EU Policy & Regulatory Alert EU Mechanism for Foreign Investment Screening to Enter into Force in April
Today, on 21 March 2019, the new Regulation establishing a framework for the screening of foreign direct investments into the Union was published in the Official Journal of the European Union (EU). The new legislation will put in place the first ever EU-wide mechanism to enhance the coordination and exchange of information on the screening of inward foreign direct investments (FDI) on the grounds of security or public order. The law has been prepared in the context of growing European concerns - in particular in France, Germany and Italy - in view of the recent surge of foreign (particularly Chinese, state-linked) investments in strategic assets in the EU. From the perspective of foreign investors, the new framework is expected to significantly increase the complexity of FDI screening processes across the EU.
The Regulation, based on a European Commission proposal of September 2017, has been finally approved in a vote at the European Parliament on 14 February 2019 and was formally adopted by the Member States in the Council on 5 March 2019. Following the entry into force of the legislation in mid-April, the Member States and the Commission will have 18 months (i.e. until mid-October 2020) to implement the mechanism into national law.
Purpose of the Regulation
The new framework reflects the EU's ambition to remain the main destination for FDI globally, while at the same time protecting the EU's strategic interests, preventing FDI inflows from affecting security and public order across the EU.
Through this legislation, EU lawmakers also seek to address the current fragmentation of the EU’s system of monitoring FDI inflows. While many other major jurisdictions such as the US, Australia, Canada and Japan have FDI screening mechanisms in place, the EU as a bloc currently does not possess a comparable single mechanism. 14 EU Member States currently have legislation in place, allowing them to review FDI on grounds of public security or public order.
Objective of the Regulation
The new framework will establish a legal mechanism for the screening of FDI by the EU Member States, in order to enhance the coordination of FDI screening between the European Commission and Member States, with the objective of increasing legal certainty and transparency. However, it is important to note that the Regulation neither aims to harmonise the national FDI screening mechanisms currently existing across the EU nor to replace them with a single EU mechanism.
Key elements of the Regulation
The new framework will bring about three key changes:
1. Advisory opinions & comments - The European Commission will be authorised to screen investment projects and issue a non-binding opinion if:
- an FDI in a Member State may affect the security or public order of projects 'of Union interest' (i.e. an exhaustive list which may be updated in the future, including Horizon 2020, Galileo, Trans-European Networks), or which are subject to EU law regarding critical infrastructure, critical technologies, or critical inputs in the fields of research, space, transport, energy and telecommunications; or if
- an FDI in a Member State may affect the security or public order of another/other Member State/s. In this case, the FDI-receiving Member State will not only be required to take into "due consideration" the Commission's advisory opinion, but also the comments of Member States that may be affected. In addition, other Member States may specifically turn to the Commission to request an opinion on an FDI in a certain Member State
2. Procedural requirements - The Regulation does not oblige Member States to introduce a screening mechanism. Non-screening Member States will be obliged to submit an annual report on FDI inflows. Those Member States that do have in place or decide to introduce a screening procedure, however, will be required:
- to fulfill minimum procedural requirements, including the principle of non-discrimination between different third countries, the protection of confidential information, and the right to judicial review
- to comply with time limits for national FDI review procedures
- to notify their mechanisms and planned amendments; and
- to provide an annual report on their application of these mechanisms
3. EU cooperation mechanism - The new mechanism created between Member States and the Commission will enhance - by way of information exchange - the coordination of screening decisions taken by the Member States concerned.
The usual duration of the new cooperation procedure is expected to be around 35 days. The information shared includes the investor and target company, the sectors and locations of operations, the value of the investment and source of funding, as well as the date of the transaction. Member States will be able to retrospectively submit comments and the Commission will be able to issue an opinion regarding a completed investment which was not screened for a period of 15 months following the completion of the investment.
New control mechanism for foreign mergers & acquisitions
Under the new Regulation, FDI screening on grounds of public security or public order issues and merger control are to be seen as two separate legal frameworks. However, Member States are not required to separate their FDI screening mechanism from the respective merger control regime. In the UK, which too has amid Brexit negotiations adopted stricter provisions on FDI screening in 2018, the two mechanisms are integrated.
Expected increase of EU influence on Member States' screening decisions
Although the European Commission's opinion will be legally non-binding, Member States where an FDI is planned will need to:
- take the "utmost account" of the Commission's opinion on FDI that may affect the security or public order on grounds of projects 'of Union interest' (i.e. in particular "involving substantial Union funding or established by Union law regarding critical infrastructure, critical technologies or critical inputs"); and to
- provide an explanation if this opinion is not followed
Moreover, the Commission's and Member States' power to issue an advisory opinion - or to submit a comment, respectively - up until 15 months after the completion of an investment will also need to be factored in any Member State's decision on foreign investments.
The new framework is thus expected to significantly influence the decisions to be taken by the Member States in which the respective targets are based.
EU powers less centralised than those of CFIUS in the US
While, in the US, the Committee on Foreign Investment (CFIUS) may review, investigate, block or unwind a transaction, under the new EU Regulation, the final decision on a transaction rests with the Member States.
Types of foreign investments concerned
The new framework covers any investments by a foreign investor aiming to establish or maintain lasting and direct links to the target undertaking "to carry on an economic activity in a Member State". FDI screening must therefore be factored into acquisition planning.
The Regulation comprises a non-exhaustive list of factors that may raise security or public order concerns, and thus are to be accounted for during the screening process, including:
- critical infrastructure, both physical and virtual, such as energy, transport, water, health, media, communications, data processing or storage, aerospace, defense, electoral infrastructure and finance
- critical technologies and dual use items, including semiconductors, artificial intelligence, robotics, cyber-security, quantum and nuclear technologies as well as nanotechnologies and biotechnologies
- access to sensitive information, including personal data or the ability to control such information
- supply of critical inputs; and
- the freedom of the media and pluralism
Another factor to be taken into account is whether a foreign investor is controlled or funded by a third country government.
- The publication of the Regulation today overlaps with the European Council of 21-22 March at which, amidst Brexit talks, EU heads of government are also set to discuss the EU's response to the threat of growing Chinese economic power in preparation of the upcoming EU-China summit on 9 April 2019. To feed into the Council's debate, the European Commission on 12 March published a strategy paper on EU-China relations which focusses on strengthening its existing single market tools so as to ensure reciprocity and opening up opportunities in China. The strategy paper for example stresses the need for reforming the EU's public procurement rules by adopting an International Procurement Instrument before the end of this year. Notably but not surprisingly, despite calls of the German and French governments to revise the EU's competition law framework so as to allow for more political influence on decisions such as in Siemens/Alstom, the European Commission's strategy paper does not focus on reforming competition law. European Commissioner for Competition, Margrethe Vestager, has many times expressed her view that competition law is not the right tool to deal with EU-China industrial distortions.
- On 13 March 2019, the European Commission has released a comprehensive analysis of the state-of-play of foreign direct investments in the EU. The report attests a continuous rise in foreign company ownership of EU companies in key sectors, with currently 35 percent of total EU assets held by foreign-owned companies. The European Commission called on the Member States to effectively implement the new FDI screening mechanism over the coming months, in order to address this trend. In the same effort, the Commission will continue to monitor EU-wide investment developments to facilitate national implementation. Moreover, the European Commission and the Member States have established a dedicated coordination group for regular exchange of information and best practices in view of the implementation of the Regulation. The Commission will provide an annual report on the implementation of the new rules.
Following its publication in the Official Journal today, the Regulation will enter into force in mid-April. The Member States and the Commission will then have 18 months (i.e. until mid-October 2020) to put in place the required arrangements to ensure the application of the mechanism on the national level. Preparations for this have already begun, which includes a regular exchange of information and best practices with the Member States via the dedicated Commission expert group on the screening of FDI into the EU.
In parallel, on the basis of the EU FDI report that was published earlier this month, the Commission will continue to monitor foreign investment trends across the EU, and will ensure that this information be taken into account in the context of national transposition of the Regulation.
How DLA Piper can assist you
- Briefings & impact assessments - In order to raise the awareness of relevant stakeholders throughout the EU and beyond regarding the impact of the new rules on specific stakeholders or sectors of industry, our team stands ready to provide tailored briefings and impact assessments to government as well as corporate actors.
- Protecting EU interests and company interests - Our team is well-placed to assist EU companies potentially affected by inward FDI and/or by the new Regulation. This can be done by representing EU-based companies individually or by establishing alliances with other relevant EU government or private stakeholders to effectively represent the client's interest in the process of future EU screenings of FDI.
- EU institutional and stakeholder engagement - In view of the Commission's expected greater influence on future screenings of FDI in the EU that may affect the EU's strategic interest or that of other Member States, the team is experienced in assisting EU companies by engaging with the relevant institutional stakeholders.
- Advising foreign investors - The team stands ready to advise and to provide an upfront assessment to foreign investors on the legal and political criteria of the new mechanism, in order to help with acquisition planning and to get the deal through.