The EU Foreign Investment Screening Regulation (Regulation 2019/452) entered into force on 10 April 2019 and will be applicable from 11 October 2020. This new Regulation creates a mandatory information sharing mechanism between Member States, and allows Member States and the European Commission to comment on foreign investments foreseen in other Member States. Since the adoption of the Regulation, some EU Member States have already strengthened their investment screening regimes, and more are considering to follow suit. In its March 10 communication on a New Industrial Strategy for Europe, the European Commission indicated that it would table proposals for the strengthening of the Regulation. 

In practice, this means that it is becoming increasingly hard to predict the timing and outcome of transactions. Businesses are advised to take these new restrictions into account when planning acquisitions. These new tools are also available to (try to) prevent acquisitions contemplated by others. The developments also reflect a wider global trend of major jurisdictions (e.g. Australia, Canada, the United Kingdom and the United States) increasingly toughening foreign investment controls.

EU Investment Screening Regulation in force

The European Union (EU) Foreign Investment Screening Regulation(Regulation 2019/452) (Regulation) entered into force on 10 April 2019 and will be applicable from 11 October 2020.

With this Regulation, the EU aims to safeguard Europe's security and public order by introducing the first EU-wide foreign investment screening cooperation mechanism and scrutinising purchases by foreign companies that target the EU's strategic interests.

The key features of the Regulation are as follows:

  • Creating a cooperation mechanism between the European Commission (Commission) and EU Member States to exchange information and raise concerns related to specific investments.
  • Allowing the Commission to issue a non-binding opinion if (i) an investment poses a threat to the security or public order of more than one Member State, or (ii) an investment could undermine projects of interest to the whole EU, such as EU programmes for energy, transport and telecommunication networks (TEN-T, TEN-E, Trans-European Networks for Telecommunications), Horizon 2020 and Galileo. While the Commission will have no direct powers to block transactions, it may nonetheless have the opportunity to 'influence' the outcome of foreign investment screening by issuing an opinion to a Member State.
  • Allowing EU Member States to provide comments to the Member States reviewing an investment, when they consider that the investment 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 investment takes place is not conducting a screening.
  • Laying out a non-exhaustive list of factors that could trigger a screening process on the grounds of security or public order - and, thus, expanding the scope of investments to be reviewed. This list includes, inter alia:
    • Critical infrastructure (energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities).
    • Critical technologies and dual use items (artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies).
    • Critical inputs (energy, raw materials and food security).
    • Access to sensitive information (personal data).
    • Media freedom and pluralism.
  • Providing certain basic requirements for Member States who choose to introduce a screening mechanism at national level: (i) transparency and non-discrimination between third parties; (ii) established timeframes for screening; (iii) protection of confidential information; and (iv) possibility of judicial redress against the Member States' decisions.

EU Member States are strengthening their investment screening regimes

The Regulation respects Member States' right to maintain, amend or adopt the screening mechanisms, as well as their decision-making power regarding any investment investigation in their territory. Accordingly, EU Member States' national regimes - not the Regulation - continue to regulate the validity of investments in each EU Member State.

As of 28 February 2020, 14 EU Member States had national investment screening mechanisms.1 In order to adapt their screening framework to the information sharing mechanism introduced by the Regulation, Member States without such a regime are now considering to introduce their own screening systems, and Member States with a screening system already in place are toughening them, by:

  • Widening the screening scope by adding new sectors subject to review
  • Lowering the thresholds that trigger investment screening procedures
  • Expanding the disclosure obligations of foreign investors
  • Extending statutory timelines for authorities to review investment
  • Introducing new civil, criminal or administrative penalties for not fulfilling or circumventing notification and screening obligations

In particular, France has adopted a new stricter regime, which will be applicable to authorisation requests submitted as from 1 April 2020. The new Decree n° 2019-1590 of 31 December 2019 relating to foreign investments in France2 not only reflects the Regulation, but also contains additional changes going beyond the Regulation by:

  • Expanding the scope of 'regulated sectors' by adding print and digital media, food safety and critical technologies (e.g. cybersecurity, artificial intelligence, robotics, additive manufacturing, semiconductors, quantum technologies and energy storage).
  • Lowering the thresholds triggering mandatory prior authorisation by the Ministry of Economy where non-EU investors are involved, from 33.33 per cent to 25 per cent.
  • Focusing on ascertaining whether a non-EU investor has links to a foreign government or a foreign public body.
  • Introducing a financial penalty of EUR 50,000, which the Ministry may impose on investors in addition to other injunctions.

Further, on 30 January 2020, the German Ministry for Economic Affairs proposed the following reforms:3

  • The investment review will include not only a 'real threat' (as required under the current regime), but also a 'potential threat' to public policy or security.
  • The investment review will include any threat to public policy or security of another Member State or in relation to projects or programs of EU interest. The current review only refers to public order or security in Germany.
  • Any foreign investment subject to notification requirements to be suspended for the duration of the review. Until now, this was only applicable to foreign investments in the defence and IT security sector (so-called sector specific review).
  • The Ministry will soon also specify the types of 'critical technologies' that are subject to the stricter investment review in Germany, most likely including artificial intelligence, robotics, semiconductors, biotechnology and quantum technologies.

EU to Strengthen Regulation 2019/452

On 10 March 2020, the European Commission stated in its "New Industrial Strategy for Europe"4 that it would further reinforce its industrial and strategic autonomy through the strengthening of the framework for screening foreign direct investment. In other words, the Commission expressed its intention to be more strategic in the way it looks at risk associated to foreign investment, going beyond the existing text of the Regulation.

Impact on future transactions

While the Regulation promotes a cooperation mechanism between the Commission and Member States to exchange information on investment screening, it does not create an EU-level regulator who could issue a binding opinion and block an investment. Unlike EU merger control, the Regulation does not provide any obligation for parties to notify their transactions to the Commission or to suspend them pending the outcome of the Commission's review. Nor does it require harmonisation of EU Member States' national investment screening mechanisms, or even create an obligation for EU Member States to introduce such regimes.

However, the EU's new investment screening regime is likely to affect transactions in the following ways:

  • More scrutiny on foreign investments - due to increased exchange of information between the Commission and Member States, national authorities will become more aware of transactions and can ask for substantial information on a transaction being reviewed in another Member State. In practice, it can also be expected that businesses will increasingly lobby the Commission to actively engage (and 'intervene') in Member States' review of foreign investments by competitors.
  • Longer review periods - it may take longer to complete transactions, because the foreign investment review periods must take into account the period when other Member States provide their comments and the Commission issues a non-binding opinion to the Member State carrying out the investment screening. This means, in practice, that an additional minimum of 35-50 days needs to be factored into the review timetable. Companies are advised to consider foreign investment issues early to mitigate any delays.
  • More investments subject to screening - as mentioned above, EU Member States are broadening the traditional screening scope beyond military goods and defence by adding new sectors subject to review.

Companies will face a 'patchwork' of national foreign investment screening regimes in the EU with different jurisdictional regimes and notification requirements, as well as a reformed and more onerous EU framework. This will create a new layer of regulatory risk in mergers and acquisitions. Companies will therefore face a dual-track system of merger control and foreign investment review. Planned acquisitions by competitors can also be brought to the attention of the European Commission and of the Member States' authorities anytime these investments present risks for the EU's interests and security.

Companies are advised to monitor developments of the investment screening mechanism both in the EU and Member States.