The European Commission issued on September 13th 2017 a Proposal for a Regulation establishing a framework on the screening of foreign direct investments (FDI) into the EU. The objective of this proposal is two-fold: pushing third countries to open their domestic markets to EU investments, and protecting EU assets against foreign takeovers detrimental to the essential interests of the EU or of its Member States. The Commission proposes to achieve this by introducing information and coordination mechanisms between the Member States’ FDI screening schemes, and giving new powers to the Commission itself to screen some FDI with EU impact. The EU Member States’ ability to screen FDI would be harmonized, and would have to be based on grounds of security and public order.

Coordination of Member States and new powers to the Commission

The proposal sets up a mechanism whereby the Member States’ authorities are required to exchange information about FDI and adopt opinions within set deadlines. A Member State will be able to provide comments on any FDI occurring in another Member State.

The proposal also gives powers to the European Commission to screen FDI that are likely to affect listed projects or programmes of Union interest on the grounds of security or public order. The result of the Commission’s screening will be consigned in opinions that will not be binding but that Member States will be required to take into due consideration. The proposed EU non-binding consultative process would be different than US reviews of inbound FDI via the Committee on Foreign Investment in the United States. The US process occurs at the federal level without the input of the state in which the entity receiving the investment is located, and if the Committee does not clear the transaction to proceed, the parties will most likely abandon the transaction.

Setting common criteria and standards in considering FDI

The Commission and the Member States would be required to review the potential effects of FDI on a – non-exhaustive – list of common factors:

– Critical infrastructure, including energy, transport, communications, data storage, space or financial infrastructure, as well as sensitive facilities;

– Critical technologies, including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology;

– The security of supply of critical inputs; or

– Access to sensitive information or the ability to control sensitive information.

When reviewing the effect of FDI, consideration may be given to the degree of control exercised by the third country’s government on the foreign investor.

Broad definition of FDI

The proposed Regulation covers a broad spectrum of FDI, including all investments establishing or maintaining lasting and direct links between foreign investors and undertakings carrying out economic activity in a Member State.

Transparency and non-discrimination

When completing FDI screening, Member States and the Commission will be required to ensure transparency and non-discrimination between third countries, and provide the possibility for investors to seek judicial redress against screening decisions. To that end, timelines must be determined by Member States, as well as standards setting the circumstances, grounds and procedural rules for screening.

What’s next?

The proposal will be submitted to the approval of the European Parliament and the Council pursuant to the ordinary legislative procedure, which requires a qualified majority at the Council. Accordingly, the text will be adopted if it is supported by at least 55% (currently 16) of the Member States representing 65% of the total population of the Union. A blocking minority of 35% of the whole Union population could prevent the text from being adopted. In this regard, some Baltic and Scandinavian countries, Greece and the Netherlands have already expressed their disagreements with the proposal. It is interesting to note that these countries only represent 12.43% of the Union population and therefore could not oppose the adoption of the Commission’s proposal, which is supported by France, Germany, Italy and Spain, amongst other Member States.

On another note, the European Parliament might be reluctant to welcome the proposed Regulation as such, in view of its call for proposal dated March 2017, whereby it has foreseen a common instrument binding on all Member States. The European Parliament has considered a regulation mirroring the current US system which sets up an ex ante evaluation of FDI by an independent body, such as the Committee on Foreign Investment in the United States (CFIUS).