On 10 April 2019, the EU framework for screening foreign direct investment (FDI) came into force, allowing the European Commission and Member States until 11 October 2020 to put in place mechanisms and resources to comply. The framework is not an FDI regime in its own right but introduces cooperation and information sharing mechanisms to ensure the Commission and Member States have the tools to coordinate when vetting FDI on the grounds of security or public order. In the context of increasing concerns around FDI, matched with a tightening of controls in a number of jurisdictions across the globe, it could signal the start of a wave of new regimes being introduced across Member States - at the very least, foreign investment from outside the EU is likely to attract much closer scrutiny.
The framework was proposed by the Commission in September 2017 as part of a new trade package announced by President Juncker at the State of the Union address. The EU’s approach – which included bypassing the requirement for an impact assessment on the grounds of urgency – prompted early controversy and concerns, and the proposals are generally reported to have divided Member States between those in favour of stricter controls versus those concerned about their potentially chilling effect on investment into the EU. The proposals were materially amended as they went through the EU legislative process.
The resulting framework, which is in the form of an EU Regulation, makes it clear that EU Member States are not required to introduce FDI regimes, and their responsibility for, and powers to protect, their own national security remain unaffected.
While there is no obligation to introduce FDI screening measures, any measure or screening mechanism that exists, or is introduced, must comply with the basic requirements of the framework, which impose (among other requirements):
- non-discrimination between third countries
- setting out timeframes for the process (accommodating the possibility of comments from the Commission and other Member States under the Regulation) and
- the possibility of appeals against national authority decisions.
The framework applies to cases involving security or public order and to ‘foreign direct investment’, defined as covering cases of ‘lasting and direct links’ between investors and the target. This seems to be a lower threshold than the test of ‘control’ under EU Merger Regulation, and there is no indication of consistent interpretation between these two EU instruments. The Regulation also lists the factors Member States and the Commission may take into account when reviewing cases, which include consideration of the potential effects on critical infrastructure, technologies and inputs, access to sensitive information and freedom / pluralism of the media. The scope of factors to consider under the banner of critical infrastructure and critical technologies, in particular, was substantially extended during the legislative process, and now include a wide range of areas such as water, health, data processing, financial infrastructure, AI, robotics and semiconductors, to name but a few.
The framework is the first of its kind in the EU, and while it stops short of introducing an EU-wide FDI control regime, it mandates a notification and cooperation mechanism both between Member States and between them and the Commission. A Member State which carries out a national screening must notify the Commission and other Member States who have the opportunity to request additional information and provide comments (or for the Commission, issue an opinion) within 35 days. The reviewing Member State must give ‘due consideration’ to those comments, although it has the final word on how to treat the investment. The possibility for other Member States and the Commission to provide comments also exists for FDIs not subject to screening - this will provide the opportunity for States to voice their concerns where a transaction is not reviewed, and it is possible that Member States more inclined to tighter controls will see this as an opportunity to put pressure on others in which a relevant transaction is taking place.
As well as the potential for delay in approval of an investment, this Regulation means that investors will also need to be mindful of the possible reactions of the Commission and Member States other than the one in which they are investing. The scope of the Regulation is defined widely, and consistent with the approach generally taken in FDI regimes, neither ‘security’ nor ‘public order’ are defined, allowing Member States a wide discretion in considering when these concerns are engaged.
Brexit may mean that the UK will be a ‘third country’ for the purposes of the Regulation, which has raised concerns in UK Government and among investors that they could be subject to stricter rules when investing in the EU – although this is likely to ultimately depend on the terms of the UK's exit, which are still uncertain.
The UK is separately considering strengthening its own national screening measures, with the publication of a White Paper on National Security and Investment on 24 July 2018. By contrast to the EU mechanism, the UK Government is proposing to introduce an entire new regime for vetting investment in the UK. Loosely based on UK merger control, the suggested regime provides for voluntary notification of transactions which fall within scope, backed by expanded powers for the Government to call in non-notified transactions. The proposed remit of the new regime is broad; although it is solely concerned with national security (rather than the broader public interest), it is not confined to certain sectors of the economy or to foreign investors only. Please see here for our separate update on the UK proposals.
The UK is not alone in reviewing the adequacy of its existing regime. Among EU Member States which have recently tightened their regime (or are considering doing so) are France, Italy, Hungary and Germany. They are joining a global trend of Governments across the globe which are reviewing and refitting their powers to ensure they have the tools they need to block investments which are seen as posing a threat to security or the national interest, including the US, Canada, Japan and Australia.