On 20 November 2018, the European Commission (Commission) announced that a draft EU framework for screening foreign direct investment (FDI) has been agreed by the European Parliament (Parliament), the Council of the EU (Council) and the Commission. The measures come in rapid response to concerns (formalised last September in a Commission proposal) regarding foreign investment in EU-based businesses active in strategic or sensitive sectors, particularly where the foreign investors are state-owned and/or where the target of investment is critical technology or infrastructure. Most notable amongst the measures is a new EU-wide "cooperation mechanism" through which EU Member States will be obliged to exchange information (amongst themselves and with the Commission) and alert specific concerns. The measures are expected to be approved very shortly and likely to be formally adopted early next year.
Currently there are no EU-wide measures for screening FDI on security grounds. At the moment, 12 Member States have screening mechanisms in place, some of which have undergone significant changes in recent years through the introduction of more stringent reviews of transactions that raise national security concerns. Furthermore, these national vetting regimes vary significantly and Member States are not required to coordinate their policies or approaches, even in situations where FDI might have cross-border security implications within Europe.
Many other advanced and developing economies either have powers for scrutinising FDI or are in the process of establishing vetting regimes – with EU companies often confronted with such scrutiny when making acquisitions or investments abroad (most notably in China and the US). It is, however, the marked increase of FDI into the EU, in particular coming from China (Chinese companies reportedly having made approximately 250 acquisitions in the EU in 2017), that has led to calls for the EU to have its own FDI regime.
To this end, the Commission and Member States have been seeking a pan-EU approach that aims to protect critical European interests beyond what is possible under current (fragmented) national arrangements. The goal is for the EU, as a bloc, to be better equipped to protect European collective interests where transactions, raising national security concerns, might have cross-border effects.
At the same time, stakeholders have been keen that the EU remains one of the most open investment regimes globally and that any adopted FDI regime operates in a demonstrably transparent, predictable and non-discriminatory manner (like, for example, the current EU merger control system).
Features of the Framework
Under the framework regulation the criteria for intervention in FDI decisions will be "public order and security". The regulation then provides a non-exhaustive list of issues that Member States may take into account when conducting their assessment – considerations such as an FDI's impact on critical infrastructure, advanced/critical technologies, security of supply of critical inputs and access to sensitive information (or the ability to control such information). Sectors captured under the regulation would likely include, among others, energy, transport, communications, data storage, artificial intelligence, robotics, semiconductors, technologies with potential dual-use applications and cybersecurity.
The framework agreement does not attempt to harmonise Member State screening mechanisms or to create an EU-wide screening mechanism, nor does it impose an obligation on all Member States to have in place a screening mechanism. Rather it aims to enhance cooperation and increase transparency between Member States (and the Commission) – in particular by:
- creating a "cooperation mechanism" whereby Member States are required to exchange information (amongst themselves and with the Commission), in particular where FDI is undergoing screening by a national authority (this is not an EU-wide screening mechanism as such, but instead a framework through which the Commission and Member States can carry out a more coordinated review of FDI);
- allowing the Commission to issue non-binding opinions:
- in cases concerning a number of Member States – ie advising Member States where it considers that an investment would likely affect security or public order in one or more Member States (and to which the Member State(s) in question must then take "utmost account" of the opinion and provide explanations where it chooses not to follow the Commission's views); or
- where a proposed investment might affect a project or programme of interest to the whole EU (citing Horizon 2020 or Galileo as examples);
- encouraging international cooperation on screening policies, including sharing experience and best practices as well as information regarding investment trends;
- reaffirming that national security interests are the responsibility of Member States and that the EU framework will not:
- affect a Member State's ability to maintain any national review mechanisms already in place, or
- require a Member State, where it does not currently have a national FDI regime, to adopt one;
- allowing Member States to have the final say as to whether a specific investment should be permitted or not in their territory; and
- recognising the need to "operate under short business-friendly deadlines and strong confidentiality requirements."
The Council is expected to approve the agreed text on 5 December. The European Parliament Committee on International Trade (INTA) will vote on the agreed text on 10 December. The expectation is that the new rules will be adopted in the first quarter of 2019.
It is worth noting that a number of EU Member States (as well as the UK) are moving forward with plans to strengthen their own powers for reviewing FDI. In practice this means that an increased portion of cross-border transactions will be subject to stringent scrutiny in Europe well before the EU rules come into force. It is, therefore, essential for parties involved in European-focused transactions to consider the scope and implications of national requirements and, where necessary, to engage with relevant national authorities as soon as practicable.
Overall, it can be expected that the new EU regulation will have a significant impact on M&A transactions. First, it increases the likelihood of more Member States introducing FDI screening tools to level the playing field. Second, for those Member States that already have a screening mechanism, the new rules will likely impact both the timing and the substantive assessment.
While Member States retain their sovereignty in taking decisions, they will need to take comments from other Member States and the Commission into account. The additional timeframe of 25 working days for Member States to comment on FDI screenings abroad are likely to delay the national procedures and decouple it from the shorter first phase merger control reviews in most Member States. Moreover, the criteria for concerns raised regarding the security or public order of Member States are not defined and leave room for uncertainty.
For parties to M&A transactions this means that they will need to engage even more thoroughly than today into an analysis of potential cross-border security issues in order to map out where FDI filings are required or advisable. While the Commission only has a coordinating role, it could become a relevant player in the political vetting process of foreign investments that parties need to consider.