Global | Publication | April 2019
On February 14, 2019, the European Parliament adopted a regulation (the FDI Regulation) creating a new framework for screening foreign direct investments (FDI) into the European Union (EU).1 In spite of its sensitive subject matter and EU Member States’ reluctance to grant the EU Commission new powers, especially in areas touching on national security, the FDI Regulation was approved very quickly by EU standards. The regulation must be applied by all Member States and the EU Commission (the Commission) starting 18 months from publication, i.e., in the second half of 2020. The new framework will apply to a wide range of transactions in key industries, including agriculture, defense, energy, healthcare, information technology, media, and transportation, among others.
The FDI Regulation creates a new cooperation mechanism in which Member States, and the Commission itself, may issue comments and opinions on transactions involving FDI in another Member State’s territory, and the Member State in question must give those comments and opinions “due consideration.” In the case of investments deemed to be of “Union interest,” the Commission will have greater authority, as Member States in which an FDI is planned will have to take “utmost account” of Commission opinions and explain any non-compliance. The regulation will not require EU Member States to create an FDI screening mechanism, but it will set out uniform factors to be applied by those that do, as well as a framework for sharing information and opinions on relevant transactions. The new EU framework comes at an opportune time, when key EU Member States, including Germany2 and the UK,3 are reviewing and tightening their own investment screening mechanisms and may encourage more Member States to introduce new FDI screening mechanisms in the coming months.
The FDI Regulation will be the first to give the Commission general powers to review private transactions since the EU Merger Regulation (EUMR) entered into force in 1989. Indeed, the Commission’s new powers will likely apply in parallel with the EUMR review of many significant transactions. When the EUMR was adopted, the Commission went to great lengths, including creating a dedicated “Merger Task Force” in the DirectorateGeneral for Competition, to allay fears that the Commission’s review process would be politicized and subject to delays.
The FDI Regulation is silent on the procedures the Commission will follow, and even on which Commission department will be responsible for FDI screening. Unusually for a measure of this type, the FDI Regulation includes no provisions instructing the Commission to adopt more detailed implementing rules. Accordingly, 30 years on, the Commission will once again need to demonstrate its ability to review and assess complex facts in a professional manner and under tight deadlines, resisting the considerable political pressures that will likely apply. This will be all the more challenging at a time when many Member States are pushing for more EU intervention to protect EU companies, even in merger review.4
The FDI Regulation stems from concerns among EU Member States about the growth in foreign investment in strategic sectors and the proliferation of foreign investor screening mechanisms among EU Member States. In a reflection paper on “Harmonising Globalisation” published on May 17, 2017,5 the Commission noted that openness to foreign investment remains a key principle for the EU and a major source of growth, but also noted concerns about foreign investors, notably State-owned enterprises, taking over European companies with key technologies and the lack of reciprocal access for EU investors.
The Commission published its proposal for the FDI Regulation in September 2017.6 In a communication accompanying the proposal,7 the Commission noted that the EU is the world’s largest source of FDI as well as the world’s largest destination for such investment. Emerging economies, particularly Brazil and China, are increasingly important as sources of FDI into the EU. The Commission noted the risk that foreign investors may seek to acquire control of or influence in European undertakings whose activities have repercussions on critical technologies, infrastructure, inputs, or sensitive information, especially but not only when foreign investors are State- owned or State-controlled, including through financing or other means of direction. The Commission also noted that many countries still maintain significant barriers to foreign investment and do not offer comparable investment conditions to EU operators.
In spite of the political sensitivity of the issue and the reluctance of some Member States to give the EU a role in security-related issues, the FDI Regulation was finalized very quickly by EU standards. The relative speed may reflect not only a broad consensus about the importance of controlling FDI, but also the desire to finalize the new regulation before the 2019 European Parliamentary elections. Nonetheless, the final FDI Regulation reflects a number of changes from the Commission proposal, limiting the time frames for review and the Commission’s discretion to designate transactions as being of “Union interest.” Interestingly, neither the Commission’s original proposal nor the final regulation reflect the concern previously expressed about reciprocal treatment of EU companies.
The FDI Regulation applies to so-called screening mechanisms for FDI. “Screening” and “screening mechanisms” are defined as procedures for assessing, investigat- ing, authorizing, conditioning, prohibiting, or unwinding FDI on grounds of security or public order. The terms “security” and “public order” are deliberately vague, leaving considerable uncertainty as to the scope of Commission and Member State review.
FDI are defined as investments of any kind by a “foreign investor” aiming to establish or to maintain lasting and direct links to an entrepreneur to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of the target. “Foreign investors” are in turn defined as natural persons or undertakings “of a third country.” The term “of a third country” arguably limits the new framework’s scope to buyers incorporated under the laws of a non-EU jurisdiction. It is not clear whether transactions by EU-incorporated buyers whose ultimate parent is a non-EU entity would be caught; if not, this would seem to be a significant loophole.
The concept of “direct participation in management” is much broader than “control,” and presumably includes the power to appoint representatives to the board of an EU company, even if they do not have strategic veto rights. Unlike the EUMR, the new mechanism is not subject to any minimum turnover or other size-based test. Thus, the FDI Regulation will apply to a much broader range of transactions than the EUMR.
Also unlike the EUMR, the FDI Regulation applies not only to proposed investments, but also to investments that have already been completed. Under the Commission’s original proposal, the framework could apply to past transactions without limit in time, but as mentioned below the final text limits ex post facto screening to 15 months.
The FDI Regulation sets out a uniform set of factors to be used by the Commission and Member States. These include potential effects on
The factors listed in the final regulation include significant additions to original proposal. Noteworthy additions include references to water, health, media, electoral infrastructure, quantum technologies, nanotechnologies, biotechnologies, and media.
In determining whether an FDI is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is controlled by the government of a third country, including through ownership structure or significant funding. This will clearly include companies controlled by State entities or in which State entities are significant investors, but could potentially apply to companies that derive a significant portion of their revenues from business with State entities, such as aerospace and defense companies.
The FDI Regulation gives the Commission new powers to screen FDI that are likely to affect projects or programs of “Union interest,” in particular projects and programs involving a substantial amount or a significant share of EU funding, or which are covered by EU legislation regarding critical infrastructure, technologies, or inputs. The projects or programs having Union interest are set out in the regulation’s annex, which the Commission will update from time to time. These include Galileo, Copernicus, Eurocontrol, and European electricity and gas transmission networks. The regulation thus gives the Commission less flexibility than the original proposal, in which the annex was only indicative of projects and programs of Union interest, not exhaustive. Nonetheless, the Commission’s power to update the list ensures that the Commission can keep it current.
Where the Commission considers that an FDI is likely to affect projects or programs of Union interest on grounds of security or public order, the Commission may issue an opinion to the relevant Member State or States, with copies to the other Member States. The Commission’s opinions will not be legally binding, but Member States will have to take “utmost account” of them and explain any failure to comply. Since the FDI Regulation does not create any new legal powers for the Commission to prohibit or impose conditions on a transaction, any action recommended by the Commission will have to be implemented under Member State laws. It is unclear how a Member State with no screening mechanism could “take account” of a Commission opinion recommending that it prohibit or impose conditions on a transaction in its territory. It seems likely, however, that the adoption of the FDI Regulation will encourage Member States that have not already done so to adopt their own FDI screening laws.
Although the FDI Regulation does not contemplate adoption of a standard notification form, the Commission can request information from the relevant Member State, in particular on the ownership structure of the foreign investor and the target; the value of the investment; the products, services, and business operations of the investor and the target; the Member States in which the investor and the target conduct business; the funding of the investment; and the date on which it is planned to be or has been completed. Experience with the EUMR and national regimes shows that information requirements can be extensive, and tend to expand over time. These information requirements are likely to create bottlenecks in some transactions, particularly in view of the tight timelines summarized below. More detailed guidance would be helpful, but no such guidance is contemplated in the FDI Regulation.
The FDI Regulation also raises practical questions about how the Commission will exercise its new powers. The FDI Regulation is silent on the Commission’s procedure and the rights of interested parties. Indeed, the FDI Regulation does not even indicate which entities within the Commission will be responsible for FDI screening. Commission officials have indicated that the DirectorateGeneral for Trade will likely take the lead in coordinating Member State notices, requests for information and comments, as well as preparing the Commission’s own opinions, perhaps through a newly-created unit. However, other Directorates-General may also want a role in transactions involving sectors for which they are responsible.
Although the FDI Regulation does not provide any right to communicate directly with the Commission regarding transactions under review, interested parties will no doubt seek out possibilities to do so. The FDI Regulation does not give the Commission decisionmaking power, but its opinions are likely to be influential, and the Commission will play an important coordinating role with Member State authorities. If the Commission unit charged with these tasks does not provide a mechanism for interested parties to have input in the process, they will likely seek such possibilities through other Commission Directorates-General. It would be preferable for the Commission to formalize its procedures and to give interested parties an opportunity to provide input.
As noted, the FDI Regulation will not restrict Member States’ ability to maintain or create screening mechanisms, but it will require Member States to notify the Commission of any new or existing screening mechanism, as well as any changes. Member States will also submit annual reports including a list of FDIs screened and undergoing screening; screening decisions prohibiting investments or submitting them to conditions or mitigating measures; the sectors, origin, and value of the investments; and whether it considers that an investment undergoing screening is likely to be caught by the EUMR.
Member States will be required to appoint an FDI screening contact point to handle communications, whether or not they have a screening mechanism in place. Rather than creating a contact point with no powers, some Member States that currently have no FDI screening mechanism will likely choose to introduce new mechanisms of their own. Thus, an unintended consequence of the FDI Regulation may be a further proliferation of Member State screening mechanisms.
The FDI Regulation will set out minimum criteria that Member States’ screening mechanisms will have to meet. They will have to be transparent and not discriminate between third countries, and Member States will have to set out the circumstances triggering the screening, the grounds for screening and detailed procedural rules. Member States will have to establish timeframes for issuing screening decisions that will allow them to take into account the comments of Member States and the opinion of the Commission referred to below. Confidential information, including commercially sensitive information, made available by foreign investors and other parties will have to protected, and foreign investors and other parties concerned will need to have the possibility to seek judicial redress against screening decisions of the national authorities. While these procedural protections are welcome, they offer far less transparency and protection for investors than, for example, the Commission’s EUMR procedures.
The FDI Regulation creates an elaborate cooperation mechanism for FDI undergoing screening. Member States must notify the Commission and other Member States of any FDI that is undergoing screening. Where a Member State considers that an FDI planned or completed in another Member State is likely to affect its security or public order or otherwise has relevant information, it may provide comments to the Member State where the FDI is planned or has been completed, with a copy to the Commission. The Commission may also issue an opinion where it considers that an FDI is likely to affect security or public order in one or more Member States or otherwise has relevant information, irrespective of whether other Member States have provided comments.AMember State may request the Commission to issue and opinion or other Member States to provide comments, and the Commission will have to deliver such an opinion in relation to FDI if at least one-third of Member States consider that the investment is likely to affect their security or public order. Member States where an FDI is planned or has been completed will have to give due consideration to such comments and opinions, but they will not be legally binding.
To address concerns about potential delays resulting from this process, the FDI Regulation revised the timetables set out in the original proposal. Upon receipt of an initial notification that an FDI is undergoing screening, the Commission and Member States will have 15 calendar days to notify the Member State concerned that they intend to provide comments or an opinion and to request additional information. Opinions and comments should be delivered within 35 calendar days of the original notice, or 20 calendar days from receipt of any additional information requested. The Commission may issue an opinion following comments from other Member States no later than 40 calendar days from the original notification.
A similar process applies to FDI not undergoing screening, including FDI completed within 15 months prior to the opinions or comments. However, this mechanism will not apply to FDI completed before the FDI Regulation’s entry into force (i.e., when it is published in the EU’s Official Journal in the first half of 2019).
As mentioned, the FDI Regulation will create the first new framework for Commission review of transactions since the EUMR entered into force in 1989. Although the FDI Regulation is not limited to mergers, acquisitions, or joint ventures that constitute concentrations caught by the EUMR, many investments triggering a public interest screening will likely also be reviewed under the EUMR.
Under the EUMR, Commission review is a “one-stop shop,” meaning that a concentration notified under the EUMR is exempt from review under Member State merger review laws. Article 21(4) EUMR allows Member States to take measures in respect of EUMR-notified transactions on grounds of other legitimate interests, provided these measures are compatible with other EU laws. Except for decisions based on the protection of public security, plurality of the media and prudential rules, Member State decisions on a transaction subject to the EUMR must be communicated to the Commission, which must decide whether the proposed decision is consistent with EU law within 25 working days. The Commission has invoked this procedure in cases concerning a variety of sectors, including the energy, telecommunications, transport, and construction sectors.
The FDI Regulation will not amend the Article 21(4) EUMR process, which differs in many ways from the proposed new screening mechanism. Article 21(4) applies only to transactions meeting the EUMR thresholds and only empowers the Commission to intervene to strike down Member State impediments to a transaction approved under the EUMR (if the Commission finds that those impediments violate EU law); Article 21(4) does not empower the Commission to review or impose restrictions on a transaction for any reason except the transac- tion’s impact on competition.
The Commission’s powers under the FDI Regulation will be broader than its powers under Article 21(4) EUMR in some respects, but narrower in others. The Commission’s powers will be broader, because it can intervene in transactions not caught by the EUMR, and it can raise public-interest objections on non-antitrust grounds, whether or not the transaction is approved under the EUMR. On the other hand, the new screening mechanism applies only to investments from non-EU countries and to a narrower range of public interests, and the Commission’s opinions under the new regulation will not be legally binding. The Commission will also be dependent on Member States for information, lacking the extensive investigatory powers granted by the EUMR. Although the Commission has promised to ensure consistency in the application of the FDI Regulation and Article 21(4) EUMR, many practical questions can be expected to arise on a case-by-case basis. Parties notifying transactions under the EUMR will likely seek to coordinate the processes to avoid delays and the risk of inconsistent outcomes, and they may be frustrated by the lack of transparency and procedural protections under the FDI Regulation.
The FDI Regulation requires the Commission to review the regulation and consider appropriate changes after three years. The FDI Regulation formalizes the role of the Commission’s expert group on screening of FDI, created by the Commission in late 2017.8 However, it is not clear what role, if any, the expert group will have in the review of individual transactions.
As the first new framework for a general Commission review of private transactions since 1989, the new screening mechanism represents a bold step and inserts the Commission into a hitherto jealously guarded area of Member State authority. In creating a relatively streamlined coordination framework while leaving ultimate decision-making powers with the Member States, the FDI Regulation aims to limit the creation of additional bureaucracy and reduce the risk of uncoordinated screening processes with potentially inconsistent approaches and outcomes. As such, the FDI Regulation is a positive step.
The new framework leaves the final say on proposed FDI with the Member State where the FDI is to take place. However, the possibility for multiple Member States, as well as the Commission, to participate in FDI screening will likely change the dynamics of FDI screening pro- cesses, which have so far taken place entirely within the host country’s borders. In principle, the host Member State’s obligation to give other Member States’ and the Commission’s views due consideration (or, in the case of Commission opinions on FDI of Union interest, to take utmost account of them) creates a potential for conflict. In practice, however, the Commission and Member State authorities can be expected to resolve any differences through confidential negotiations in the vast majority of cases.
The regulation as finally adopted made a number of changes intended to reduce the risk of extended delays, curtail the possibility of screening foreign investments that have already been completed, and limit the Commission’s discretion to identify investments of Union interest in which it may intervene. The FDI Regulation nonetheless continues to raise many questions. For example, it is unclear how Member States without a screening mechanism will participate in the review process, and the regulation may in fact lead to a proliferation of additional Member State regimes.
Perhaps most importantly, the FDI Regulation says nothing about how the Commission will exercise its powers or the possibility for foreign investors and EU investees to have input into the process. Investors, investees, and other interested parties will no doubt seek to share their views through various Commission channels, potentially creating confusion and undermining the credibility of the process. It is to be hoped that the Commission will use the 18 months before the new framework needs to be applied by creating and staffing a new unit within the Directorate-General for Trade and preparing procedural rules to clarify how it will exercise its new powers.
http://www.europarl.europa.eu/meetdocs/2014_2019/plmrep/COMMITTEES/INTA/AG/2018/12-10/1171525EN.pdf.
New rules entered into force in Germany on Decem- ber 29, 2018. See, https://www.bmwi.de/Redaktion/DE/Downloads/XYZ/zwoelfte-verordnung-zur-aenderung-der-aussenwirtschaftsverordnung.pdf?__blob=publicationFile&v=4.
New rules entered into force in the UK in June 2018. See, https://www.gov.uk/government/news/new-merger-and-takeover-rules-come-into-force.
See for example the joint statement of 18 EU industry ministers on December 18, 2018, available at https://www.bmwi.de/Redaktion/DE/Downloads/F/friends-of-industry-6th-ministerial-meeting-declaration.pdf?__blob=publicationFile&v=6.
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