Today, 5 March 2019, the Council of Ministers of the EU officially endorsed legislative proposals for a Regulation to screen foreign direct investment ("FDI") into the EU (the "Regulation"). The Council's endorsement signals the successful passing of the Regulation through the full co-legislative process, having already been approved by the European Parliament on 14 February 2019.
The current President of the Council of Ministers, Ștefan-Radu Oprea, welcomed the introduction of the Regulation, saying "the EU is and will remain one of the world's most open places to invest in. The new rules on the screening of investments will ensure that openness goes hand in hand with sensible protection of our strategic assets".
Whilst the Commission has emphasised its desire for the EU to remain one of the world's most attractive destinations for FDI, this Regulation nevertheless confirms the growing trend of traditionally open economies enacting increasingly protectionist regulation when it comes to foreign investment. In this update, we outline the central features of the new framework for the screening of FDI, including:
- the factors Member States may take into account when screening FDI, along with certain procedural requirements that will apply to their screening mechanisms;
- the extent of the Commission's and other Member States' influence over domestic FDI screening decisions; and
- the interaction of the Regulation with merger control.
The Regulation, a draft of which was originally put forward by the Commission in 2017, provides Member States with a framework for the screening of FDI on the basis of the risk the proposed investment poses to security and public order. It applies both to initial FDI and subsequent transactions which entail significant changes to the ownership structure of a foreign investor.
The Regulation is concerned only with inward FDI (that is, investment from abroad in assets based in the EU); it does not affect EU investors' access to the markets of third countries.
Following inter-institutional negotiations between the Parliament, the Council and the Commission, provisional agreement on the substance of the Regulation was reached in November 2018. Having now successfully passed through the co-legislative process, the Regulation will officially enter into force; however its provisions will only apply as from 18 months after this date. It is therefore anticipated that Member States have until (approximately) October 2020 to make any necessary amendments to their domestic regimes (largely in terms of procedure) to ensure compliance with the Regulation.
A common approach to FDI screening
The Regulation is not intended to replace existing domestic FDI regimes, nor does it make notification of contemplated FDI subject to a requirement that the Commission first be notified. Furthermore, the Regulation does not require Member States to adopt a fully harmonised approach to the screening of FDI (or even to adopt legislation for the screening of FDI at all).
The Regulation does, however, require existing regimes to be maintained/amended – and in the case of new regimes - adopted, in accordance with a minimum set of requirements.
The Regulation sets out a non-exhaustive list of factors that may be taken into account to determine whether FDI poses a risk to security or public order. This includes the impact of the investment on:
- Critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and land and real estate that is crucial for the use of such infrastructure.
- Critical technologies, such as energy storage, artificial intelligence, robotics, semiconductors, cyber security, quantum, aerospace, defence, nanotechnologies, biotechnologies and nuclear technologies.
- The supply of critical inputs (such as energy, raw materials and food security).
- Access to, and ability to control, sensitive information including personal data.
- Freedom and pluralism of the media.
In addition, Member States may also take into account whether the investor: is controlled (directly or indirectly) by the government of a third country; has previously been involved in activities affecting the security or public order of a Member State; or is considered to be at serious risk of engaging in illegal activities.
The Regulation requires Member States to be transparent as to the circumstances in which FDI will trigger a review, as well as the procedure to be applied.
In terms of procedure, Member States shall be under an obligation to set timeframes of a sufficient length to allow for the possibility of comments from other Member States and/or an opinion from the Commission, and for those comments/opinions to be taken into consideration.
In addition, the Regulation requires Member States' FDI screening regimes not to discriminate in respect of third countries; protect confidential (including commercially sensitive) information; and to allow foreign investors a right of appeal against screening decisions that are not in their favour.
Member States will be under a reporting obligation to notify their existing screening mechanisms (and any amendments thereto) to the Commission. The Commission will maintain a publicly available list of such information.
Member States will also need to comply with an annual reporting obligation on the application of their FDI screening regimes. This will comprise aggregated information on the FDI that took place in their territories, including details of the transactions screened, prohibitions and conditions imposed, the value of screened investment and its origin. With this information, the Commission will produce an annual report which will be made publicly available.
Focus on Cooperation
Cooperation, collaboration and information sharing are central themes of the Regulation. In this regard, the Regulation establishes a framework to enable Member States and the Commission to comment on FDI taking place in the territory of another Member State, irrespective of whether the Member State receiving the investment has chosen to screen the FDI. Such comments may even be made in relation to FDI which has already been completed (if made within 15 months of completion and completion took place after the entry into force of the Regulation).
However, the new framework is not intended to replace domestic regimes. Whilst Member States are required to give "due consideration" to the comments of the other Member States and to the opinion of the Commission, the Member State receiving the FDI retains authority as the final decision-maker.
The Commission has greater influence with respect to projects or programmes of Union interest (such as Horizon 2020, Trans-European Networks for Energy, the European Defence Industrial Development Programme and Galileo), on the grounds that these projects serve the Union as a whole and represent an important contribution to its economic growth, jobs and competitiveness. In these circumstances, Member States are required to take "utmost account" of the Commission's opinion and to provide an explanation to the Commission in the event that its opinion is not followed.
To facilitate the functioning of the cooperation mechanism, when a Member State chooses to screen FDI, it shall be obligated to provide certain information to both the Commission and the other Member States. This should include a list of Member States whose security or public order is deemed likely to be affected by the FDI, as well as information in relation to:
- the ownership structure of the investor;
- the value of the FDI;
- the business operations of both the investor and target (including the Member States in which they operate);
- the funding of the investment (and source of funding); and
- the date of completion.
Where a Member State has chosen not to screen FDI, the Commission or other Member States may nevertheless request that it provides this information. However, the cooperation mechanism should only be used for the purpose of protecting security or public order and the party requesting the information should duly justify their requests on these grounds.
Relationship with merger control
The implementation of the Regulation is without prejudice to the application of the EU Merger Control Regulation ("EUMR"). Member States should nevertheless endeavour to indicate whether proposed FDI is likely to require notification under the EUMR, when notifying the other Member States of FDI undergoing screening in their territories.
The EUMR does not allow for political considerations to be taken into account as part of the merger review process, but does allow Member States to take appropriate measures to protect legitimate interests in respect of a transaction that is notifiable under the EUMR (article 21(4) EUMR). This provision expressly recognises the protection of public security, plurality of the media and prudential rules as legitimate interests, but any other public interests must be communicated to the Commission and must be recognised by the Commission as compatible with the general principles of EU law before the Member State can take any measures.
The proposed FDI framework will not change this position and the two regimes will remain fully independent, but it does open the way for dual influence from the Commission: (i) as the substantive decision maker for competition issues and (ii) through a non-binding advisory opinion where countries seek to review the transaction domestically.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021