On 11 December 2018, the European Parliament’s trade committee endorsed the agreement reached by the Parliament, Council and Commission on a new EU-wide foreign direct investment (“FDI”) screening mechanism. Whilst it does not introduce an independent regulatory body capable of issuing binding decisions or a comprehensive screening mechanism, the new Regulation does introduce a framework aimed at fostering cooperation and information-sharing between Member States and sets minimum standards for national regimes.
Even though the Regulation highlights that the Member States retain sole responsibility for screening FDI based on security and public order grounds, the new regime can be expected to have a very real impact on foreign investment control into the EU, both from a procedural, as well as substantive point of view.
The EU has historically been open to FDI and has opposed moves aimed at introducing EU-wide FDI screening mechanisms. However, over the past two years – in parallel with increasing restrictions introduced at a national level – the EU’s reticence on this front has all but disappeared. Several countries outside the EU, notably the US, Australia and Canada, have had formal foreign investment review mechanisms in place for a long time. In contrast, many EU countries only started introducing them over the last 5-10 years – with no EU-wide alignment in terms of scope or review process. However, given the strong increase in FDI from non-Western countries (particularly from China) and the transfer of sensitive and cutting-edge technologies as well as infrastructure (such as the UK’s Hinkley Point or France’s Toulouse Airport) to foreign buyers, the push for a more aligned approach has increased.
Therefore, in February 2017, Germany, France and Italy launched a FDI screening initiative, and in September 2017, the European Commission (“EC”) adopted a framework proposal to monitor inbound investment across Member States. The initiative aimed to balance the desire for openness with the need to protect its interests. In May and June 2018, the European Parliament and Council respectively adopted their positions on the proposal, leading to the political agreement on 20 November, which was endorsed by the Parliament’s trade committee this week.
The creation of a new foreign investment review regime?
The Regulation introduces the first EU-wide foreign investment screening framework and it is important to understand both its scope and its limitations.
Unlike the EU merger control regime, the EU mechanism for FDI screening will not be an overarching regulator holding supranational jurisdiction and issuing binding decisions. Nor will it require Member States to harmonise existing national regimes beyond minimal procedural requirements, or to introduce such regimes under national law. Instead, it is an enabling legal framework with several interlinking themes.
Cooperation mechanism and additional screening
The Regulation creates a cooperation mechanism between the EC and Member States to facilitate coordination of screening decisions and draws attention to specific investments, enabling additional Member States to review particular transactions:
(i) Notification of screened investments – in cases in which a Member State decides to review FDI on the basis of security or public policy concerns, it has to notify both the EC and other Member States. It shall in particular provide information regarding the investor’s ownership structure, the target entity and its relevant activities.
(ii) Member State comments – other Member States have the opportunity to provide comments to the reviewing Member State, where they consider that the FDI will affect their security or public order. The reviewing Member State must give due consideration to such comments. Member States may even provide comments where the Member State in which the FDI takes place is not conducting a screening. They may do so based on information contained in public sources or provided to them by interested parties.
(iii) Commission opinion – the EC, upon review of the information provided, may issue a non-binding opinion, if (a) it considers that FDI is likely to affect security or public order in one or more Member States, or (b) FDI is likely to affect projects or programmes of Union interest on grounds of security or public order – these will be set out in an Annex to the Regulation. Where at least one third of all Member States consider that FDI will affect their security or public order, the EC is required to issue an opinion.
(iv) 15 months post-closing comments / opinion – where an FDI is not subject to screening in a Member State, other Member States may nevertheless provide comments and the EC issue an opinion up until 15 months post-closing, if they consider that the transaction is likely to affect the security and public order in their own territory or more than one Member State
New transparency and information requirements
FDI screening mechanisms often lack transparency, with limited information made public; in some jurisdictions, only the parties know if a filing is even made. The Regulation increases transparency and promotes a cohesive approach through the following mechanisms:
- Member States which already have such mechanisms must notify the EC of their existing mechanisms within 30 days of the Regulation entering into force, and again if any amendments are made;
- all Member States are required to submit annual reports on FDI into their territory, with those maintaining screening mechanisms required to provide information on its application. The EC will then produce a public report on FDI across the Union, as well as maintaining a record of all national mechanisms;
- when information is requested by the EC or other Member States, investors are expected to provide national regulators with details such as ownership structures and controlling shareholders, value of the FDI, products, services and business operations involved, the Member States involved, completion date, and funding sources. Any failure to provide information must be justified by the Member State.
To further harmonise the approach, the EC will chair an expert committee of national FDI authorities. Whilst much of its activity will be understanding FDI in general, exchanging information, or identifying concerns in areas of Union interest, the group is also mandated to promote convergence at a national level.
National FDI screening mechanisms
The Regulation confirms Member States’ right to maintain, amend or adopt FDI screening mechanisms, as well as their decision-making power regarding any FDI investigation in their territory. However, where Member States choose to have a screening mechanism, this needs to follow 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.
Furthermore, while all FDI review mechanisms are legally based on the protection of national security and public order, to date, the criteria and factors applied in the substantive assessment have varied from Member State to Member State. While there has been a general shift over the last few years away from concerns limited to hardcore military technologies to an ever-widening list of sectors such as infrastructure and emerging technologies, each Member State has focused on different aspects. In this context, the Regulation sets out a non-exhaustive list of factors that Member States may take into account in their assessment.
The Regulation groups areas for concern into five categories:
(i) Critical infrastructure (physical or virtual, including utilities, health, transport, finance, communications, data, defence and aerospace, electoral and financial infrastructure, and real estate crucial to sensitive facilities);
(ii) Critical and strategic technologies (wide ranging including artificial intelligence, nano/bio/quantum technologies, robotics, semiconductors, cybersecurity, energy storage, defence and dual-use items);
(iii) Critical inputs (commodities, raw materials, agriculture etc.);
(iv) Access or ability to control sensitive information (including personal health or large-scale sensitive data);
(v) Media freedom and pluralism.
This list is not exhaustive, and screening may be conducted in any of these sectors where FDI “threatens security or public order”, similar to the recurrent theme of national security seen in the US and proposed in the UK. Examples include threats to supply lines, the context and purpose of the investment, and risk of criminal activity.
The identity of the foreign investor is also scrutinised, with particular consideration on whether the buyer is owned or controlled by a third-party state, any previous involvement in activities affecting security or public order in Member States, and the risk they may engage in criminal or illegal activity. It is important to note that the Regulation expressly states that it does not apply to portfolio investments. However, several national regimes both within and outside the EU do and will continue to review such investments.
Implications and next steps
The new framework will no doubt have an impact on existing or new national regimes and therefore affect transactions both in terms of substantive concerns and their timetable. For instance, the new Regulation will lead to:
(i) A clear dual-track system of merger control and FDI reviews – in addition to reviewing transactions from a merger control perspective, the Commission will be able to review and issue an opinion on the FDI implications. Member States on the other hand will be able to review transactions for FDI purposes through these new arrangements, even where they are excluded from conducting the merger control review.
(ii) Closer scrutiny of transactions in a larger number of jurisdictions – the cooperation mechanism will likely lead to additional Member State authorities becoming aware of, and taking an interest in, reviewable transactions. Furthermore, transactions may come under closer scrutiny by additional Member States following comments from other Member States or the Commission.
(iii) Potential alignment of procedure and substantive reviews – while the list of factors to be taken into consideration when assessing FDI is non-exhaustive and Member States can choose to apply additional criteria, over time Member States are likely to align their reviews.
(iv) Longer review periods – review periods may have to be adjusted to allow Member State authorities to provide their comments, and the Commission to potentially issue an opinion, before the reviewing Member State can clear a transaction (likely around 50 days or more).
(v) Increased transparency and more deal security – the introduction of procedural minimum requirements and the non-exhaustive list of substantive factors to be taken into account could enable parties to anticipate and plan for potential filing requirements.
In terms of next steps and timing, the legislation is expected to be signed off by April 2019, shortly before the Parliament is dissolved for elections in May. There will then be an 18-month delay for governments to implement the new rules at national level, meaning that it will not come into full force until the end of 2020.
Conclusion and comments
The new screening mechanism is the latest in a series of increasingly protective measures being introduced by Western countries, and with countries such as France, Germany and the UK proposing to strengthen their domestic regimes, it is unlikely to be the last. Currently only 14 Member States have a national mechanism, and it will be interesting to observe whether the adoption of EU-wide legislation will prompt others to follow suit. Although this has not been made explicit, the new legislation can be seen as a response to growing Chinese investment into the EU. These concerns allowed political consensus to be reached in a near record time of four months, and there is currently close alignment in policy between several of Europe’s influential leaders.
The current framework essentially endorses a bottom-up approach. While some Member States that are heavily dependent on FDI may continue to refrain from introducing any review mechanism, it can also be expected that other Member States will, over time, align their practices. Whether this will ultimately lead to a Union-wide review mechanism remains to be seen, but further change seems likely.