Introduction

The European Union has proposed a new framework for screening foreign investment that raises security and public order concerns for the European Union and its member states. The proposed legislation intends to:

  • establish common standards for national screening mechanisms;

  • provide guidance on the factors to consider regarding the grounds of security or public order;

  • permit the European Commission to screen foreign investment in projects of EU interest; and

  • provide for an EU cooperation mechanism.

The proposal will not:

  • establish a unified EU-wide screening mechanism;

  • enable the commission to block foreign investments; or

  • oblige member states to adopt their own national screening system if they do not have one.

The potential implications for foreign investors into the European Union include:

  • wider and increased national screening mechanisms for foreign investment;

  • longer and less flexible screening procedures;

  • uncertainty regarding the application of the new rules; and

  • transparency and procedural guarantees for foreign investment rules across the European Union.

The commission intends to launch, and possibly complete, the proposed framework by the end of 2018. Opposition by several member states (including the Netherlands, Portugal and Spain) means that it is unclear whether the proposal will be approved by the Council of the European Union.

Overview

Under the draft regulation, EU governments will be able to screen foreign investments that fall short of acquisitions of control and therefore do not fall within EU merger control rules. The screening will apply to investments of any kind by a foreign investor which aim to create or maintain lasting and direct links between the foreign investor and the target, including investments which enable effective participation in the management of a business.

The implications are far-reaching, as security and public order concerns are widely interpreted to include effects on at least:

  • critical infrastructure (eg, energy, transport, communications, data storage, space, financial infrastructure and sensitive facilities);

  • critical technologies (eg, artificial intelligence, robotics, semiconductors, dual use, cybersecurity, space and nuclear technology);

  • security of supply of critical inputs (eg, mining outputs); and

  • access to or the ability to control sensitive information.

This is a non-exhaustive list, leaving it open to member states to broaden the scope of factors that they consider might affect security and public order. In deciding whether foreign investment raises security concerns, the commission and EU member states may take into account whether the foreign investor is controlled by a government of a third country, including through significant funding.

EU governments will be required to share information on foreign investments with each other and the commission, and to state which investments they plan to screen. Individual member states will be able to raise concerns about foreign investment taking place in another member state. The commission will also have the power to give a non-binding opinion on such investments.

The commission will be able to carry out its own review of foreign investment that affects a project of EU interest (ie, projects involving substantial EU funding or relating to critical infrastructure, critical technology or critical inputs).(1)

Such vetting is unprecedented at EU level, and the commission will need to build up relevant expertise. In the United States, the foreign investment screening procedure (known as CFIUS) requires intelligence reports and vulnerability assessments for each foreign investment screening case. It is as yet unknown whether the commission will need to prepare similar reports and, if so, whether it will seek to obtain the necessary data from EU national intelligence agencies. If it does, questions will be raised about the possibility for judicial review of relevant commission decisions by the European courts, to which such intelligence would not ordinarily be disclosed.

Proposed new screening process

There are four main strands to the proposed regulation:

  • Where an EU member state already has a national system of review of foreign investment raising potential security concerns, it must notify the commission of its review mechanisms and provide annual reports on the application of its foreign investment reviews, as well as information on review decisions either prohibiting an investment or subjecting such an investment to certain conditions. Any review mechanisms must meet basic procedural requirements, such as the possibility of judicial review of decisions, non-discrimination between third countries and transparency.

  • Where foreign investment is being reviewed for security or public order purposes by a member state, it must give the commission and the other member states information about that investment and allow them to provide their views. This will have timing implications – the draft regulation suggests that member states will have 25 working days to provide comments and the commission will have an additional 25 working days to decide whether to issue an EU opinion to the country in which the investment is taking place.

  • Where foreign investment could affect a project of EU interest, the commission can conduct a security review of the investment and give an opinion to the relevant member state. The commission's opinion will be non-binding, but the member state concerned must "take utmost account of the Commission's opinion and provide an explanation to the Commission in case its opinion is not followed".

  • All member states must report to the commission on foreign investment taking place in their country, irrespective of whether they have national review systems. Relevant information includes ownership structure of the foreign investor, financing of the investment and information about subsidies granted by third countries.

Implications

Jurisdictions around the world have well-established foreign investment review regimes. The United States, Canada and Australia, as well as many EU member states, already have national regimes to screen deals raising national security concerns. This latest move by the European Union is in line with steps taken by European governments to tighten control over foreign acquisitions of critical national assets.(2)

The proposal will not affect the commission's one-stop shop under the EU Merger Regulation. If a foreign investment is notifiable to the commission under the regulation, any decision by a member state to intervene on the grounds of protecting its legitimate interests must be approved by the commission, unless the legitimate interest relates to public security, plurality of the media or prudential rules. This position will not change.

While protection of national interests is a legitimate objective, the proliferation of foreign investment rules in EU member states places an additional administrative burden on foreign investors. The proposed EU rules may further incentivise member state governments to expand their national regimes. Businesses that are considering investing in the European Union may increasingly need to assess whether their investments raise security or public order concerns and, if so, carefully consider their notification strategies in the relevant EU countries. On the other hand, all national measures must follow the EU framework and be fully transparent.

United Kingdom and Brexit?

The new framework will apply to EU member states only. According to the United Kingdom's EU Withdrawal Bill as currently drafted, all existing EU regulations will be retained in UK law on the day that the United Kingdom leaves the European Union, which means that this new regulation (provided that it has entered into force pre-Brexit) will form part of UK law post-Brexit. It is uncertain how the regulation would be applied in practice post-Brexit – it may be that the United Kingdom would in due course seek to repeal the regulation from domestic law. Post-Brexit, UK investors would be 'foreign investors' for the purpose of the new regulation, unless otherwise agreed between the European Union and United Kingdom as part of their new trade relationship. This means that post-Brexit direct investments by a UK entity into an EU country might be subject to review on security or public order grounds by that country or the commission under the new regulation.

For further information on this topic please contact Werner Berg or Samantha Mobley at Baker & McKenzie by telephone (+32 2 639 36 11) or email (werner.berg@bakermckenzie.com or sam.mobley@bakermckenzie.com). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.

Endnotes

(1) The draft regulation includes a list:

  • the Galileo and EGNOS satellite programmes;

  • the Copernicus earth observation programme;

  • research and development programmes under Horizon 2020 (including key enabling technologies such as artificial intelligence, robotics, semiconductors and cybersecurity); and

  • transport, energy and telecoms infrastructure under the EU Trans-European Network programmes.

(2) For example, Germany recently expanded its mandatory filing requirements for foreign acquisitions relating to the defence sector and introduced notification requirements for foreign acquisitions relating to critical infrastructure. France has national legislation to vet foreign investment in sectors such as telecoms and energy.

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