As of 11 April 2019, investments into the EU will be subject to a broad FDI framework regulation requiring Member State information sharing for cases that may affect "security or public order". The new regulation does not create an EU-wide FDI regime, nor does it grant FDI enforcement powers to the European Commission. It does, however, mandate cross-border cooperation and information sharing between national agencies, and promotes the creation of new FDI regimes in the EU. It also allows Member States to comment on, and request information relating to, FDI in other Member States for a full 15 months after closing. The immediate impact on investments in the EU will be increased scrutiny, and the potential for information requests and delays even where investments are made in Member States without their own FDI screening in place. In the longer term, Member States will be more likely to introduce their own FDI screening mechanisms.
On 21 March 2019, the European Union ("EU") published Regulation (EU) 2019/452 of 19 March 2019 ("FDI Regulation"), establishing a framework for the screening of foreign direct investments ("FDI") into the EU likely to affect security or public order. Investments completed before 10 April 2019 will not be subject to the provisions of the regulation. However, any investments completed after 11 April 2019, may be subject to the FDI Regulation once it enters into force on 11 October 2020.
The FDI Regulation follows rising protectionism concerns and perceived imbalances between the generally open European economy and other large economies with more significant foreign investment restrictions. Fourteen EU Member States currently have national investment screening mechanisms. Several are in the course of reforming them, or adopting new ones. The UK tightened its foreign investment rules in June 2018 for mergers involving restricted goods or their components, lowering the turnover threshold from 70 million to 1 million, and removing the overlap requirement from the market share threshold. Similarly, in December 2018, Germany lowered its thresholds to allow review of acquisitions of as low as 10% of the voting rights of German companies, if they operate in areas of critical infrastructure, security-related infrastructure or defence. This increased scrutiny is also evidenced by the German Leifeld case of August 2018, which would likely have been the first case blocked if the Chinese acquirer had not withdrawn its notification and terminated its attempt to acquire the German manufacturer of turbine elements for the civil and military aerospace industry. While the FDI Regulation does not require that Member States introduce investment screening mechanisms, it does provide some guidance on what such screening mechanisms should look like.
Less than Control
The FDI Regulation allows wide discretion for national review of minority investments, as well as other links that fall below the threshold of control within the meaning of most merger regulations. Specifically, it defines "foreign direct investment" as "an 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". As mentioned, Germany has introduced a threshold of only a 10% voting share. While the UK currently requires "material influence", proposals from July 2018 would lower this to any investment of more than 25% of an entity's shares or votes. Nevertheless, the regulation notes that portfolio investment should not be covered.
The FDI Regulation primarily acts as an umbrella, establishing a general framework for Member State implementations of national screening of foreign direct investments that may affect security or public order. It does not require the implementation of an FDI screening mechanism, but where one does exist, it requires:
- Transparent screening mechanism, rules, procedures and timeframes;
- Non-discrimination between third countries;
- Protection of confidential information;
- Possibility of appeals of negative decisions of the national authorities; and
- Anti-circumvention measures.
The FDI Regulation does not specify the particulars of those requirements, leaving them to Member States to implement.
The FDI Regulation also provides guidance to Member States in determining the likelihood of an effect on security or public order. The relevant factors fall broadly into two categories: Article 4(1) factors relate to the target of investment (e.g. the involvement of critical infrastructure, critical technologies, critical inputs, sensitive information, or the freedom and pluralism of the media), and Article 4(2) factors relate to the characteristics of the foreign investor (whether they are directly or indirectly controlled by a third country government, or whether there is a risk they have already been involved in activities affecting security or public order, or in criminal activities). Importantly, despite some initial lobbying and discussion, reciprocity is not a factor included in the legislation, meaning that Member States are not required to determine whether the country of the foreign investor would impose screening in the opposite investment scenario. This means that all ex-EU investors will be subject to these rules, including both US and post-Brexit UK.
Nevertheless, the inclusion of state-ownership is an important factor, as part of the justification for the FDI Regulation is the growing global role played by companies that are owned by third-countries or that benefit from significant state subsidies. The Commission notes that acquisitions by such companies "may allow the States in question to use these assets to the detriment not only of the EU's technological edge but also its security and public order", and that outward foreign direct investment is in some cases part of the declared government strategy of such states.
Information Sharing and Cooperation
Where investors and acquirers will see the most significant and immediate change is in the cooperation provisions of the FDI Regulation, and their implications on timing. Under the FDI Regulation, Member States must notify the European Commission ("Commission") and every other Member State when conducting a national FDI screening "as soon as possible". While Member States are not required to implement their own screening rules, they are required to establish a contact point for purposes of this notification process. The information required as part of the information sharing notification is minimal, and will typically be provided by the relevant companies in most FDI notifications. Listed in Article 9(2) of the FDI Regulation, it includes details on ownership structure, the value of the investment, the product and geographic scope of the parties' business activities, the source of the funding for the investment, and the anticipated closing date.
Where no screening is to take place, the FDI Regulation creates a mechanism whereby Member States may notify the Commission of foreign direct investment planned or completed in another Member State. Member States have a remarkably long 15 months after a foreign direct investment has been completed in order to comment on such foreign investments where they consider that such FDI is likely to affect security or public order in the Member State. Once notified of such an investment, the Commission, concerned Member States, and the Member State where the investment will take place, will exchange information in a process designed to resolve these concerns. In particular, Member States with security or public order concerns may request the Article 9(2) information from the Member State where the investment will take place. That Member State may then request that information from the investor and the target company, which must respond "without undue delay". While there is no formal penalty included in the FDI Regulation for breach of this provision, it is likely that such requests will be enforceable under national information gathering provisions.
Once the necessary information is provided, Member States have up to 35 calendar days to issue comments regarding security or public order concerns. The Commission must issue an opinion where at least one third of Member States consider that a foreign direct investment is likely to affect security or public order. The Commission has discretion to issue an opinion where it considers such concerns exist in more than one Member State. The Commission has an additional 15 calendar days to issue an opinion.
Member States where foreign direct investment shall occur are required to "give due consideration to the comments of the other Member States . . . and to the opinion of the Commission". Ultimately, however, the final screening decision shall be taken by the Member State undertaking the screening.
Exceptionally, where the foreign investment is "likely to affect projects or programmes of Union interest", the Commission may issue an opinion directly addressed to the Member State where the investment will take place (even absent Member State concerns). Projects or programmes of Union interest include projects that involve a substantial amount of EU funding or that are covered by EU legislation regarding critical infrastructure, critical technologies, or critical inputs. This could apply to major energy and infrastructure projects. The ultimate decision to screen a particular foreign direct investment remains the sole responsibility of the Member State concerned. However, in such cases, the Member State must "take utmost account of the Commission's opinion and provide an explanation to the Commission if its opinion is not followed."
While these provisions do not create new substantive hurdles for investors, the FDI Regulation does create a foundation for Member State cooperation and information sharing for FDI screening. Member States that do not have an FDI regime in place will be encouraged to create one, if only to handle information sharing requirements and concerns raised by other Member States. Accordingly, the FDI Regulation is a first step towards, and will enable, greater intervention and EU harmonisation in the future.