National security concerns regarding Huawei continue to make headlines around the world, against the backdrop of an ongoing US / Chinese trade war. This blog looks at new EU rules on foreign investments which raise security or public order concerns.

Background

We first blogged about Huawei and UK national security in December, including a description of the UK government's proposals for new UK legislation for reviews of foreign investments on national security grounds. Since then, Huawei has hardly been out of the headlines – just one example is the sacking of the UK's Defence Minister over an alleged leak of national security decisions in relation to Huawei supplying the UK's new 5G network.

Without access to briefings from MI5 and MI6, it is difficult to tell how justified these national security concerns are. However, against the backdrop of an increasingly tense US / Chinese trade war, national security controls continue to attract criticism as being a mask for partisan economic protectionism.

The European Union continues to walk the middle ground between the US and China. In doing so, it has introduced a new regulation which tackles the thorny issue of control of foreign investment on security grounds, but in a way which is much less wide ranging and much less centralised than the US equivalent, CFIUS.

New regulation

Regulation 2019/452 (the Regulation) will come into force by the end of 2020, and will create a "framework" for cooperation between Member States and the EU Commission on foreign investments.

The Regulation is perhaps most notable for what it does not do. It does not mandate that all Member States must adopt national laws on screening of foreign investments. In fact, at the time of writing a significant number of Member States have no national rules on foreign investments – for example, the UK proposals for meaningful legislation are still only at white paper stage. Equally, it does not mandate an EU wide "super-regulator" for foreign investments – as we shall see later, the circumstances in which a foreign investment may be "reviewed" by the EU Commission will be limited, and even then any decision will be advisory only/

Where a Member State does choose to adopt national laws for screening of foreign investments on security or public order grounds, the Regulation merely requires that those laws be transparent, not discriminatory and capable of appeal – hardly a high benchmark to meet.

Cooperation between Member States

What is of much more significance is that the Regulation creates a system for cooperation between different Member States in relation to review of foreign investments. In a nutshell:

  •  a Member State reviewing a foreign investment will be required to inform the Commission and all other Member States, and will be able to request comments from other Members States and the Commission;
  •  a Member State will be able to send comments to, and request information from, another Member State in which a foreign investment is taking place (whether or not it is being reviewed), and any such comments must be given due consideration.

The role of the EU Commission

The Regulation also creates the possibility for review of foreign investments by the EU Commission. The Commission may issue an "opinion" in a number of circumstances, such as where:

  •  it considers that a foreign investment is likely to affect security or public order in more than one Member State;
  •  one-third of Member States believe a foreign investment is likely to affect their security or public order;
  •  any Member State requests the Commission to issue an opinion (either where the foreign investment is taking place in that Member State or in more than one Member State); or
  •  the foreign investment affects projects with significant EU funding (such as the Galileo satellite navigation system) or are otherwise on a list of EU supported projects.

However, any opinion issued by the Commission will not be binding on the relevant Member State and will be advisory in nature only. While a Member State must take the Commission's opinion into account and provide an explanation if it does not follow that opinion, it is explicit that the "final decision" on any foreign investment remains the "sole responsibility" of the relevant Member State.

Delays to transactions?

It remains to be seen whether the UK will still be subject to EU law at the end of 2020. However, if it is, then those contemplating receiving foreign investments into the UK will need to take account of both the UK national legislation (which is yet to be enacted) and this new Regulation.

Where the UK government has decided to review a proposed transaction pursuant to the proposed new UK legislation, there is likely to be a delay if that transaction is also referred to the EU Commission. That is because the parties will not be able to complete the transaction without the approval of the UK government, and the UK government will be obliged to wait for the opinion of the EU Commission so that it can take that opinion into account (even though it is not obliged to follow that opinion).

In circumstances where the UK government has chosen not to review a proposed transaction but that transaction is separately referred to the EU Commission, there should be no need to wait for the EU Commission's opinion to be delivered before completing the transaction. However, parties should be aware that the EU Commission can publish an opinion for up to 15 months after a transaction has completed. While that opinion would be advisory only, it could prompt the UK government to take post-completion measures (which could even include unwinding the transaction).