The EU Investment Screening Regulation
On 19 March 2019 the EU adopted Regulation (EU) 2019/452 establishing a framework for screening foreign direct investments (FDI). The provisions of the regulation are set to be applicable on 11 October 2020 in order for the Member States and the Commission to prepare for its application. In the year until its application, foreign investors involved in acquisitions in the EU should similarly prepare for the new regulation by identifying and assessing the developments in the EU and their impact on relevant FDI screening procedures in the Member States.
The regulation was adopted following a significant increase of FDI from non-western countries, such as Brazil, Russia and China. The influx of FDIs that targeted strategic sectors and often through state-owned companies raised security concerns and prompted the proposal for an EU wide framework. While the EU and the Member States have traditionally been welcoming of FDIs, the past years developments have resulted in tighter FDI controls. As it is now, certain mergers and acquisitions may be subject to review by the Commission, but this review only concerns the effects on competition. With this regulation, there will now be an EU wide framework for FDI screenings on the grounds of security and public order. The final decision concerning FDIs, including any screening measures however still remains with the Member States. Accordingly, the regulation does not impose any formal obligation to adopt screening mechanisms at national level. Currently, 15 Member States have reported that they have national screening mechanisms in place. For those Member States that already have such screening mechanisms or for Member States planning to implement them, the regulation does set out certain minimum requirements.
What does the new EU FDI regulation provide?
The new regulation establishes a framework for screening FDIs on the grounds of national security and public order. FDIs are defined broadly and includes investments of any kind by a foreign investor aimed at establishing or maintaining direct, lasting links with the recipient, in order to perform economic activities in a Member State. Foreign investments which enable effective participation in the management or control of companies are also included.
The regulation further provides for a cooperation mechanism. In this regard it particularly enables the Member States and the Commission to exchange information, comments and opinions on certain planned or completed FDIs in the Member State.
Minimum requirements for FDI screening measures
The regulation requires that national FDI screening mechanisms shall be transparent and may not discriminate between third countries. This requires that Member States set out the circumstances that trigger screening, the grounds for screening and the applicable procedural rules. Moreover, Member States are required to apply time frames under their mechanisms and provide foreign investors the ability to seek recourse against screening decisions by national authorities. Finally, Member States are required to adopt and maintain measures necessary for identifying and preventing circumvention of the screening measures and decisions.
When is an FDI likely to affect a Member State’s security or public order?
The regulation provides a non-exhaustive list of factors that the Member States and the Commission may consider when determining if an FDI is likely to affect security or public order. This includes considering the effects of the FDI on;
critical infrastructure, including energy, transport, communication, financial infrastructure and sensitive facilities,
critical technologies and dual-use items, including artificial intelligence, robotics, aerospace, defense, and nano- and biotechnologies,
supply of critical input, such as energy, raw materials and food security,
access to sensitive information, such as personal data and the ability to control information, and
freedom and pluralism of media.
The regulation further provides that Member States and the Commission may in particular consider;
if the foreign investor is directly or indirectly controlled by a government,
if the foreign investor has already been involved in activities affecting security or public order in a Member State,
if there is a serious risk that the foreign investor engages in illegal or criminal activities.
The cooperation mechanism provides for the exchange of information between the Member States and the Commission in relation to FDIs and their effect on national security and public order. Such information includes the ownership structure of the foreign investor, the approximate value of the investment, the funding of the investment and the business operations, products or services of the foreign investor. In addition, the regulation provides for the exchange of comments with regard to national security and public order concerns between the Member States, which they are required to take into due consideration. The Commission may also issue non-binding opinions, which must similarly be taken into due consideration.
FDIs likely to affect projects or programmes of EU interest
If the Commission considers that an FDI is likely to affect projects or programmes of EU interests on the grounds of security or public order, the Commission may issue non-binding opinions to the relevant Member State. Member States are required to take utmost account of the Commission’s opinion and provide an explanation if the opinion is not followed. This only applies to FDIs that are likely to affect EU interests. The type of projects and programmes that are of EU interest mainly concern those involving a substantial amount or share of EU funding and areas covered by EU law with regard to critical infrastructure, technologies and input essential for security and public order. There is an Annex to the regulation, which provides a list of such projects and programmes.
Where previously FDI screenings were mostly common in sectors such as defense and military, more attention is now placed on areas such as critical infrastructure, technology and data. The regulation is thereby in line with the recent global trends towards more scrutiny of foreign investments on national security grounds. The new regulation will therefore especially impact the acquisition of companies in strategic and sensitive sectors with access to dual-use items and sensitive technology. Several Member States have already expanded their existing FDI screening measures and others have adopted new FDI screening mechanisms. It is currently unclear exactly how and to what extent the Netherlands will implement FDI screenings, but the topic is high on the political agenda. FDIs in the gas and electricity sectors are already subject to screenings, and may be prohibited on the grounds of public order and security of supply by the Ministry of Economic Affairs and Climate. Also a legislative proposal to establish FDI screenings in the telecommunications sector is in preparation. Investors, particularly those in strategic sectors as well as those owned or connected to foreign governments are advised to be diligent in identifying the impact of the regulation and relevant national screening measures on their investment plans. A fortiori the same applies for those aiming to sell.
For more information on the Dutch legislative proposal for FDI screenings in the telecommunications sector “wetsvoorstel ongewenste zeggenschap telecommunicatie”, see: https://www.tweedekamer.nl/kamerstukken/wetsvoorstellen/detail?cfg=wetsvoorsteldetails&qry=wetsvoorstel%3A35153