The Foreign Investment Regulation Review: EU Overview
The EU framework for the screening of foreign direct investment (FDI) into the European Union (EU FDI Screening Regulation)2 entered into force on 10 April 2019 and became fully applicable on 11 October 2020.3 The inception of this regulation is linked to concerns of certain Member States, spearheaded by France, Germany and Italy, that foreign investors – especially state-owned enterprises investing as part of a strategic industrial policy – may acquire critical assets and key technologies from EU companies, in particular when there are no reciprocal rights to invest in the country from which the FDI originates.4 Against this background and after intense political debates, the European Commission (the Commission) and the Member States put in place the EU FDI Screening Regulation with the aim of preserving the EU's strategic interests while at the same time keeping the EU market open to investment.
The EU FDI Screening Regulation emphasises the open investment environment of the European Union and its Member States. It highlights the advantages of FDI in light of key interests of the European Union, such as enhancing competitiveness, creating jobs and economies of scale, bringing in capital, technologies, innovation, expertise and more generally contributing to the European Union's growth and opening markets for EU's exports.5 However, it clarifies that for the purpose of protecting security or public order it is possible for the European Union and the Members States to adopt restrictive measures relating to FDI, as is also established in point (b) of Article 65(1) TFEU.6
The EU FDI Screening Regulation provides a framework for FDI screening mechanisms at Member State level to ensure legal certainty and EU-wide coordination and cooperation. It does not introduce a centralised FDI screening mechanism and there is no 'one stop shop' mechanism in the European Union that would allow the Commission to take own decisions or even block FDI into the European Union. The Commission rather assumes a coordination role but does not act as a decision maker. It remains the sole responsibility of the Member States to safeguard their national security and public order (see Article 4(2) TEU, Article 346 TFEU). The Member States are free to decide if they want to set up an FDI screening mechanism or to screen a particular foreign direct investment.7
The EU FDI Screening Regulation increases harmonisation within the European Union by creating a framework for national FDI screening mechanisms (see Section II below). The EU FDI Screening Regulation's centrepiece is a cooperation mechanism between the Member States and the Commission (see Section III below). This chapter concludes with a short summary current developments and a brief outlook into the future of EU FDI (see Section IV below).
II Framework for FDI screening mechanisms of the Member States
FDI is defined as an investment of any kind by a foreign investor that aims to establish or to maintain lasting and direct links between the foreign investor and the target company to carry on an economic activity in a Member State, including investments that enable effective participation in the management or control of a company carrying out an economic activity.8 This definition excludes mere portfolio investments.9
The procedural and substantive framework, inter alia, aims at increasing transparency for the benefit of investors, the Commission and other Member States.10
While it is left to Member States as to whether to introduce FDI screening mechanisms, they must notify any existing or newly introduced FDI screening mechanism to the Commission. The Commission regularly publishes an updated list of the existing screening mechanisms within the European Union.11 In addition, Member States are obliged to submit annual reports to the Commission that not only include information on the FDI that took place in their territory in the preceding year and any requests received by other Member States in the context of the cooperation mechanism, but also on the operation of their national screening mechanism.12 On that basis, the Commission shall submit an annual report to the European Parliament and the European Council on the implementation of the EU FDI Screening Regulation.13
i EU requirements for Member States' screening mechanisms
Article 3 of the EU FDI Screening Regulation establishes certain minimum requirements for Member States' screening mechanisms:
- rules and procedures shall be transparent and non-discriminatory between third countries (Paragraph 2);
- screening mechanisms shall set out triggering events for the screening, the ground for screening and detailed procedural rules, including timeframes (Paragraphs 2 and 3);
- confidential information made available to the Member States shall be protected (Paragraph 4).
- foreign investors and undertakings concerned shall have the possibility to seek recourse against screening decisions of national authorities (Paragraph 5); and
- the screening mechanisms shall include measures necessary to identify and prevent circumvention of the screening mechanism and screening decisions (Paragraph 6).
As can be seen from the bullet list above, there remains considerable scope for Member States to determine the details of their respective FDI screening procedures, which at the same time means that there is limited harmonisation within the European Union. As a consequence, investors need to be aware of the national particularities of different FDI screening procedures in all Member States where they are planning cross-border M&A.
ii EU suggestions for Member States' substantive test
The EU FDI Screening Regulation includes a list of factors that can be taken into consideration by a Member State when determining whether an FDI is likely to affect security or public order. These factors relate to (1) the activities of the target company and (2) the identity of the foreign investor.
Activities of the target
The EU FDI Screening Regulation lists a number of sectors that may trigger an FDI review:
- critical infrastructure (e.g., energy, transport, water, health, communication or defence);
- critical technologies and dual use items (e.g., artificial intelligence, robotics, semiconductors, cybersecurity, nuclear technologies and nanotechnologies);
- supply of critical inputs (e.g., raw materials and food safety);
- access to sensitive information (including personal data) or the ability to control such information; or
- freedom and pluralism of the media.14
The list is non-exhaustive and Member States may have rules for additional sectors depending on national specificities. At the same time, the terms used by the EU FDI Screening Regulation (such as 'critical infrastructure', 'artificial intelligence' or 'robotics') are very broad and leave ample room for interpretation. In practice, many Member States apply more specific definitions of the factors that are being considered when screening FDI into their territory. This exemplifies the balance to be struck by the EU FDI Screening Regulation between preserving the sole responsibility of Member States for safeguarding their national security on the one hand, and providing legal certainty and unionwide coordination on the other hand.
Identity of the investor
With a view to the identity of the foreign investor, factors to be considered in the context of the substantive FDI assessment include whether the foreign investor is controlled by the government of a third country, whether the foreign investor has already been involved in activities affecting security or public order in a Member State, or whether there is a serious risk that the foreign investor is engaging in illegal or criminal activities.15 As mentioned above, FDI rules and procedures shall be non-discriminatory between third countries16 but, in practice, (state-owned) investors from certain (non-EU and non-NATO) countries (e.g., China or Russia) may be more likely to face increased scrutiny than others.
III Cooperation Mechanism
The EU FDI Screening Regulation provides for a framework for the Commission to issue opinions and Member States to provide comments on FDI in the territory of (other) Member States:17
- the Commission may issue an opinion if it considers that the transaction is likely to impact security or public order in more than one Member State, if the Member State in which the transaction is taking place has asked the Commission to do so, or the Commission has information relevant to the transaction. Where at least one-third of Member States consider that the transaction is likely to affect their security or public order, the Commission shall issue an opinion;18 and
- Member States may submit comments if they consider that the transaction is likely to impact their security or public order, or if they have information relevant to the FDI screening.19
In addition, the EU FDI Screening Regulation explicitly mentions the possibility of Member States and the Commission to cooperate with the responsible authorities of third countries on grounds of security and public order.20
With a view to cooperation within the European Union, different rules apply to the following:
- FDI that is undergoing screening in the Member States in which it takes place;
- FDI that is not undergoing screening; and
- FDI that is likely to affect projects or programmes of EU interest.
i FDI undergoing screening
Under the EU FDI Screening regulation, Member States shall inform the Commission and other Member States as soon as possible about FDI in their territory that is undergoing screening and, without undue delay, provide certain information, which some Member States request from the notifying parties from the outset via a standard form. The information that is required includes details on:21
- the ownership structure of the foreign investor and of the target company;
- the approximate value of the FDI;
- the activities of the foreign investor and of the target company;
- the Member States in which the foreign investor and target company are active;
- the funding of the investment and its source; and
- the date on which the FDI is planned to be completed or has been completed.
Within 15 calendar days of receipt of the notification and the relevant information, the Commission and the other Member States must inform the Member State undertaking the screening of their intention to provide comments (in the case of Member States) or an opinion (in the case of the Commission).22 To the extent necessary for their review, the Commission and the other Member States may request additional information from the Member State, which shall provide it to them without undue delay.23 In practice, this can lead to delays, for example where an authority must first obtain the information from other governmental agencies or third parties with no statutory deadlines applying. Recent examples, which will hopefully remain the exception, show that this can lead to delays of several months.
On the basis of the above, 15 calendar days is the minimum time that the process under the cooperation mechanism could take in the event neither a Member State nor the Commission makes a submission or requests any additional information. Otherwise, the Commission shall issue an opinion and the Member States shall provide comments within 35 calendar days following receipt of the information outlined above (this may be extended to 40 calendar days for Commission opinions). In case further information is requested, comments by Member States or an opinion by the Commission shall be issued no later than 20 calendar days following receipt of the additional information.24
While the final decision to clear a transaction, request remedies or to block the FDI remains with the Member States undertaking the screening, they shall give due consideration to the comments of other Member States and to the opinion of the Commission, unless immediate action is required.25
In practice, the obligation of Member States to 'stand still' and take a final decision only after they have received comments or opinions can lead to significant delays. For investors, the cooperation mechanism remains a 'black box' and there is a lack of transparency with a view to the potentially significant impact on deal timetables. The terms used by the EU FDI Screening Regulation are partially opaque (e.g., the notions of 'without undue delay', 'as soon as possible' or to 'give due consideration') and for the investor, there is no visibility on which authority of which Member State requests which information on the planned FDI and for which reason. The Commission communicates exclusively with the Member States that remain the sole point of contact for the notifying parties. In practice, this can lead to a lack of transparency and frustrating delays, which raises questions with a view to the principle of due process and the investors' rights of defence.
ii FDI not undergoing screening
Even FDI, which is not undergoing screening, may be subject to comments of other Member States or to an opinion of the EU Commission, to which the Member State where the FDI is planned or has been completed shall give due consideration.26 Where the FDI has not completed, the relevant Member State could either decide to review the transaction under its domestic screening regime or use any other instruments available to it under domestic laws (if it does not have an FDI screening regime in place). Where the FDI has already completed, the Member State may decide to act, depending on what powers are available to it under national law.
There is a time limit for providing submissions on completed FDI of 15 months after completion.27 This also applies to transactions that completed prior to 11 October 2020.
There are no thresholds in relation to unscreened transactions under which the cooperation mechanism could not be applied. Therefore, even transactions that are not notifiable in a Member State in which they take place may be subject to information requests or be commented or opined upon. The only requirement is that a Member State and the Commission duly justify their information requests and ensure they are proportionate, limited in scope to information necessary to comment or opine and not too burdensome for the Member State in which the transaction takes place. Member States and the Commission must also duly justify their respective comments and opinions and explain why the FDI is likely to impact the security and public order of other Member States.28
iii FDI likely to affect projects or programmes of Union interest
In case the FDI is likely to affect projects or programmes of Union interest, a slightly modified cooperation procedure applies and, in particular, the Member State where the FDI is planned or has been completed shall take 'utmost account' of the Commission's opinion and provide an explanation to the Commission if its opinion is not followed.29 The relevant projects and programmes of EU interest are set out in the Annex to the EU FDI Screening regulation and include:
- the European GNSS programmes (Galileo & EGNOS);
- Horizon 2020;
- the Trans-European Networks for Transport (TEN-T);
- the Trans-European Networks for Energy (TEN-E);
- the Trans-European Networks for Telecommunications;
- the European Defence Industrial Development Programme; and
- permanent structured cooperation (PESCO).
IV Current Developments and Outlook
While the EU FDI Screening Regulation is a relatively new instrument, its impact on FDI screening in the European Union can hardly be overstated. To date, 18 national screening mechanisms have been notified to the Commission.30 In the first few months following its entry into force, the European Union has reviewed approximately 15 transactions per month.31 If the number of national regimes and the number of notified FDI continues to increase, we assume that the Commission will review more than 200 transactions per year. Many Member States follow the European Union's suggestion regarding which sectors to review. This has led to some convergence between national review mechanisms. However, varying definitions (or the lack thereof) for the same terms still necessitate detailed analyses and separate filings under every country's rules. This is understandable because FDI screening regimes relate to public order and security, and the area for which the legislative competence remains with the Member States.32
The first year of experience with the cooperation mechanism shows that the system efficiently works in most cases. To ensure that FDI review does not become overly burdensome for investors, it would be preferable if the Commission were to introduce strict rules on timing for Member States' cooperation. This would help increase foreseeability and, ultimately, legal certainty. Other points where harmonisation would be beneficial include:
- aligned definitions in specific sectors to ensure that all Member States review the same kinds of transactions;
- the duration of national reviews;
- the types of remedies that national authorities require to clear transactions,; and
- transparency with respect to the correspondence between the Commission and Member States, which would allow investors and target companies to comment to resolve open questions.
1 Frank Röhling is a partner and Uwe Salaschek is counsel at Freshfields Bruckhaus Deringer Rechtsanwälte Steuerberater PartG mbB.
2 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, OJ L 79 l, 21.3.2019,
3 See Article 17 of the EU FDI Screening Regulation.
4 See corresponding letters from the French, German and Italian governments submitted to the European Commission setting out their concerns, available at https://www.bmwi.de/Redaktion/DE/Downloads/E/eckpunktepapier-proposals-for-ensuring-an-improved-level-playing-field-in-trade-and-investment.pdf?__blob=publicationFile&v=4 and https://www.politico.eu/wp-content/uploads/2017/08/170728_Investment-screening_non-paper.pdf.
5 Recitals 1 et seq. of the EU FDI Screening Regulation.
6 Recitals 3 et seq. of the EU FDI Screening Regulation.
7 See Article 1, Article 3 (1) and recitals 7 and 8 of the EU FDI Screening Regulation.
8 Article 2, Paragraph 1 of the EU FDI Screening Regulation.
9 See recital 9 of the EU FDI Screening Regulation.
10 See also recitals 12 and 15 of the EU FDI Screening Regulation.
11 Article 3 Paragraphs 7 and 8 of the EU FDI Screening Regulation. The Commission publishes the list of screening mechanisms notified by Member States at: https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157946.pdf (last update: 28 May 2021).
12 Article 5, Paragraph 1 and Paragraph 2 of the EU FDI Screening Regulation.
13 Article 5, Paragraph 3 of the EU FDI Screening Regulation.
14 See Article 4, Paragraph 1 of the EU FDI Screening Regulation.
15 See Article 4, Paragraph 2 of the EU FDI Screening Regulation.
16 Article 3 (2) of the EU FDI Screening Regulation.
17 For this purpose, each Member State and the Commission establish a contact point, see Article 6, Paragraph 10; Article 7, Paragraph 9; and Article 11 of the EU FDI Screening Regulation.
18 Article 6, Paragraph 3 and Article 7, Paragraph 2 of the EU FDI Screening Regulation.
19 Article 6, Paragraph 2 and Article 7, Paragraph 1 of the EU FDI Screening Regulation.
20 Article 13 of the EU FDI Screening Regulation.
21 See Article 6, Paragraph 1 and Article 9, Paragraphs 1 and 2 of the EU FDI Screening Regulation.
22 See Article 6, Paragraph 6 of the EU FDI Screening Regulation.
23 See Article 9, Paragraph 3 of the EU FDI Screening Regulation.
24 Article 6, Paragraph 7 of the EU FDI Screening Regulation.
25 Article 6, Paragraph 8 and Paragraph 9 of the EU FDI Screening Regulation. In exceptional cases where immediate action is required, the Member State that undertakes the screening must notify the other Member States and the Commission of its intention to issue an immediate decision and in such a case the other Member States and the Commission should endeavour to provide comments or to issue an opinion expeditiously.
26 Article 7, Paragraph 7 of the EU FDI Screening Regulation.
27 Article 7, Paragraph 8 of the EU FDI Screening Regulation.
28 Article 7, Paragraph 5 of the EU FDI Screening Regulation.
29 Article 8 of the EU FDI Screening Regulation.
30 As at 28 May 2021, the following Member States have notified screening mechanisms to the Commission: Czech Republic, Denmark, Germany, Spain, France, Italy, Latvia, Lithuania, Hungary, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia, Slovakia and Finland; see Commission overview at https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157946.pdf.
32 Cf. Article 65(1)(b) TFEU.