Key points 

  • The EU has proposed a new EU framework for screening foreign investment that raises security or public order concerns for the EU or its Member States. The proposal does not go as far as obliging Member States to adopt their own national screening systems, but confirms that Member States that do have such regimes must comply with the proposed EU requirements, in order to ensure greater coordination and transparency. The European Commission itself will not have the power to block foreign investments.
  • In the State of the Union 2017 Letter of Intent, President Juncker indicated that the Commission intends to launch, and possibly complete, the proposed framework by the end of 2018. It is worth noting that there has been opposition by several Member States (such as the Netherlands, Portugal and Spain) against the proposed initiative and at this stage it is unclear whether the proposal will be approved by the EU Council.
  • Under the draft regulation, EU governments will be able to prohibit Chinese and other foreign investments that fall short of acquisitions of control, as the screening will apply to investments of any kind by a foreign investor aimed at creating or maintaining lasting and direct links between the foreign investor and the target, including investments which enable effective participation in the management of a business.
  • The implications are far-reaching, as "security and public order" concerns are widely interpreted. All of the following are covered: effects on critical infrastructure (energy, transport, communications, data storage, space, financial infrastructure, sensitive facilities), effects on critical technologies (artificial intelligence, robotics, semiconductors, dual use, cybersecurity, space, nuclear technology), effects on the security of supply of critical inputs (e.g. mining outputs) effects on access to or the ability to control sensitive information). This is a non-exhaustive list, leaving it open to Member States to broaden the scope of factors that they consider might affect security and public order.
  • EU governments will be required to share information on foreign investments with each other and with the European Commission, and to state which investments they plan to screen. Individual Member States will be able to raise concerns about foreign investment taking place in another Member State. The European Commission will also have the power to give a non-binding opinion on such investments.
  • Importantly, the European Commission will be able to carry out its own review of foreign investment that affects a project of EU interest. These are projects involving substantial EU funding or in relation to critical infrastructure, critical technology or critical inputs. The draft regulation includes a list: the Galileo and EGNOS satellite programmes, the Copernicus earth observation programme; R&D programmes under Horizon 2020 (including key enabling technologies such as artificial intelligence, robotics, semiconductors and cybersecurity), and transport, energy and telecoms infrastructure under the EU Trans-European Network programmes. Such vetting is unprecedented at EU level, in an area in which the European Commission has no previous experience and will need to build up relevant expertise, which will be challenging. For example, the US foreign investment screening procedure known as CFIUS, requires intelligence reports and vulnerability assessments for each foreign investment screening case. The intelligence reports (focused on the buyer) are prepared by a dedicated office working for the Director of National Intelligence and drawing on the intelligence community within the US Government. The vulnerability assessments are prepared by the relevant department with regulatory or policy equities. It is not known whether the European Commission would need to prepare similar reports and if so, whether it would seek to obtain the necessary data from national intelligence agencies of EU countries. Furthermore, EU legislation would require the possibility for judicial review of European Commission decisions relating to foreign investments. If the European Commission is going to rely on information from national intelligence agencies, judicial review may not be viable as such intelligence would not be disclosed in the courts.
  • Exceptionally the proposed regulation is presented without an accompanying impact assessment in view of the rapidly changing economic reality and the growing concerns of EU citizens and countries. Instead there will be an in-depth analysis of foreign investment into the EU which can feed into the decision-making process.

More information:

New screening process

There are four main strands to the proposed regulation:

  • Where an EU country already has a national system of review of foreign investment which could raise security concerns, it will need to notify the European Commission its review mechanisms and any amendments. It will need to provide annual reports on the application of its foreign investment reviews including information on the sector concerned, origin and value of the investment, as well as information on review decisions either prohibiting an investment or subjecting such investment to conditions. Any review mechanisms must meet basic procedural requirements, such as the possibility of judicial review of decisions, non-discrimination between third countries, and transparency.
  • Where foreign investment is being reviewed for security/public order purposes by an EU country, it must give the European Commission and the other EU countries information about that investment and allow them to give views. This will have timing implications - the draft regulation suggests that Member States will have 25 working days to provide comments, and then the European Commission will have an additional 25 working days to decide whether to issue an EU opinion to the country in which the investment is taking place.
  • In the case of foreign investment which could affect a project of EU interest, the European Commission can conduct a security review of the investment and give an opinion to the relevant EU country. The EU's opinion will be non-binding but the EU country concerned must "take utmost account of the Commission's opinion and provide an explanation to the Commission in case its opinion is not followed." This is the case even if the country in question does not have a national foreign investment review system. If it chooses not to follow the EU opinion, it will need to explain its reasons to the Commission.
  • All EU countries must report to the European Commission on foreign investment taking place in their country, irrespective of whether they have national review systems. Relevant information includes ownership structure of the foreign investor, financing of the investment, and information about subsidies granted by third countries.

Implications

  • Other jurisdictions around the world have well-established foreign investment review regimes, such as the US, Canada and Australia. The vetting of foreign direct investment has been subject to debate across Europe in recent years. Many EU countries already have their own national regimes to screen deals that raise national security concerns. The debate has centred around reciprocal investment conditions - earlier this year Germany, France and Italy called for EU-level intervention and proposed that foreign investors should face restrictions in Europe if their home country provides for similar restrictions on foreign investment (such as, e.g. a requirement to establish joint ventures with a local partner).
  • Whilst the draft EU regulation does not go as far as expressly making reciprocity a factor in deciding whether a foreign investment raises security concerns, the recitals and accompanying Communication state the need for vigorous and effective policies to open up other economies and ensure that everyone plays by the same rules. Furthermore, in deciding whether foreign investment raises security concerns, the Commission and EU countries may take into account whether the foreign investor is controlled by a government of a third country, including through significant funding. France, Germany and Italy have issued a joint statement welcoming the EU’s proposals as an important step towards a level playing field in Europe.
  • This latest move by the EU is in line with steps taken by European governments to tighten control over foreign acquisitions of critical national assets. For example, in the wake of a series of acquisitions of key technology and assets by Chinese investors, Germany recently expanded its mandatory filing requirements for foreign acquisitions relating to the defence sector, and introduced notification requirements for foreign acquisitions relating to critical infrastructure. In addition, the government continues to be entitled to intervene in transactions in any other industry sector if the transaction constitutes a threat to the public order or security of Germany.
  • In France, President Macron has been actively lobbying the EU to introduce a regime for screening foreign investment in strategic sectors in Europe. France already has in place national legislation to vet such deals in sectors such as telecoms and energy. The UK government has also recently stated that it is planning to increase scrutiny of foreign investment in the UK which impacts national security. The UK already has the ability under its competition law regime to intervene in deals that raise public interest issues (not limited to foreign investors) but the proposals appear to go wider, as they may capture deals irrespective of whether or not they fall within the scope of the existing competition regime. At present, deals that do not meet the UK merger control jurisdictional criteria are only subject to review if they fall within a limited category of "special public interest mergers".
  • The proposal will not impact the European Commission's "one-stop shop" under the EU Merger Regulation ("EUMR"). If a foreign investment is notifiable to the European Commission under the EUMR, any decision by a Member State to intervene on the grounds of protecting its legitimate interests must be approved by the European Commission, unless the legitimate interest relates to public security, plurality of the media or prudential rules. This position will not change, though in practice Member States have rarely invoked this procedure.
  • The new framework will apply to EU Member States only. According to the UK's EU Withdrawal Bill as currently drafted, all existing EU regulations will be retained in UK law on the day that the UK leaves the EU, which means that this new regulation, provided that it has entered into force pre-Brexit, will form part of UK law post-Brexit. It is uncertain how the regulation would be applied in practice post-Brexit, when the UK is no longer a member of the EU. It may be that the UK would in due course seek to repeal the regulation from domestic law. Post Brexit, UK investors would be "foreign investors" for the purpose of the new regulation, unless otherwise agreed between the EU and UK as part of their new trade relationship. This means that post Brexit, for example, direct investments by a UK entity into an EU country could be subject to review on security or public order grounds by that country or the European Commission under the new regulation.
  • Whilst protection of national interests is a legitimate objective, this needs to be properly balanced against encouraging foreign investment which is ultimately an opportunity for many EU countries, and indeed necessary to increase economic growth and productivity. The proliferation of foreign investment rules in EU Member States creates additional administrative burden on investors and the proposed EU rules may further incentivize Member State governments to expand their national regimes. Businesses that are considering investing in the EU may increasingly need to assess whether their investments raise security or public order concerns and if so, carefully consider their notification strategies in the relevant EU countries.