On March 5, 2019, the European Union adopted a new framework for the screening of foreign direct investment. The new rules, which will apply from October 2020, have been adopted amid political concern that European assets may be too open to foreign investment. Although the new rules stop short of empowering the European Commission to block investments, they nonetheless establish the most extensive European framework yet for coordinating investment screening, and will require careful management in the context of inbound merger and acquisition (M&A) deals.

New Framework

In proposing the new measures back in 2017, the President of the European Commission (Commission) had observed: “We are not naïve free traders. Europe must always defend its strategic interests. That is why we are proposing a new EU framework for investment screening.” Yesterday’s legislation stops short of harmonizing the disparate national-level frameworks for foreign direct investment (FDI) review. But it has cleared the way for a new, EU-wide system of information exchange among the Commission and the EU’s member states and may represent the first step toward what might ultimately become a centralized system for EU-level review of FDI, akin to Committee on Foreign Investment in the United States (CFIUS) reviews in the United States.

Strategic Interests

Fourteen of the EU’s 28 member states have legislation providing for some form of investment screening. But these national-level rules differ significantly in terms of scope, thresholds, sector coverage, process (ex-ante or ex-post), timetable and enforcement.

Under EU law, member states may restrict cross-border investments only on limited grounds of security and public order. The newly adopted framework expands on the areas that may be taken into account in member states’ assessments, including whether the FDI has impacts on

  • “critical infrastructure,” including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, and investments in land and real estate crucial for the foregoing 
  • “critical technologies,” including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies, nanotechnologies, biotechnologies and “dual use items”
  • “critical inputs” encompassing energy, raw materials and food
  • “sensitive information” including personal data
  • “freedom and pluralism of the media”  

Member states and the Commission may also take into account whether an investor is directly or indirectly controlled by a foreign government, including through ownership structure or funding, or whether it already engages in activities relating to security or public order.

Coordinated Screening Mechanism

The new investment framework

  1. requires each member state in which a planned or completed FDI is undergoing screening to notify all other member states and the Commission
  2. allows the Commission and each member state to request additional information from the reviewing member state and, if they consider that their security or public order may be affected, to provide comments
  3. empowers each member state to request information from the member state in which the FDI is planned or has been completed, even if the FDI is not undergoing screening in that member state
  4. mandates the Commission to issue an opinion if at least one third of member states consider that an FDI undergoing screening is likely to affect their security or public order; the Commission may also issue an opinion at its own initiative, whether or not the FDI is undergoing screening
  5. empowers the Commission to issue an opinion if it considers that the FDI affects a “Union interest,” in which case the EU member state to which such opinion is addressed must take “utmost account” of the Commission’s opinion and must provide an explanation if such EU member state does not follow it. (“Union interest” in this context means Commission-designated projects or programs that relate to space (Galileo, Copernicus), research (Horizon 2020), transport (Trans-European Networks for Transport, TEN-T), energy (TEN-E), or telecommunications) 

Implications for Inbound European M&A

More Deal Scrutiny? The new framework will likely add another layer of complexity to deal execution in the European Union. Member states to which deals are notified will likely come under more pressure to conduct more detailed investigations (especially if other member states or the Commission ask questions or make comments) and on some more sensitive deals, there will be many more stakeholders to consider. Inter-relationships with existing approval processes (including antitrust) will also need to be considered. 

Increased information burdens and increased transparency? Under the new rules, when a member state screens an investment, it must provide to the other member states and the Commission certain information, including details of the ownership structures of the parties, their operations and their sources of funding. This will likely mean additional reporting obligations for deal parties and may lead to detailed information on investor structure and sources of funding being sent to multiple member states that might not otherwise have received such information.

Extensions to Deal Timetables? The member state FDI procedures already have vastly different timelines, but adding new, pan-EU information and comment rights will presumably extend a number of reviews by several months. Even if an FDI has not undergone screening in the EU member state at issue, each other member state may provide comments, and the Commission may provide an opinion, up to 15 months after the FDI has been completed. The EU system itself does not impose mandatory waiting periods, so it will be up to each member state to determine — under its own national regimes — whether deals can close while still under review. Clearly, if a deal appears likely to undergo significant FDI scrutiny in the EU, it will be important to have regard to such scrutiny when considering deal timing.