On the 13th September 2017 Jean-Claude Juncker, the European Commission President, unveiled a framework for investment screening for certain foreign mergers in his “State of the Union” address to the European Parliament.

At the same time the text of a proposed Council Regulation was published which set out inmore detail the proposed new EU system.

These proposals are similar in nature to those proposed by the UK in the Queen’s speech a few months ago.

This proposal had been widely predicted since early August when the UK Press highlighted how the EU Commission President was preparing to unveil EU foreign takeover controls in his keynote speech in September.

In his speech he re-stated his dedication to free trade but noted that EU Member States were not “naïve free traders”. He promised that Europe will and, must, always defend its strategic interests.

This is why he explained that he was proposing a new EU framework for investment screening. He stated:-

“ If a foreign, state-owned, company wants to purchase a European harbour, part of our energy infrastructure or a defence technology firm, this should only happen in transparency, with scrutiny and debate. It is a political responsibility to know what is going on in our own backyard so that we can protect our collective security if needed”.

The new draft legislation made under Article 207(2) of the Treaty on the Functioning of the European Union (TFEU) empowers both Member State governments and the Commission to screen and block or unwind foreign investments in the European Union (EU) on the grounds of “security or public order”. The proposed regulation would form part of the Common Commercial Policy and would be applied separately to the provisions of the EU Merger Regulation..

The proposed regulation would apply to all foreign investments of any kind and give Member States the power to screen foreign investments concerning persons established in that Member State. However the EU Commission will have a power to intervene to screen foreign investments in any Member State “that are likely to affect projects or programmes of Union interest”. The draft Regulation includes an indicative list of EU projects including Horizon 2020, the Trans-European Networks for Energy (TEN-E), the Trans-European Networks for Transport (TEN-T) and European GNSS programmes (aka “Galileo”, the global navigation satellite system).

Member States could intervene on the grounds of security or public order which are defined widely to include critical infrastructure or technologies, the supply of critical inputs and access to sensitive information or the ability to control sensitive information”.

The proposal appears to be clearly aimed at foreign state controlled-principally Chinese- enterprises. The proposed Regulation states that in considering whether a foreign investment is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is “controlled by the government of a third country, including through significant funding”.

At the back of this proposal is the Commission’s belief that the EU’s openness to Chinese investment is not reciprocated in China and measures to stop the gradual Chinese spending spree are required.

The proposed Regulation introduces a cooperation mechanism between Member States and the Commission to ensure that Member State governments report screening of foreign investments under the new mechanism to the Commission and the other Member States allowing other Member States and /or the EU Commission to raise objections, where appropriate. These objections, however, would stop short of a formal veto. The power to block or not would remain with the relevant Member States but the decision making Member State would be hard pressed to ignore the protestations of other Member States or the Commission..

It is up to each Member State to design their own investment screening mechanism within the confines of the proposed Regulation.

It is as yet unclear how these systems would be similar to CFIUS, the USA’s Committee on Foreign Investment. In the USA, the CFIUS mechanism allows the USA to block foreign takeovers when they could threaten USA strategic interests.