The European Parliament adopted a new regulation on March 19 establishing a bloc-wide framework for the screening by EU member states of foreign direct investment (FDI) into the European Union (the FDI Regulation). The FDI Regulation seeks to ensure a consistent framework throughout the European Union for screening FDI on grounds of security or public order. However, ultimate responsibility for screening of FDI rests with EU member states. Moreover, the FDI Regulation does not require member states to introduce FDI screening. The FDI Regulation is due to enter into force on April 10, 2019, and will effectively apply from October 11, 2020, after an 18-month transition phase to allow for the implementation of the new rules.
The enactment of the FDI Regulation has been driven by the absence in the European Union of the sort of comprehensive framework that exists in other major trading blocs, such as in the United States, through the Committee on Foreign Investment in the United States (CFIUS). Whether or not the FDI Regulation results in a regime that is more transparent and user-friendly than its US counterpart remains to be seen.
To date, only the EU Merger Regulation (EUMR) provides for the possibility for member states to step in to protect certain legitimate interests in the context of inward FDI into the European Union. The FDI Regulation extends the scope of public interest and covers investments not subject to the EUMR. The public interest criterion will have to be applied in a consistent manner where both sets of rules overlap.
FDI in EU companies has followed a consistent upward trend over the last 10 years, amounting to €6.295 billion (about $7.12 billion) by the end of 2017. State-owned entities in China, Russia, and the United Arab Emirates completed three times as many EU acquisitions in 2017 as they did in 2007. For many member states, this recent increased investment into strategic domestic players was a “wake-up call,” prompting countries like Germany, France, and the United Kingdom to call for increased scrutiny of FDI.
Today, only 14 current EU member states (Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Hungary, Italy, the Netherlands, Poland, Portugal, Spain, and the United Kingdom) have mechanisms that enable them to vet FDI. These laws vary widely in procedure, scope, and substance. Some regimes screen FDI solely on grounds of national security, while others extend screening to numerous key infrastructure sectors. Similarly, thresholds for screening range from stakes of 5% to 50%. Some member states require notification to regulators prior to investment, while others operate an ex post facto regime. As a result, the existing system was inadequate to counter the cross-border effects of FDI.
The FDI Regulation introduces a more cohesive and cooperative approach between member states to protect strategic sectors that are critical to the security and public order of the European Union. These sectors include biotechnology, communications, data, defence, energy, finance, food security, health, media, space, technologies (such as semiconductors, artificial intelligence, and robotics), transport, and water.
The FDI Regulation does not create a unified regime, but rather an overarching framework to promote EU-wide cooperation in the screening of FDI. The thresholds and procedures applicable at the national level remain within the sole discretion of member states. Under this “devolved authority,” member states will (i) have the final say on whether a specific investment operation will be permitted in their territory; and (ii) be able to maintain or adopt their own screening regimes at the national level.
The FDI Regulation provides some key requirements for national screening mechanisms.
An FDI will fall within the ambit of the FDI Regulation if it establishes or maintains “lasting and direct links” between investors from third countries (including state entities) and companies carrying out economic activity in a member state, excluding portfolio investments. As with the CFIUS regime, this definition also catches non-controlling investments and therefore transactions not otherwise subject to the EU merger rules.
The FDI Regulation establishes a coordination mechanism between member states’ national authorities and the EU Commission (the Commission), somewhat similar to the network of European competition authorities. This mechanism applies irrespective of whether FDI is undergoing screening in a member state or not.
By setting clear timeframes, the FDI Regulation accommodates the need for investors to operate according to tight deadlines and robust confidentiality requirements.
In order to determine whether an investment is likely to affect security or public order, the effects of the investment on the following will be critical:
The power of the Commission to issue nonbinding opinions is important: The Commission is authorized to issue a nonbinding opinion where it considers that an investment poses a security or public order threat to more than one member state. This power is exercisable at the Commission’s own initiative, or at the request of a member state where it considers an FDI being screened in another member state is likely to affect its own security or public order. The Commission may also exercise this power where an FDI could undermine a project or program that is of interest to the European Union as a whole (such as Horizon 2020 or Galileo).
The FDI Regulation further lays out reporting and notification obligations for member states: Each member state is required to report by March 31 each year on all FDI that took place within its territory during the preceding calendar year. Additionally, it must report any requests received from other member states on FDIs that it has screened in the preceding calendar year, but which those other member states have not screened.
Member states must notify the Commission of their screening mechanisms by May 10, 2019. They must also notify any newly adopted or newly amended screening mechanism within 30 days of such mechanism or amendment entering into force.
The new mechanism could complicate and impede investment by UK investors into the European Union. In June 2018, the then UK trade and investment minister, Greg Hands, stated he was “dissatisfied with the FDI Regulation overall” and would consider abstaining from voting on it.
Owing to the sole discretion afforded to member states under the FDI Regulation to screen FDI according to “their individual situations and national specificities,” the implementation of the FDI Regulation per se is unlikely to have a net material effect on FDI originating in the United Kingdom. Increased cooperation and interconnectedness may reduce some of the administrative delay involved in notifying in multiple EU member states post-Brexit. However, greater uncertainty is likely to arise due to the power of an individual member state to request the Commission to issue an opinion where it considers that an FDI screening in another member state is likely to affect its own security or public order. As with much of Brexit, time will tell.
Against the backdrop of rapid development of FDI screening regimes across multiple jurisdictions within the European Union, companies and counsel need to accommodate the development of such regimes at the national level in their merger and acquisition and investment plans. Particular care is required for transactions in the above-mentioned strategic sectors. Where a state-owned entity is involved, parties must consider the implications on the deal timetable of notifications in multiple jurisdictions. As with other types of regulatory filings, it is advisable to engage early with the relevant authorities, and to identify solutions to address any real or perceived security and public order concerns.
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