospace, defense, energy storage, nanotechnologies, and biotechnologies (“critical technologies”), media freedom and plurality, raw materials and food security.

Pursuant to Articles 6 and 7 of the Regulation, Member States are now required to notify the EC and all other Member States of an FDI undergoing screening. The Regulation also enables a Member State to comment on any planned or completed FDIs in other Member States if it considers that its security and public order may be affected, and to request an opinion from the EC. Although the EC’s power to issue opinions is discretionary, if at least one third of Member States consider the FDI likely to affect their security or public order, it must set out its views on the transaction. While the opinion does not technically have binding force, Member States are required to “take utmost account” of it and provide an explanation if the opinion is not followed. This is expected to create a level of pressure on the involved Member State to conform to the views of the EC and to justify its decisions.

The Regulation amplifies the level of scrutiny on foreign acquisitions adopting a very broad concept of “public order and security”. Indeed, Member States and the EC are free to take account of “all relevant factors” in considering such concept, including effects on critical areas and inputs essential to this purpose and disruption or failure thereto, control by a foreign government, and the pursuit of “State-led projects”. Also, the Regulation expands the definition of FDI capturing “foreign-government controlled direct investment”, which includes government control as direct or indirect, and state bodies and armed forces. It also allows authorities determining whether the FDI could affect security to consider whether the investor “has already been involved in activities affecting security or public order of a Member State”, and whether “there is a serious risk that the foreign investor engages in illegal or criminal activities”.

Foreign companies involved in M&A transactions in the EU will need to carefully consider the impact of the new legislation for several reasons:

(1) the obligation on Member States to report an FDI undergoing screening, as well as to request EC review, coupled with information sharing requirements between authorities will potentially subject transactions to additional layers of assessments;

(2) once a Member State notifies an FDI, the EC and other Member States may request further information and indicate if they have concerns within 15 days. After that, a Member State will have 35 additional days to provide their comments. The EC should issue its opinion within that 35-day timeframe, but is allowed an additional five days;

(3) As the new framework sets out a list of factors that could underpin FDI review, this will provide a baseline guide to investors in the EU as to potential EU concerns. The heightened transparency anticipated in the intra-EU screening system will also lead to a better understanding of investment activity, as well as the positions of Member States and the EC towards certain types of investments. This could have the positive effect of greater consistency in approach.

In conclusion, the Regulation makes it more difficult for investors to bypass screening in the EU. While there are presently only 14 EU Member States with FDI screening mechanisms (Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Hungary, Italy, Poland, Portugal, Spain, United Kingdom, and Hungary), this Regulation anticipates a higher level of monitoring across the EU by each Member State, as well as by the EC. In addition, Member States which currently have screening mechanisms to ensure that measures shall conform to the new screening regime enhanced by the Regulation.

Compliments of AEM Canelutti, a member of the EACCNY