Non-EU investors may be confronted with more rigid clearance processes when attempting to acquire EU companies as a result of an unprecedented call for action by the European Commission.
In a policy paper issued on 25 March 2020, the Commission urges member states to set up "fully fledged screening mechanisms" and use "all other available options" to avoid risks stemming from non-EU investors acquiring healthcare capacities (e.g. for the production of medical or protective equipment) or related industries such as research establishments (e.g. for developing vaccines), which are desperately needed in the COVID-19 crisis. The paper might be a direct reaction to the US president’s public statements regarding the intended acquisition of German vaccine researcher CureVac.
The Commission's call for closer scrutiny of foreign investment, however, goes beyond the protection of healthcare assets. Brussels is equally concerned that the plunging stock markets could lead to an undervaluation of EU companies and fears a sell-out of critical assets and technology or, more broadly, of economically important companies, which will be needed for a fast recovery after the COVID-19 crisis.
As a result, the Commission suggests that any and all foreign investments merit close scrutiny.
COVID-19 likely to fuel implementation of EU's FDI Screening Regulation
The policy paper needs to be understood in the context of the FDI Screening Regulation. In March 2019, the European Parliament and the Council agreed on the first EU Regulation on foreign direct investment screening, Regulation (EU) 2019/452. Since this Regulation enters into force in October 2020, member states have time to adapt their national laws.
The regulation does not create an EU screening procedure, unlike the EU merger control system. Rather, the screening competence remains within the jurisdiction of EU member states. The regulation only introduces certain standards to be applied in screening procedures and establishes coordination and information mechanisms between member states and the Commission. Notably, it does not require member states to adopt mechanisms to screen investments.
In fact, within the EU 27 only 14 member states currently have such mechanisms in place and the Commission has seized the current emergency to promote FDI screening. The dramatic undersupplies of vital medical goods are vivid examples that certain companies are crucial to the security and public order of the EU. Fear of additional undersupply could prompt member states either to set up screening now or further tighten existing rules, such as by lowering the shareholding threshold that triggers screening.
Given the climate of trepidation across the EU, it remains to be seen whether all member states will manage to strike the right balance between the economic benefits of an open investment environment and the legitimate aim to prohibit foreign investment if concerns exist about security and public order.
What does this mean for investors and sellers now?
Non-EU investors should be prepared for more hurdles when investing in certain EU companies since the global trend of ever-increasing FDI scrutiny is likely to continue.
EU member states without FDI screening mechanisms could quickly introduce them now. In the meantime, the Commission encourages the use of other forms of state intervention in order to protect important domestic companies from foreign takeovers, such as the acquisition of "golden shares" that gives the state certain veto-rights.
EU member states with existing screening mechanisms must be expected to tighten their control immediately. When assessing the impact of a foreign investment on public security and order, the screening authority enjoys a high degree of discretion. This discretion is likely to be exercised in the future in such a way that earmarks more companies as sensitive. Furthermore, member states must be expected to continue to tighten the rules when adapting their laws to the requirements of the FDI Screening Regulation.
In practice, this means that affected transactions will take longer, and transaction security will decrease. Both effects can be mitigated to some extent by considering, early in the transaction process, the likely impact of FDI screening on the transaction and by developing possible remedy proposals.
EU companies looking for new investors should carefully evaluate whether they are likely to be considered a sensitive business. If this is the case, potential investors should also be selected with a view to potential concerns from an FDI screening perspective. The Commission suggested in its paper that shareholdings with as little as 5% may be relevant cases for screening.
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