Snapshot: foreign investment law and policy in European Union

Law and policy

What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?

The European Union (the EU) is one of the most open destinations for foreign direct investment in the world. The EU recognises the key role that foreign direct investment can play in contributing to member states’ growth, for instance by (1) enhancing competitiveness; (2) creating jobs and economies of scale; (3) bringing in capital, technologies, innovation and expertise; and (4) opening new markets for EU exports. 

The European Commission (the Commission) noted in a working document on foreign direct investment in the EU dated 13 March 2019 (SWD(2019) 108 final): ‘Although foreign ownership is widespread across virtually all sectors of the EU economy, it is remarkably high in a number of sectors that are at the heart of the economy, such as oil refining (67 percent of total assets of the sector), pharmaceuticals (56 percent), electronic and optical products (54 percent), insurance (45 percent) or electrical equipment (39 percent).’ The same working document noted that: ‘In terms of countries of origin, the “traditional” main investors in the EU – i.e. advanced economies such as the US, Switzerland, Norway, Canada, Australia, Japan – remain well ahead and still control more than 80 percent of all foreign-owned assets. They started investing a long time ago and have kept their acquisition rates constant over time.’ In recent years, however, there has been an increasing diversity of countries investing in the EU and the data also clearly shows the emergence of new investors. Investments and acquisitions from emerging countries are typically concentrated in a much more limited number of sectors, but they are becoming increasingly visible in a number of subsectors. Notably, these include investors from China (eg, in aircraft manufacturing and specialised machinery) and India (eg, in pharmaceuticals), as well as offshore investors.

The Treaty of Lisbon (which entered into force on 1 December 2009) extended the scope of trade policy to include foreign direct investment, thus making foreign direct investment an exclusive competence of the EU. Before the Treaty of Lisbon, investment was generally considered an area of mixed competence, which meant that both the EU and its member states could maintain and adopt instruments such as international investment agreements.

What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?

The debate surrounding foreign direct investment entering the EU became a pre-eminent issue in February 2017 when the French, German and Italian ministers for the economy requested action at the EU level. Subsequently, on 13 September 2017, Jean-Claude Juncker, then President of the Commission, spoke before the European Parliament and confirmed that the EU would remain open to foreign direct investment but should devise ‘vigorous and effective policies’ to ensure a level playing field with the rest of the world, and to ‘protect critical European assets against investment that would be detrimental to legitimate interests of the Union or its Member States’. President Juncker highlighted the ‘political responsibility’ to ensure that foreign direct investment in certain industries ‘should only happen in transparency, with scrutiny and debate’.

The Commission’s proposal that followed was a response to the EU’s decentralised and fragmented system of monitoring foreign direct investment inflows, as well as member states’ concerns about the lack of reciprocity with EU trade partners. Member states had pointed out the imbalance created by increased flows of foreign direct investment by non-EU investors with strong ties to their home governments that often target sectors considered to be of strategic national and EU importance, such as energy, telecommunications and technology.

This debate eventually led to the adoption of Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, the EU Foreign Direct Investment Regulation (the EU FDI Regulation). The EU FDI Regulation entered into force on 10 April 2019. The cooperation mechanism between member states and the Commission, one of the key features of the EU FDI Regulation, became effective on 11 October 2020.

The Commission also noted at the height of the covid crisis that member states can intervene in certain cases outside of screening mechanisms – for instance, by imposing compulsory licences on patented medicines in the event of a national emergency, such as a pandemic. It also pointed to the possibility for national governments to take ‘golden shares’ in companies, which usually grant the state special rights, if this is ‘necessary and proportionate to achieve a legitimate public policy objective’.

For completeness, it should be noted that article 21 of Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations between undertakings, the EU Merger Regulation (EUMR) recognises the right of member states to take appropriate measures in relation to transactions requiring notification to the Commission under the EUMR to protect legitimate interests other than maintaining competition in the relevant markets. These include, in particular, public security, plurality of the media and prudential rules (in effect, financial stability). Article 21 of the EUMR also leaves open the possibility that other public interests may be recognised by the Commission as legitimate, at the request of a member state, after an assessment of their compatibility with general EU law principles. Individual member states have used this provision to protect national interests in the context of acquisitions of businesses operating in the defence, media and financial services sectors that would otherwise fall within the exclusive jurisdiction of the Commission under the EUMR. Importantly, however, these provisions are not expressed as applying specifically or exclusively to acquisitions or investments by foreign entities (and indeed have been used to review domestic mergers in addition to takeovers by foreign entities).

Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?

The EU FDI Regulation creates an enabling framework for member states to screen foreign direct investment on grounds of security and public order. It confirms that member states may continue to maintain and amend existing foreign direct investment screening measures, or adopt new measures, taking into account their national circumstances. Importantly, however, member states are not required to adopt a foreign direct investment screening mechanism.

A key feature of the EU FDI Regulation is the creation of channels for communication and collaboration between member states and the Commission, to facilitate the sharing of information about planned or completed foreign direct investment in the territory of one or several member states. Through such channels, member states are also able to comment on investments taking place in other member states that may affect their security or public order. Further, the Commission may itself issue an opinion on an investment that may affect security or public order in more than one member state. However, the final decision on the appropriate response to any particular foreign direct investment rests exclusively with the specific member states reviewing that investment – they must give due consideration to the comments or opinion received (and in limited cases take ‘utmost account’ of the Commission’s opinions), but they are not bound by them.

The EU FDI Regulation also provides that every member state that has a foreign direct investment screening mechanism has to ensure that it complies with basic substantive and procedural requirements.

In terms of substance, the EU FDI Regulation lays out a non-exhaustive list of effects that may be taken into consideration by member states when screening foreign direct investment. These include effects on critical infrastructure, technologies, sensitive information and inputs that are essential for security or the maintenance of public order. Crucially, the EU FDI Regulation states that, when assessing these effects, member states and the Commission should be able to take into account whether a foreign investor is controlled directly or indirectly by the government of a third country, including through significant funding.

The EU FDI Regulation also outlines the essential elements of a procedural framework to allow investors, the Commission and member states to understand better how investments are likely to be screened across member states and to ensure transparency and non-discrimination between third countries. In particular, the EU FDI Regulation provides that national foreign direct investment screening regimes should have clear time frames, which allow them to take into account comments by other member states and the opinions of the Commission. The EU FDI Regulation also provides that individual investors should have the possibility to seek recourse against screening decisions.

How is a foreign investor or foreign investment defined in the applicable law?

A foreign investor is defined in the EU FDI Regulation as a natural person of any non-EU country or an undertaking of any non-EU country, intending to make or having made a foreign direct investment. 

A foreign direct investment is defined in the EU FDI Regulation as an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom, or the undertaking to which, the capital is made available in order to carry on an economic activity in a member state. This includes investments that enable effective participation in the management or control of a company carrying out an economic activity.

Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?

Non-EU SOEs and SWFs are covered by the EU FDI Regulation’s general definition of foreign investors. No special rules apply to non-EU SOEs and SWFs. The EU FDI Regulation imposes upon member states an obligation to ensure that their national foreign direct investment screening mechanisms do not discriminate between non-EU countries.

However, article 4(2)(a) of the EU FDI Regulation provides that one particular factor that member states and the Commission may take into account when determining whether a foreign direct investment is likely to affect security or public order, is whether the foreign investor is directly or indirectly controlled by the government of a non-EU country. This includes state bodies or armed forces, and encompasses control through ownership structure or significant funding.

Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?

The EU FDI Regulation provides that each member state and the Commission must establish a contact point that will be involved in all issues relating to the implementation of the EU FDI Regulation. 

Within the Commission itself, the day-to-day responsibilities in relation to the implementation of the EU FDI Regulation are handled by the Directorate-General for Trade. Unit TRADE-F-4 manages the consultation procedures put in place by the EU FDI Regulation. That unit acts as a focal point for cooperation with member states’ representatives as well as with subject-matter experts of other Commission services, other EU institutions and the European External Action Service, the EU’s diplomatic service. 

In addition, a group of experts on the screening of foreign direct investments into the EU has been created. The group of experts is chaired by the Commission and is composed of representatives of member states’ authorities. All member states take part in the group, irrespective of whether they have a national screening mechanism in place. The group of experts does not discuss individual foreign direct investment cases. Instead, its mission is to provide advice and expertise to the Commission on issues relating to the screening of foreign direct investments, share best practices and lessons learned, and exchange views on trends and issues of common concern relating to foreign direct investments. The group of experts must also be consulted on systemic issues relating to the implementation of the EU FDI Regulation, as well as implementing rules in relation to the list of projects and programmes of EU interest annexed to the EU FDI Regulation.

Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?

The EU FDI Regulation does not foresee any centralised screening mechanism at the EU level by which the Commission, or any other EU institution, would have the final say on foreign direct investments. Rather, the final decision will be made by the member states undertaking screening under their national rules.  

The EU FDI Regulation does not allow for the screening of foreign direct investments based on concerns other than security and public order.