FI Monitor Issue 7, 2023
European Commission reports on FDI Screening: more FDI regimes, fewer cases, more Phase II proceedings and prohibitions
The European Commission’s (the Commission) EU Foreign Direct Investment Screening Regulation (the Regulation) entered into force on 11 October 2020, creating an FDI cooperation framework between the Commission and EU Member States (see more details here). Almost exactly three years later, the Commission has published its Third Annual Report on the Regulation covering the FDI regimes of 18/27 of the EU Member States in 2022 (though 90 percent of the 423 notifications submitted to the Commission in 2022 were from just six countries: Austria, Denmark, France, Germany, Italy and Spain).
The EU: an attractive FDI destination?
In 2022, €1,216bn of FDI flowed into the EU, a 14.3 percent decrease compared to the previous year. This fall in FDI is broadly reflective of a global dampening of dealmaking (especially in the second half of 2022), resulting from the economic slowdown and the rising cost of financing due to higher interest rates. It was also reflected in the overall number of national procedures initiated decreasing from 1,563 to 1,444. The EU suggests that the region remains open to investment. However, inverse to the amount of FDI entering the EU and the volume of transactions reviewed, the number of cases which underwent formal FDI rose from 29 percent to 55 percent between 2021 and 2022 (and from 20 percent in 2020). It is worth noting that the Commission puts a significant disclaimer on these reported numbers as the considerable differences in FDI procedures in the Member States mean that the basis on which they report their cases is likely very different. For example, what it means for a case to be “formally screened” is defined differently in the different Member States.
What has driven this increase in formal screening? The Commission would argue that the proliferation in EU FDI regimes and national capabilities, combined with a renewed focus on security on national and supranational levels, together with the geopolitical climate are primarily responsible. However, EU Member States’ FDI regimes are broadly drafted, often viewed as catching transactions unnecessarily or unintentionally—such as internal restructurings—due to innate textual ambiguities. The fact that only 45 percent of notified transactions were not formally screened underlines this point.
FI Monitor Issue 7
Formal screenings are unlikely to result in remedies or a block but more Phase II investigations and prohibition in absolute terms
Perhaps somewhat unsurprisingly given the increased amount of formal screening, the proportion of cases with an intervention by authorities has decreased sharply. While in 2021, 23 percent of cases were approved conditionally, in 2022 this figure fell by over half to only 9 percent (many of which likely stemmed from France which imposed conditions in 54 percent of its cases). In absolute terms, the number of conditional clearances also decreased, though less drastically.
The percentage of investments that were blocked by the authorities (1 percent in both 2022 and 2021) or that were voluntarily abandoned by the parties (4 percent in 2022, 3 percent in 2021) remained roughly the same (though in absolute terms, the number increased). The fact that the figure remains so low implies that cases are only blocked when the FDI authorities consider that they posed an insurmountable threat to national security.
Commission’s review of cases remains steady – Manufacturing and ICT in the spotlight
According to the report, 423 cases were notified under the Regulation’s cooperation mechanism giving the Commission an opportunity to assess the transaction and issue an opinion (the Member State must give due consideration to a Commission opinion when reaching their final decision). As in the previous year, the Commission opened a Phase II investigation in around 11 percent of cases and only issued an opinion in about 3 percent (where deemed necessary due to the risk profile presented by the investor and/or the criticality of the target).
The Phase II referral statistics give an indication of the most sensitive defined sectors from a Commission perspective, namely: Manufacturing (59 percent despite only being 27 percent of notified cases), Information and Communication Technologies (ICT) (23 percent as compared to 24 percent of notified cases), and Transport and storage (8 percent as compared to 7 percent of notified cases).
How should investors adjust their strategies?
Many of the report’s conclusions are predictable for investors but they stress the importance, now more than ever, of factoring in: (i) the inherent cost – in terms of information gathering, management time and third party costs – of investing in the EU if a FDI filing is required; and (ii) potential delays/timing uncertainty particularly for deals with a high EU FDI risk profile (e.g. in certain sub-segments of Manufacturing and ICT). For instance, in the Phase II cases mentioned above (and in the absence of any formal timeline) Member States’ responses to the Commission varied considerably (from one to 126 calendar days), suspending the review timeline until full information was received. The delay can be particularly long if the Member State does not already possess the information requested by the Commission.
- Potential reform of the Regulation – first announced in June 2023, the Commission is planning to propose revisions to the Regulation by the end of 2023. The Commission is likely to argue that these revisions – expected to be significant if a stakeholder questionnaire distributed earlier this year is anything to go by – are necessary to reflect the evolving geopolitical landscape and governments’ changing approaches to protecting national security and other national interests. The Commission’s proposals may cover the introduction of universal approaches to timelines, procedures and/or sensitive sectors.
- Potential tension between the Commission and Member States – the mooted amendments are likely to focus on the Commission’s ability to unify the approach of Member States’ FDI regimes. To date, the Commission has not shied away from criticizing the inconsistencies and often perceived ineffectiveness of Member States’ FDI regimes in its reports and communications. However, it is unclear whether Member States will agree to far-reaching reforms (including giving the Commission a greater role) which may be perceived as encroaching on their sovereignty, as well as how any tensions might impact the EU elections in 2024.
- Continuing close scrutiny of investments made by hostile actors, particularly those by entities connected to the Russian and Belarussian governments in EU critical assets.
- Increased coverage of national FDI regimes among EU Member States – by the end of the year, 22/27 Member States are expected to have active FDI regimes in place. In Belgium, Estonia and Luxembourg, FDI regimes have entered into force this year (for the Belgian regime see our article on developments in FDI regimes in Belgium, the Netherlands and Spain in this issue) while the Swedish regime is due to become effective on 1 December 2023. Bulgaria, Croatia, Cyprus, Greece and Ireland are currently working on draft legislation.
- A potential EU outbound investment screening mechanism – the Commission is due to publish proposals aimed at addressing security risks relating to outbound investments by the end of this year. This development reflects increasing concern regarding outbound investment as shown by the U.S. developments covered in our article U.S. Outbound Investment Executive Order focuses on next generation technologies in this issue.
With thanks to Freshfields Alastair Mordaunt, Uwe Salaschek, Iona Crawford and Matthias Wahls for contributing this update.
Please get in touch with us or your usual Freshfields contact if you would like to discuss these or any other regulatory issues in more detail.
Alastair Mordaunt Partner
London, Hong Kong
Aimen Mir Partner | Foreign Investment and National Security | Head of CFIUS Practice
Dr. Frank Röhling Partner
Rafique Bachour Managing partner
Ignacio Borrego Of Counsel
Colin Costello CFIUS and National Security Advisor
Pascal Cuche Public Law
Dr. Stephan Denk Partner
Ninette Dodoo Partner
Dr. Maria Dreher-Lorjé Partner
Dr. Juliane Hilf Partner
Álvaro Iza Partner
Sarah Jensen Counsel
Winfred Knibbeler Partner
Christine Laciak Special Counsel
Dr. Jérôme Philippe Partner
Alex Potter Partner
Dr. Uwe Salaschek Counsel
Ermelinda Spinelli Partner
Paul van den Berg Partner
Dr. Andreas von Bonin Partner
Kaori Yamada Partner