New EU rules for foreign direct investment screening: One step closer to adoption and entry into force

This alert is an update to our alert of 3 December 2018 that reflects the published text as agreed by the European Commission, the European Parliament and the Council of the EU on 6 December 2018.

The compromise text (Text) of the European Commission (Commission), the European Parliament (Parliament) and the Council of the EU (Council) of the EU framework for screening foreign direct investment (FDI) has been released following the conclusion of the trilogue negotiations between the three EU institutions. The Committee on International Trade of the Parliament (INTA) voted on the Text on 10 December. The Text contains certain new elements to the proposal initially submitted by the Commission, including a clearer distinction of the role of the different actors involved, additional screening factors, enhanced cooperation mechanism, strengthened confidentiality of information and streamlined deadlines. The new rules are expected to enter into force in April – May 2019 and fully apply as of November 2020.

Features of the new Framework

Under the new framework regulation (FDI Regulation) the criteria for intervention in FDI decisions will be "security and public order ". The FDI Regulation provides a non-exhaustive list of factors that Member States may take into account when conducting their assessment – considerations such as an FDI's impact on critical infrastructure, advanced/critical technologies, security of supply of critical inputs, access to sensitive information (or the ability to control such information) and the freedom and pluralism of the media. Sectors captured under the FDI Regulation include, energy, transport, communications, water, health, data processing or storage, aerospace, defence, electoral or financial infrastructure, investments in land and real estate, artificial intelligence, robotics, semiconductors, defence, energy storage, nuclear technologies, nanotechnologies and biotechnologies, energy and raw materials, food security, and personal data.

The FDI Regulation does not attempt to harmonise Member State screening mechanisms or to create an EU-wide screening mechanism, nor does it impose an obligation on Member States to have in place a screening mechanism. Rather it aims to enhance cooperation and increase transparency between Member States (and the Commission) – in particular by:

  • Introducing certain common principles for national screening mechanisms, i.e., transparency, non-discrimination, timeframes, confidentiality of information and possibility for judicial redress;
  • Creating a "cooperation mechanism" whereby Member States are required to exchange information (amongst themselves and with the Commission). This cooperation mechanism will apply where FDI is undergoing screening by a national authority and in cases where the FDI takes place in a Member State without such screening mechanism. This is not an EU-wide screening mechanism as such, but instead a framework through which the Commission and Member States can carry out a more coordinated review of FDI;
  • Allowing for enhanced cooperation through the exchange of any relevant information (such as the ownership structure of the foreign investor, the approximate value of the FDI, the products, services and business operation of the foreign investor and the target company, the Member States in which the foreign investor and the target company have relevant business operations; the funding of the FDI and its source, and the date when the FDI is planned to be or has been completed). The Member State concerned may request such information directly from the foreign investor;
  • Allowing the Commission to issue non-binding opinions:
    • in cases concerning various Member States – i.e., advising Member States where it considers that an investment would likely affect security or public order in one or more Member States;
    • on request by a Member State which considers that a FDI may affect security or public order in its territory; or
    • where a proposed investment might affect a project of interest to the whole EU, such as Horizon 2020 and Galileo (and to which the Member State in question must then take "utmost account" of the opinion and provide explanations where it chooses not to follow the Commission's views);
  • Encouraging international cooperation on screening policies, including sharing experience and best practices as well as information regarding investment trends;
  • Reaffirming that national security interests are the responsibility of Member States and that the EU framework will not:
    • affect a Member State's ability to maintain any national review mechanisms already in place, or
    • require a Member State, where it does not currently have a national FDI regime, to adopt one;
  • Allowing Member States to have the final say as to whether a specific investment should be permitted or not in their territory; and
  • Introducing deadlines (including an "early warning" option, whereby Member States and the Commission must indicate within 15 days from a notification on the screening of an FDI whether they intend to submit their views thereto, and a total of 35 days for comments by Member States and the Commission following the receipt of the relevant information).

Another important element of the FDI Regulation is that, in the context of the cooperation mechanism for FDI not undergoing screening, Member States and the Commission will be able to provide comments up to 15 months following the completion of the FDI. This provision aims at ensuring legal certainty for such investments, through a proportional mechanism to allow for review of investments in Member States with no screening mechanism.

Practical implications

It is worth noting that an increasing number of Member States are moving forward with plans to strengthen their own powers for reviewing FDI. Recently, Hungary and the Netherlands, initiated processes for the introduction of rules for the screening of FDI in their domestic legal order.

In practice this means that an increased portion of cross-border transactions will be subject to stringent scrutiny in Europe well before the EU rules come into force. It is, therefore, essential for parties involved in European-focused transactions to consider the scope and implications of national requirements and, where necessary, to engage with relevant national authorities as soon as practicable.

Overall, the FDI Regulation will likely have a significant impact on M&A transactions. First, it increases the likelihood of more Member States introducing FDI screening tools to level the playing field. Second, for those Member States that already have a screening mechanism, the FDI Regulation will likely impact both the timing and the substantive assessment, as increased obligations of cooperation with the other Member States and the Commission will be introduced. For companies participating in EU programmes and projects, the due diligence process is likely to involve not only formal contact with the Member State in which the FDI is planned, but also contacts with the Commission.

While Member States retain their sovereignty in taking decisions, they will need to take comments from other Member States and the Commission into account. The additional timeframe of 35 working days for Member States to comment on FDI screenings are likely to delay the national procedures and decouple it from the shorter first phase merger control reviews in most Member States. A counterbalance to that is the introduction of the "early warning" system, according to which Member States and the Commission will have to notify the Member State conducting the screening on their intention to submit comments.

The possibility for comments by Member States and the Commission on FDI not undergoing screening up to 15 months after the completion of the investment raises questions with respect to any contracts or licences provided by the Member State concerned, and any potential additional requirements/mitigating factors with which the transaction will have to comply, on the basis of such comments.

Moreover, the criteria for concerns raised regarding the security or public order of Member States are not defined in an exhaustive manner, which leaves room for uncertainty.

For parties to M&A transactions this means that they will need to engage even more thoroughly than today into an analysis of potential cross-border security issues in order to map out where FDI filings are required or advisable. While the Commission only has a coordinating role, it could become a relevant player in the political vetting process of foreign investments that parties need to consider.

For further Hogan Lovells commentary on foreign investment screening, please see:

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