The European Union (EU) has recently proposed new rules establishing a framework for the review of foreign investments in the EU on the grounds of security or public order (“Commission Proposal”). [1] The proposed new rules respond to the increased number of acquisitions by foreign companies in sectors that are considered sensitive or strategic for the national security of Member States. These rules add to the existing requirements for the review of foreign investment, as well as merger control filings around the world. Companies entering into a merger and acquisition deal, including a joint venture or a minority shareholding, will need to carefully assess in which jurisdictions they have to file and under which sectorial regime. 

The Proposed EU Foreign Investment Rules

The Commission Proposal provides for an enabling framework for European Member States to screen / review foreign investments on grounds of security and public order. In addition, the European Commission will be able to provide its opinion in cases where the foreign investment concerns programmes or projects with EU interest, on the grounds of security or public order. This opinion will be addressed to the Member State in which the foreign investment is planned or has been completed. The Member State concerned will have to take “utmost account” of the Commission’s opinion and provide explanations in case it diverts from it.

The European Commission stated that the EU market remains open to foreign investment, which contributes to its growth. On the other hand, the EU does not want foreign takeovers to threaten the European security or public order.

The rationale behind the new rules is to prevent acquisitions from non-EU investors that do not operate based on market rules in sectors that are deemed sensitive or strategic for the EU. Such would be the case if, for example, a foreign investor was heavily subsidised by its own Government, which would result in unfair competition when bidding for projects with European companies.

Foreign direct investment inflow in the EU reached €280 billion in 2016. [2] An example that illustrates the above considerations was the controversial acquisition of Kuka, a German manufacturer of industrial robots, by Midea, a Chinese electrical appliance manufacturer in 2016.

An additional concern is the lack of reciprocity between European and foreign markets, including the involvement in European bids of foreign Government-subsidised or -owned companies. [3] In reviewing foreign investments, the Member States and the European Commission may consider the potential effects of the proposed investment into certain sectors including:

— critical infrastructure, such as energy, transport, communications, data storage, space or financial infrastructure or sensitive facilities;

— critical technology, such as artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology;

— the security of supply of critical inputs; or

— access to sensitive information or the ability to control sensitive information.

The Commission Proposal aims to establish a framework for Member States to review foreign direct investments in accordance with certain common requirements such as the possibility for judicial review, transparency and non-discrimination between third countries. Member States should notify their existing review mechanisms (and provide an annual report on the application of such mechanisms) to the European Commission.

The Commission Proposal would not oblige Member States to adopt a foreign investment review mechanism. However, Member States that do not maintain review mechanisms would be required to provide to the European Commission an annual report of the foreign direct investment that took place in their territory. The new rules also include a cooperation mechanism between the Member States and the European Commission, which include the obligation to exchange information on foreign investments that are undergoing review. Finally, the Commission Proposal also cross-refers to the existing merger control rules as well as the sectorial regimes in the EU. The European Commission will ensure consistency in the application and interpretation of foreign investment and merger control rules.

The Existing Foreign Investment and Merger Control Regimes

The proposed EU rules for foreign investment interact with the existing national regimes allowing Member States to restrict capital movements, the so called “merger control” rules, as well as sectorial regimes. In practical terms, if the Commission Proposal is adopted, companies will need to take into account the new rules as well as the existing rules on merger control.

Firstly, foreign investment: Today, nearly half of the Member States have foreign investment review mechanisms in place. These existing screening mechanisms are characterised by differences in scope and procedure: ex-ante/ex-post; voluntary/mandatory notification; companies/assets; applicable to investments from other Member States and third countries or third countries only. The existing foreign investment rules cover different sectors: infrastructure, including energy, water supply, telecommunications (for example in Germany, Austria, France or Italy), information technology, health, transport (for example in Germany, France or Italy), or acquisition of land in border areas (for example in Greece). The term “defence” is also defined in different manners (weapons industry for example in Denmark, Sweden and Slovenia or a broader set of products for example in Germany).

Germany recently strengthened its laws relating to M&A transactions by expanding the list of sectors for which scrutiny of foreign investment is required and extending the deadlines for the review procedures.[4] Italy also tightened its rules on foreign takeovers recently, by extending, among others, the Government's power to block acquisitions by non-EU companies to high-technology sectors.[5] At the international level, many countries around the world already review foreign direct investment. For example, in the United States, the Committee on Foreign Investment in the United States (CFIUS) has the power to block foreign acquisitions of U.S. companies for national security reasons under the Exon-Florio Amendment to the Defense Production Act 1950. In Canada, the government is able to review foreign acquisitions of Canadian companies applying a national net benefit test, under the Investment Canada Act 1985. In Australia, the Foreign Investment Review Board (FIRB) applies a national interest test to foreign acquisitions of Australian companies under The Foreign Acquisitions and Takeovers Act 1975.

Secondly, merger control rules: Foreign direct investments may take the form of mergers, acquisitions or joint ventures that constitute “concentrations” falling within the scope of the EU merger control rules.

EU merger control rules allow Member States to take appropriate measures to protect legitimate interests which includes security, among others.[6] EU merger control explicitly recognises the protection of public security, plurality of the media and prudential rules as legitimate interests for which European Member States can adopt screening decisions that do not need to be communicated to the European Commission. By contrast, when a Member State intends to take a screening decision to protect “other” public interests, it will need to communicate this to the European Commission, if the decision concerns a concentration that falls within the scope of EU merger control. There are at least twelve Member States where wider public interest considerations can either form part of the merger control assessment or can otherwise feature in the overall decision making process.[7]

In the light of BREXIT, the eyes are on the U.K. Government and the power of the U.K. Secretary of State to issue a Public Interest Intervention Notice in relation to transactions which he or she believes may be expected to operate against the public interest, regardless of any adverse effect on competition.[8] Public interest considerations carry more weight in merger control assessment in certain jurisdictions around the world such as South Africa or Taiwan.[9]

On 17 October, the UK Government published a proposal that would allow it to intervene in mergers that raise national security concerns even when smaller businesses are involved. First, the turnover threshold of GBP 70million would be lowered to GBP 1million, while the requirement that a merger increases a business' share of supply to 25% or over would be abolished for the dual-use and military use sector and for parts of the advanced technology sector (within the proposed short-term steps). Second, long-term reforms are proposed (an expanded version of the existing ‘call-in’ power to allow the UK Government to scrutinise a broader range of transactions for national security concerns within a voluntary notification regime; and/or a mandatory notification regime for foreign investment into the provision of a focused set of ‘essential functions’ in key parts of the economy).[10]

Lastly, sectorial regimes: Several sectorial regimes will continue applying such as energy, raw materials (including mining and recycling), electronic communications, cybersecurity, air transport, financial sector, insurance, space, export control and EU free movement rules. The proposed rules will not affect EU rules for these sectors, and companies will have to comply with all the applicable sets of rules.

What To Do Next?

The Commission Proposal will go through the EU ordinary legislative procedure, which requires the involvement of the two co-legislators: the European Parliament and the Council of the EU. During the European Council meeting on 22 June 2017, various Member States expressed their concerns about restricting much needed foreign investments. The non-binding mechanism provided for in the Commission Proposal is likely to strike a compromise among Member States on the matter. It is too premature to assess the final content and the timing of the approval of the Commission Proposal. It seems unlikely that the proposed new rules will be adopted before the end of 2018.

Today, companies already need to consider that its investment or acquisition (including a joint venture or a minority shareholding) can trigger filings around the world for foreign investment and/or for merger control purposes. Companies operating globally need to assess the laws of over 130 regimes around the world. A global and coordinate approach for both foreign investment filings and merger control filings is what can help a company navigate the intricacies of the different sets of rules.