European investment screening "light" — first steps towards European investment controls
Due to the significant increase of foreign direct investment into European technology assets over the past 18 months, particularly from the People's Republic of China (PRC), there has been an increased call for the EU to take a more active role in scrutinizing investments. As of today, 12 out of 28 Member States (Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain and the United Kingdom) have national security review mechanisms in place, differing widely in scope and enforcement. However, there is no unified approach towards national security reviews within the EU.
This may change since Jean-Claude Juncker, President of the European Commission, presented the proposal of an EU Regulation establishing a framework for the review of foreign direct investments into the EU. The announcement was made on September 13, 2017 as part of Juncker's State of the Union address to the European Parliament. The proposed EU Regulation is expected to come into force towards the end of 2018 at the earliest, given that it has yet to complete the European legislative process.
PROPOSED SCOPE OF EU REGULATION
The proposed EU Regulation seeks to establish a general framework for Member States and the Commission for the review of foreign direct investments into the EU. However, the proposal does not introduce an obligation for Member States to establish or to maintain investment review mechanisms. Yet, should Member States decide to have investment reviews in place, they will have to be in compliance with the proposed EU Regulation.
The European approach to investment reviews will revolve around the criteria of "security and public order." While such terms stem from European law, they are only vaguely defined by the European Court of Justice. The proposed EU Regulation specifies the criteria by a non-exhaustive list of considerations to be taken into account when conducting a review. The list of relevant aspects include, inter alia:
- Critical infrastructure, including energy, transport, communications, data storage, space or financial infrastructure, as well as sensitive facilities
- Critical technology, including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology
- The security of supply of critical inputs
- Access to sensitive information or the ability to control sensitive information. The EU Regulation's scope of investment reviews reveals conceptual and technical similarities with the recent amendments of the German Foreign Trade and Payments Act (AWV) (see Germany chapter). Contrary to the rules recently amended in Germany, the proposed EU-Regulation also takes into account whether the acquirer is "controlled by the government of a third party, including through significant funding". Hereby, the Commission responds to investments backed by state-owned enterprises and state-supported funding (normally from the PRC).
NEW ROLE OF THE EU COMMISSION
One of the most significant changes to the existing national review mechanisms throughout the EU is the envisaged role of the Commission. The EU Regulation provides for a cooperation mechanism between the Member States and the Commission by virtue of which the Commission shall—for the first time—be authorized to conduct investment reviews in a coordinating and supporting function. Accordingly, the Member States will be required to inform the Commission, as well as other Member States, of any foreign direct investment undergoing the national review process. As a matter of practice, this raises confidentiality concerns for the parties of a transaction, in particular when considering pre-filings. The Commission may review the respective investment in its own right and issue its opinion to the relevant Member State. Other Member States may also deliver comments to the reviewing Member State, though neither the Commission's opinion nor other Member States' comments will be binding, thus, leaving the ultimate decision on the clearance of a transaction to the reviewing Member State.
Furthermore, the EU Regulation introduces annual reporting obligations on the part of the Member States with respect to national security reviews on the basis of the information available to them, irrespective of whether they have review mechanisms in place. This is intended to achieve transparency of national review proceedings through the EU, as most Member States do not provide publicly available information on the domestic review processes or the decisions taken by the relevant authorities.
Should the Commission qualify a transaction as likely to not only affect public order and security but also projects or programs with significant EU funding (e.g., Galileo, Copernicus, trans-European Networks, etc.), the relevant Member State must "take utmost account of the Commission's opinion and provide an explanation to the Commission in case its opinion is not followed." Yet, even in this context, the ultimate decision remains with the Member State.
Therefore, the Commission's role in the review process is generally limited to an advisory responsibility, falling short of the competencies of the Committee on Foreign Investment in the United States (CFIUS). Although the ultimate decision on the clearance of the transaction in the US lies with the US President, CFIUS controls the review process and may, for example, provide Q&As to the parties—a measure beyond the Commission's power, which is limited to addressing any issues it may have vis-à-vis the Member States.
The implications of the proposed EU Regulation for existing national review mechanisms are expected to be mostly of a procedural nature. Under the proposed regulation, Member States retain the ultimate decision-making power and remain free to not implement investment reviews at all. The Commission may have the authority to review transactions undergoing review, but its opinion is merely advisory. Given that Member States will be obligated to give the Commission's opinion and other Member States' comments due consideration, the time frames for national review procedures are likely to expand further.
This is further illustrated by the fact that under the proposed EU Regulation, Member States will have to inform the Commission and other Member States of the transaction undergoing review within five working days following initiation of the review process. Opinions and comments will then have to be submitted within another 25 working days. Should the Commission require additional information, it may request such information from the reviewing Member State and the 25-working-day period will start upon receipt of such information. Should another Member State issue comments before the Commission's opinion, it would trigger a restart of the 25-day-review period, which may significantly reduce predictability of transaction timetables.
The new role of the Commission and other Member States will add another layer of complexity to the review process—a testimony to increasing significance of security reviews in the field of international M&A. Annual reporting obligations will contribute to reducing the current lack of transparency of national investment reviews, and the cooperation mechanism should serve as an important step towards a unified approach to security reviews through the EU. It remains to be seen whether the current proposal is an interim or more definitive step in the course of harmonizing European investment controls.