On 14 February 2019 the European Parliament approved an European wide framework for the screening of foreign direct investments into the EU (the Regulation). The Regulation will enter into force 18 months after it has been adopted by the European Council and officially published, which is expected to occur on 5 March 2019. In the interim period, EU Member States must implement the relevant procedures to effectuate the mechanisms under the Regulation.
The Regulation will enable cooperation between EU Member States to screen foreign direct investments (FDI) into the EU on the grounds of security or public order and for a mechanism for cooperation between EU Member States, and between EU Member States and the European Commission (EC), with regard to foreign direct investments likely to affect security or public order. It includes the possibility for the Commission to issue opinions on such investments. Unlike under the CFIUS regime in the US, the EC will not act as a regulator that can issue binding rulings to prevent transactions, since EU Member States will have the final say as to whether a specific investment should be permitted or not in their territory.1
The Regulation aims to strike a balance between maintaining the EU’s openness to foreign investments and ensuring that the EU's essential interests are not undermined by this openness. With the Regulation, the EU to a certain extent follows countries like the United States, Australia, Canada, Japan and China where various forms of foreign direct investment screening mechanisms are already in place.
Impact of the Regulation
The Regulation will not introduce a single EU screening of FDI investments. Neither will it harmonize the FDI screening mechanisms currently used by roughly half of the EU Member States, nor include a requirement for EU Member States to introduce any FDI screening, but it will by no means be toothless.
The Regulation establishes minimum requirements that EU Member States' screening mechanisms must apply (i.e., transparency, non-discrimination and the possibility for foreign investors to avail of judicial redress) which may lead to changes of currently existing screening systems and possibly also some harmonization thereof in the EU.
We expect that the Regulation will have a meaningful impact on M&A activity within the scope of the Regulation, at least from a procedural point of view. Due to the involvement of the EC and other EU Member States we except a more intensive and time-consuming screening process to develop, certainly if the transaction at hand would involve a target group active in various EU countries (each of which may have a different approach to FDI screening at national level or a different set of comments submitted to the screening EU Member State to take into account). In any case, it is unlikely that national screening will proceed prior to finalizing the EU process, and one can imagine that the views of one EU Member State in respect of a screened investment will also impact on the process in another EU Member State.
Investors will therefore be well-advised to make a thorough advance analysis of the likely assessment of the contemplated transaction both by the EC and in all EU Member States concerned.
Relevant terms such as ‘security’ and ‘public order’ have not been defined by the Regulation, hence will leave room for interpretation to the EU Member State performing the screening and shall develop over time. The term ‘foreign direct investment’ is defined fairly broad: ‘investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in an EU Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity’. However, the Recitals to the Regulation clarify that it should not cover portfolio investments.
On 13 September 2017, EC president Mr. Juncker published plans to introduce an European investment screening framework for foreign direct investment into the EU (the Draft FDI Regulation), please see our flash of September 2017 here. Following review by the EC, the European Council and the European Parliament of the Draft FDI Regulation, various amendments have been made to the Draft FDI Regulation which have resulted in the Regulation as adopted by the European Parliament on 14 February 2019. Notably, the initial proposal for the EC to screen and resolve whether or not to admit a FDI has been abolished and instead the Regulation provides that the final decision in relation to any FDI remains the sole responsibility of the EU Member State.
Below is a high level overview of the most relevant elements of the Regulation.
- The Regulation establishes a framework for the screening by EU Member States of foreign direct investments into the EU on the grounds of security or public order and for a mechanism for cooperation between EU Member States, and between EU Member States and the Commission.
- If EU Member States have a screening mechanism in place, the mechanism should comply with a number of basic requirements set out in the Regulation: (a) transparency and lack of discrimination between third party countries, (b) established timeframes, (c) protection of confidential information, and (d) possibility of judicial redress for decisions. The circumstances triggering the screening shall be set out by the EU Member States themselves under their own mechanisms.
- The Regulation sets out a non-exhaustive list of areas that EU Member States (or the EC for issuance of an opinion) may take into account in their assessment. The following categories are included:
(a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
(b) critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC) No 428/20091, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;
(c) supply of critical inputs, including energy or raw materials, as well as food security;
(d) access to sensitive information, including personal data, or the ability to control such information; or
(e) the freedom and pluralism of the media.
- EU Member States can take the following circumstances into account to determine whether a foreign direct investment is likely to affect security or public order, EU Member States and the EC may also take into account, in particular:
(a) whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding;
(b) whether the foreign investor has already been involved in activities affecting security or public order in an EU Member State; or
(c) whether there is a serious risk that the foreign investor engages in illegal or criminal activities.
- If the EC considers that a foreign direct investment is likely to affect projects or programs of Union (as included in the annex to the Regulation, such as European satellite programs Galileo & EGNOS) interest on grounds of security or public order, the EC may issue an opinion addressed to the EU Member State where the foreign direct investment is planned or has been completed. This screening can take place ex-ante as well as ex-post, for a period up to 15 months after the investment has been completed. It is not entirely clear yet what the consequences would be of a negative opinion ex-post, however there is in any event no legal basis included in the Regulation to challenge a transaction post-completion.
- The EU Member State undertaking the screening shall give due consideration to the comments of the other EU Member States and to the opinion of the EC as to whether the investment would likely affect security and public order. The final screening decision shall be taken by the EU Member State undertaking the screening.
The cooperation mechanism will increase awareness within the EU to respond adequately to foreign direct investments into multiple EU Member States.
The rules establish minimum requirements for EU Member States' screening mechanisms must apply (i.e., transparency, non-discrimination and the possibility of foreign investors for judicial redress) which may lead to changes of currently existing screening systems (some) harmonization thereof in the EU.
Exchange of information and cooperation mechanism
- Member states shall notify the EC and the other EU Member States and provide required information to them, if any foreign direct investment is undergoing screening. Other EU Member States may provide comments to the EU Member State performing the screening considering that their own security or public interest may be affected and a copy of such notification will be sent to the EC. The EC in turn will inform all EU Member States that comments have been received.
- EU Member States may express their views on proposed and completed investments in a specific member state if this is likely to affect its security or public order.
- In addition, the EC can express its views on proposed as well as completed FDI likely to affect the security or public order of one or more EU Member States.
The Regulation should increase awareness among EU member states and may result in other EU Member States providing comments to the EU Member State performing the screening considering that their own security or public interest may be affected. Through the framework, a better coordinated review of direct foreign investments can be achieved.
Issuance of opinions by the EC
- If the EC considers that a foreign direct investment undergoing screening is likely to affect security or public order in more than one EU Member State, or if the EC has relevant information in relation to that foreign direct investment, it may issue an opinion addressed to the EU Member State undertaking the screening, as well as if the investment is likely to affect projects or programs of Union interest on grounds of security or public order. The EC shall issue an opinion in case at least 1/3rd of EU Member States considers that a foreign direct investment is likely to affect their (national) security or public order. Finally, the EC may also issue opinions upon request of an individual EU Member State.
Although the EU Member States must give opinions issued by the EC ‘due consideration’, the opinions are non-binding in nature.
- Within 15 calendar days following receipt of the notification by an EU Member State to the EC and the other member states that a given foreign direct investment is undergoing screening in its territory, the other EU Member States and the EC must confirm their intention to provide comments or an opinion respectively, to the screening EU Member State.
- Comments by other member states or opinions by the EC shall be sent to the EU Member State undertaking the screening within a reasonable period of time, and in any case no later than 35 calendar days following receipt of confirmation that the FDI is undergoing screening. However, if any additional information was requested, such comments or opinions shall be issued no later than 20 calendar days following receipt of the additional information or the notification.
- The EC may issue an opinion following comments from other member states where possible within the deadlines referred to in this paragraph, and in any case no later than 5 calendar days after those deadlines have expired.
- Similar timelines apply if a member state notifies other member states and the EC that it considers that a foreign direct investment planned or completed in another member state which is not undergoing screening in such member state is likely to affect its security or public order.
Since the opinion by the EC and the other member states’ comments must be given ‘due consideration’, the screening timelines under existing national screening mechanisms will likely increase significantly since we do not expect that national screening will proceed prior to finalizing the EU process.