On 14 February 2019, the European Parliament approved a new EU regulation to establish an EU-wide foreign investment screening mechanism framework. The law still needs to be formally approved by the Council of Ministers, comprised of national government ministers from every EU Member State, but it is expected that this will happen on 5 March 2019 paving the way for the regulation to come into effect in late 2020.
Once in force, this will be first time that the EU as a whole has sought to regulate foreign (i.e. non-EU) investments through specific regulations, as opposed to simply applying the rules that apply to all EU companies and investors equally, such as the existing EU merger control rules. Under the new regulation, EU countries will be required to exchange information on foreign investments as well as sending yearly reports to the European Commission, meaning many countries will start systematically collecting that information for the first time.
The regulations are regarded as a response to strategically important EU companies, infrastructure and technology recently being acquired by enterprises owned or controlled by non-EU states and as such the rules would apply to all non-EU countries equally. The perceived threat of competition from outside the EU has been a hot-topic across the EU for several years, and came to light most recently in the politically controversial prohibition by the European Commission of a planned merger between Alstom and Siemens. The German and French governments had lobbied intensely for the Commission to allow the merger to create an EU rail champion to compete against global competition.
At this juncture, the EU’s proposed regulations are only a first step towards meaningful foreign investment controls. The new rules would only provide the EU institutions with information, not the direct power to intervene to block or restrict investments. Clearly, however, it does open up the possibility in the longer term for the EU to adopt an overall approach towards the businesses, technology and infrastructure that should be protected from falling into foreign hands.
These EU wide reforms come at a time when several national governments have been taking their own independent steps to tighten foreign investment controls in their own countries. Germany has been leading the way in this regard, and in December 2018 reduced the threshold for vetting foreign investments into certain German businesses and assets from 25% down to just 10%.
As we reported in September 2018, the UK is also actively considering wide-ranging foreign investment intervention powers. We have already seen the impact of the changes to the UK merger thresholds to protect national security. The current powers are broad and even UK purchasers are caught by them. As a result, businesses are having to engage with the Department for Business, Energy and Industrial Strategy (BEIS) and other government departments to manage acquisition consents and timetables where the target business supplies dual-use technology, quantum technology and/or computing hardware. Practically, this does not always involve seeking formal approval but can result in discussions with government departments to understand whether if the transaction is of interest to BEIS from a national security perspective.
As the UK government is currently planning to introduce its own foreign investment controls in order to safeguard strategically important national interests, it would be difficult for the UK to credibly oppose plans by other countries to do the same. Nevertheless, given that the UK is set to imminently be fully outside the EU, it is with a note of caution that potential UK investors will regard the EU’s protectionist leanings. In the short to medium term, UK investors may very well be the subject of any such EU-wide investment controls.