The “EU Regulation 2019/452 establishing a framework for the screening of foreign direct investments into the Union” (the “Regulation”) on the grounds of security and public order has come into force as of 11 October 2020. The Regulation, first adopted in March 2019, seeks to protect the EU by facilitating Member States and the Commission to collectively assess potential cross-border threats posed by specific foreign direct investments (“FDI”).
Why is the Regulation necessary?
The Regulation was prompted by security and public order concerns brewing in recent years regarding foreign direct investors seeking to control or influence European companies with such control or influence having repercussions on “critical technologies, infrastructure, inputs or sensitive information”. The importance of FDI, however, is recognised by the Commission noting that the EU, being the primary destination for FDI worldwide, as of 2017, had €6,441 billion in European stocks held by non-European investors with FDI also providing 16 million direct jobs to Europeans. The EU is therefore seeking to mitigate the risks posed by FDI whilst remaining open by introducing the measures contained in the Regulation. These include (i) providing appropriate screening tools to manage high risk FDI and (ii) an EU-wide framework to facilitate coordination between Member States and the Commission.
Cooperation on this matter at an EU level is considered essential as FDI into one Member State may pose a security risk beyond that Member State. Consequently FDI screening under the Regulation requires Member States to take into account the impact of such investments on the EU as a whole as opposed to solely the Member State into which the investment is made. Foreign direct investments in Member States under the pre-Regulation regime where such Member States only take into account risks to that Member State’s security when screening FDI may be blind spots for such Member States. An example of FDI which may cause security or public order risks to Member States would be the acquisition by foreign investors predatorily of European strategic assets with a view to limiting the supply to the EU market of a certain good or service.
How does the Regulation apply?
The Regulation applies to “any” foreign direct investment. It requires each Member State, amongst other things, to:
- provide formal contact points and secure channels to enable the exchange of information and analysis between Member States and the Commission;
- develop a procedure that Member States and the Commission can follow in the event of foreign direct investment concerns; and
- to notify the European Commission and other Member States of the FDI cases which undergo national screening and providing information on such transactions. The Commission and Member States may then request additional information and issue opinions or provide comment respectively.
Importantly, although the Commission may issue an opinion and Member States may raise concerns in relation to FDI, the final decision as to the authorisation of specific FDI continues to rest with individual Member States however they must take into account the comments and opinions received.
Although the Regulation does not require all Member States to set up a national screening mechanism, the European Commission has called upon “those Member States that currently do not have a screening mechanism…to set up a fully-fledged screening mechanism” (only 14 Member States currently have an FDI screening process). Ireland is not currently one of the 14 Member States but this will change upon the enactment of the Investment Screening Bill 2020.
The Commission recognises that the COVID-19 crisis has highlighted vulnerability in certain industries. Guidance on the Regulation has been issued encouraging Member States to preserve EU companies and critical assets, particularly in health, biotechnology and medical research and the Commission has called on Member States to be vigilant and to ensure the economic and health crisis “does not result in a sell-off of Europe’s business and industrial actors”.
Implementation by Ireland
The Investment Screening Bill 2020, announced on 13 September 2020 will fully implement the Regulation empowering the Minister for Enterprise, Trade and Employment, for the first time to respond, prevent and mitigate threats raised by FDI.
Although the text of the Investment Screening Bill 2020 has not yet been published we understand that it is due to be published in the near future and we will provide an update on same. The cooperation mechanism however facilitated by the Regulation is now live as of 11 October 2020.