The EU framework for screening foreign direct investment (FDI) (Framework)1 was published on 21 March 2019. It enters into force on 10 April 2019 and applies across all Member States from 11 October 2020. Investors from non-EU countries, such as China, Brazil and Russia, should therefore factor the Framework into planning their relevant transactions, including procedure and timetables.
The Framework is the first EU measure to screen FDI on grounds of security and public order. It brings the EU in line with other jurisdictions, including China, Japan and the US, which operate well-established screening mechanisms. However, the Framework does not make the European Commission (EC) the decision-maker for FDI approvals within the EU. The final decision-making power continues to rest with the Member State(s) concerned. Fourteen Member States currently have their own FDI screening mechanisms. Others, like the UK, are considering strengthening their national regimes.
The Framework allows Member States to maintain, amend or adopt mechanisms to screen FDI in their territory on the grounds of security or public order (neither of which are defined in the Framework). No Member State is obliged to introduce any FDI screening measure, but, if it does so, it must comply with certain specified requirements (as detailed below).
"Foreign investor" means any third country person or undertaking. In assessing whether FDI is likely to affect security or public order, relevant considerations will include whether the foreign investor is directly, or indirectly, controlled by the government of a third party (including State bodies or armed forces). Control may be through ownership structure or significant funding.
Protecting strategic sectors
The strategic sectors most likely to be impacted by the introduction of the Framework include:
(a) critical infrastructure – including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities;
(b) critical technologies and dual use items (as defined) – including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies;
(c) critical inputs – including energy or raw materials, as well as food security;
(d) access to sensitive information – including personal data, or the ability to control such information; and
(e) freedom and pluralism of the media.
Cooperation at EU level
The new Framework ensures that:
- Member States with screening mechanisms comply with basic requirements, so that screening is transparent (including relevant timeframes), non-discriminatory and provides for adequate redress, confidentiality and annual reporting;
- a Member State must inform the EC and other Member States of any FDI it is screening, so that the EC and Member States may issue an opinion/comment respectively (the EC must issue an opinion in certain circumstances). The Member State concerned must give due consideration to any opinion/comments it receives;
- where FDI is not being screened by a Member State, one or other Member States may provide comments to the relevant Member State and the EC may issue an opinion (and must do in certain circumstances). Again, any opinion/comments must be duly considered by the Member State concerned; and
- the EC can screen FDI affecting projects or programmes of EU interest, which are those projects/programmes that involve a substantial amount or significant share of EU funding, or are covered by EU law regarding critical infrastructure/technologies/inputs that are essential for security or public order. These are identified in the Framework and include, for example, Trans-European Network projects (transport/energy/telecommunications). The EC may issue an advisory opinion to the Member State where the FDI takes place, and that State must take utmost account of the opinion and give reasons if it is not followed.
Implications for non-EU investors
Foreign investors should note:
(i) Increased cooperation – there will be greater cooperation between Member States and the EC, and between the Member States themselves, in particular in relation to sharing certain specified information about specific FDI (see below). Member States may become aware of FDI where they otherwise would not have done. The Framework also provides for cooperation between the EC, Member States and appropriate authorities in third countries;
(ii) increased disclosure – Member States must provide certain specified information to the EC, or other Member States that have requested it. Such information includes the ownership structure and business operations of the investor and the target EU company, the value of the FDI, and the funding of the investment and its source. The foreign investor must provide this information without undue delay where it is requested to do so;
(iii) increased delay – where a Member State is screening FDI, the EC and other Member States will have up to 35 days from notification of the FDI to provide comments. The EC then has a further five calendar days to issue an advisory opinion;
(iv) increased scrutiny – even where FDI is not being screened by a Member State, the EC and other Member States will have up to 15 months after the FDI has been completed to provide comments/issue an opinion. This applies to FDIs completed after 10 April 2019; and
(v) increased uncertainty – when making an investment into the EU, investors will have to try to predict the possible reactions of the EC and various Member States with regard to their investment and provide for various scenarios in their transaction agreements.
Implications of Brexit
The Framework will not apply to the UK if the UK is not a member of the EU as at 11 October 2020. The UK is currently taking steps to strengthen its own national security screening measures.
The Framework's impact has yet to be seen. The final decision in relation to any FDI undergoing screening, or any measure taken in relation to FDI not undergoing screening, remains the sole responsibility of the Member State where the FDI is planned or completed. Although the Framework provides for cooperation between Member States, rather than harmonisation of national FDI screening legislation, it seems likely that alignment of practices will occur over time.
One important question is how the FDI regime will fit with the EC's and Member States' merger control regimes. A foreign investor could face separate reviews by the EC under the two regimes, and it is not clear at this stage what the timetabling consequences of this would be. A Member State may also have a review role in relation to FDI, even though it might not have jurisdiction to review the transaction under merger control law.