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EU Foreign Direct Investment - Final agreement reached on new EU regulation

Executive summary

On 20 November 2018 the European Parliament, the Council and the European Commission (the Commission) reached a political agreement on a European Union (EU) framework for screening foreign direct investment (FDI) (the Regulation).  The final agreed version of the text reveals a number of important implications for investors doing business in the EU.
The fundamentals of the Regulation remain for the most part unchanged from the draft unveiled by the Commission in September 2017 (see our earlier briefing), namely:
  • The Regulation sets out a framework of rules to which Member States who choose to have their own domestic FDI screening regime must adhere.
  • A key part of the Regulation is its mechanism for co-operation between Member States and the Commission, whereby the Commission and Member States may request certain information from a Member State where an FDI is taking place.  Other Member States may then provide comments, while the Commission can issue an opinion.  The Member State in question must give due consideration to the comments/opinion. 
  • While all Member States are required to comply with the co-operation mechanism, there is no obligation for every Member State to adopt their own screening regime. Importantly, Member States remain the ultimate arbiters of whether or not to permit an FDI in their territory.
  • The Regulation provides for the Commission to issue an opinion if an FDI is likely to affect projects or programmes of Union interest on grounds of security or public order.  Member States must take “utmost account” of this opinion and provide an explanation if it is not followed.  Projects/programmes of Union interest are currently GNSS programmes (Galileo & EGNOS), Copernicus and Horizon 2020. 
Nevertheless, the final version of the Regulation contains some significant changes.  Most notable are in relation to the co-operation mechanism:
  • Where an FDI in one Member State has not undergone screening, other Member States/the Commission may provide comments/issue an opinion up to 15 months after that FDI has completed.  That Member State must then give the comments/opinion due consideration and could, at least in theory, seek to take enforcement action against the investment post-completion.  The form and scope of any enforcement action would depend on what is available under that Member State’s national law.  This applies to FDI taking place after the Regulation has entered into force (expected to be May 2019).
  • There has been a broadening of the circumstances in which the Commission can have its say (by way of a non-binding opinion) on FDI in Member States on security or public order grounds.
The Regulation is expected to enter into force in May 2019 and fully apply as of November 2020.  This is relevant because the provisions of the Regulation only apply after November 2020 but FDI completing up to 15 months prior to November 2020 are within scope of the co-operation mechanism.  The Regulation is, however, already having an impact on national screening regimes.  For example, a new regime in Hungary will enter into force in January 2019 and new regimes are also expected in Sweden and Czech Republic.
The Regulation is in line with current trends across the world, where a number of key jurisdictions have recently sought to expand/strengthen their screening regimes, or stepped up their enforcement action against FDI.  For example, the United States has seen an uptick in enforcement by the Committee for Foreign Investment in the United States (CFIUS), and this is expected to continue as a result of recent legislative reforms.  Within Europe, Germany, France and Italy have increasingly active FDI review regimes, and the UK recently proposed a far-reaching legislative package for the screening of investments on national security grounds which is expected to enter into force in mid-2020.

Who will be affected by the Regulation?

The most directly affected parties will be non-EU persons/entities (which will include those with EU subsidiaries but controlled by non-EU persons/entities) investing in EU Member States, in particular but not exclusively State-owned enterprises or investors with links to foreign governments. It is worth noting that post-Brexit UK investors will be categorised under the Regulation as foreign investors, and Member States are not allowed to discriminate in their screening regimes between third countries.  EU-based persons/entities may also be affected in transactions with non-EU counterparties.

Overview of the Regulation

A framework for Member States to review FDI on security or public order grounds
The Regulation provides a framework of rules and procedures for Member States who wish to have a mechanism in their domestic law for screening FDI on security or public order grounds.
FDI is defined broadly by reference to investments of any kind by a foreign investor aiming to establish or maintain lasting and direct links with an entrepreneur/undertaking in order to carry on an economic activity in a Member State.  The Regulation specifically does not apply to “portfolio investments” (which should be interpreted in line with the Court of Justice’s opinion in relation to the free trade agreement between the EU and Singapore, according to which portfolio investments made without any intention to influence the management and control of an undertaking are considered to be outside of the EU’s exclusive competence).  A foreign investor is a natural person or an undertaking of a third (i.e. non-EU) country.
The Regulation provides a list of areas on which an FDI may have potential effects that Member States may take into account when screening transactions.  While non-exhaustive, the list of areas is designed to emphasise that the Regulation should not be interpreted by Member States as a green light for protectionist intervention.  The specified areas are:
  • critical infrastructure whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, as well as sensitive facilities and investments in land and real estate, crucial for the use of such infrastructure;
  • critical technologies and dual use items as defined in Article 2.1 of Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, quantum, aerospace, defence, energy storage, nuclear technologies, nanotechnologies and biotechnologies;
  • security of supply of critical inputs including energy or raw materials, as well as food security;
  • access to sensitive information, including personal data, or the ability to control sensitive information; or
  • the freedom and pluralism of the media.
The Regulation also emphasises that Member States and the Commission may take into account whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding. Recital 13 of the Regulation takes this further by referring to investors “pursuing State-led outward projects or programmes.”  In this sense, while the Regulation is not limited to covering investments by State-backed foreign investors, such investors (including those that may not be formally State-owned but, for example, are following the industrial policy of a foreign government) may find themselves subject to a greater degree of scrutiny.
In addition, Member States are obliged to have anti-circumvention measures.  This could cover, for example, investments by European-domiciled companies that are in fact owned or controlled by a foreign investor, or artificial arrangements within the EU that do not reflect economic reality and that are designed to circumvent the review mechanism.
Co-operation mechanism
The co-operation mechanism is a key aspect of the Regulation and is presented under Articles 6 and 7 to cover both FDI undergoing screening by a Member State and FDI not undergoing screening respectively (so the latter part requires Member States without screening mechanisms to nevertheless co-operate).
In both circumstances:
  • a Member State may comment on FDI in another Member State if the FDI is likely to affect its security or public order, or if it has relevant information in relation to that FDI;
  • the Commission may issue an opinion if (i) the FDI is likely to affect security or public order in more than one Member State; or (ii) the Commission has relevant information in relation to that FDI; or (iii) a Member State where an FDI is taking place requests the Commission to issue an opinion.  The Commission is obliged to issue an opinion when at least one third of Member States consider that an FDI is likely to affect their security or public order; and
  • the Member State where the FDI is taking place must give “due consideration” to the comments of other Member States or the opinion of the Commission. 
The co-operation mechanism permits Member States and the Commission to request information from the Member State where the FDI is taking place, provided that the information is duly justified, limited to information necessary to provide the comments/opinion and not unduly burdensome for the Member State in question.  Member States are required to notify the Commission and other Member States of any FDI undergoing screening in their territory and provide certain information in relation to the FDI.
The key timing point is that Member States and the Commission will generally have 35 days to provide their comments/opinion from either receipt of notification that an FDI screening is taking place (Article 6) or receipt of information requested by Member States/the Commission in relation to an investment that has not been screened (Article 7). This may be extended, for example, if further information is requested.
Arguably the most controversial procedural element, however, applies to FDI that has not been screened.  Article 7 allows Member States/the Commission to provide comments/issue an opinion up to 15 months after the FDI has been completed.  This does not apply to FDI completed prior to the Regulation entering into force.  This is likely to create uncertainty for investors who will not only have to consider whether the Member State where they are investing is likely to intervene, but also whether any other Member State with concerns about their own security/public order could activate the co-operation mechanism up to 15 months post completion.  The practical impact of this is that if the Member State where the investment is taking place receives comments/an opinion from other Member States/the Commission, even if initially it had not screened the FDI it might then seek to intervene post-completion.  The form that this intervention could take, and the extent to which intervention could post-date completion of an FDI, would vary depending on the possibilities available under the relevant Member State’s national law.  Member States without direct powers to call in transactions post-completion might seek to use indirect measures such as withholding relevant licences.
Commission screening of projects of Union interest
The Regulation contains a provision for the Commission to issue an opinion if an FDI is likely to affect projects or programmes of Union interest on grounds of security or public order.  In these circumstances Member States must take “utmost account” of the Commission’s opinion and provide an explanation if it is not followed.  Such projects/programmes are listed in the annex to the Regulation and can be updated by the Commission.  They currently include European GNSS programmes (Galileo & EGNOS), Copernicus and Horizon 2020.
The Regulation provides for foreign investors and undertakings to be able to seek “recourse” against screening decisions of national authorities.  This is an apparent watering-down of the draft Regulation, which provided for “judicial redress”.

Background and commentary

The Regulation initially came about as a result of significant pressure in particular from Germany, but also from France and Italy, for an EU-wide effort to address concerns that foreign investors are seeking to acquire strategic assets that allow them to control or influence European enterprises with activities critical for security and public order in the EU and its Member States.  A number of other Member States, in particular the Netherlands, Malta, Luxembourg, Finland, Sweden and Portugal, are understood to have been lukewarm from the outset to the idea of an EU-level FDI screening mechanism. In this context, the Regulation, with its co-operation mechanism but no ultimate power for the Commission to block transactions, may be seen as a compromise measure.  That said, there are two broad ways in which its impact will likely be most greatly felt, which are:
  • in the confidence it gives to Member States to introduce or bolster their own domestic screening regimes, which up until recently had only been rarely used; and
  • the opportunity it gives to Member States to intervene in investments in each other’s territories, either through mutual co-operation or through one Member State applying pressure on another to block a transaction.
If you would like to discuss these developments, please get in touch with your usual contact at Freshfields.