On September 13, 2017, the EU Commission released a proposed regulation establishing a framework for screening Foreign Direct Investments (FDI) in Europe. Several EU Member States have already implemented national mechanisms enabling them to intervene in transactions that the States believe endanger their national interest. However, there is no harmonized regime for reviewing FDI into the EU other than the EU Merger Regulation (EUMR). The EUMR focuses only on competition and does not take into account security or public order concerns. This new proposal addresses the more political notion of “national security”.
Under the new proposal, Member States will still retain the power to approve or prohibit certain FDI. Additionally, the Commission will be empowered to review FDI for its effect on European Union interests. The proposal does not set up a unified EU-wide screening mechanism nor does it require Member States to adopt a screening mechanism if they don’t already have one.
The Proposed Regulation
Below is a summary of the major provisions of this new proposal:
Minimum requirements national FDI review procedures and guidance on factors to consider in screening FDI
Member States that decide to implement screening mechanisms shall ensure judicial review, non-discrimination, and transparency of their screening decisions. The proposed regulation also lists factors Member States should consider when screening investments such as the investment’s potential effects on critical infrastructure or technologies, inputs essential to national security or public order, and access to sensitive information.
Commission’s authority to screen projects of “Union interest”
Under the new regulation, the European Commission is authorized to carry out its own assessment of the investment’s impact on security and public order where a proposed FDI affects a project or program of Union Interest (e.g. a project involving EU funds). The Commission’s opinion will be addressed to the Member State or states in which the investment is subject to review. Those states would be required to “take utmost consideration” of the Commission’s opinion and provide an explanation if they choose not to follow that opinion. An annex to the proposed regulations contains an illustrative list of EU projects that, if affected, might warrant review, including the Galileo and EGNOS satellite programs or networks for transport, energy, and telecommunications.
EU cooperation mechanism
Each Member State must inform the Commission and other Member States of a screening procedure it is undertaking and provide those parties with all information relevant to the screening. The Commission may give opinions and other Member States can comment. Concerned Member States shall give “due consideration” to this input. Besides, all Member States must report to the Commission on FDI in their country, even if they do not have a review system in place.
The Future of FDI Regulation in Europe
For now, the proposed regulation must pass through the legislative process which, at the earliest, would put the regulation in effect in late 2018. The proposed regulation is different from the United States’ CFIUS scheme, in which the Committee on Foreign Investment in the United States may review, investigate, or block a proposed transaction, or even unwind a completed deal. The Commission would not be empowered to investigate. Rather, it will need to build cooperation mechanisms between Member States and the Commission in order to harmonize the means by which Member States conduct their internal FDI review.
While the proposed regulation ensures better protection for foreign investors against the misuse of screening mechanisms by Member States, new risks may emerge. An increase in number and variety of EU national FDI screening mechanisms may lead to an increase of restricted or denied foreign investment. Additionally, the Commission’s involvement in reviewing FDI may result in longer and less flexible FDI screening procedures. We will continue to monitor the proposed EU regulation as well as the development of new national FDI review regulations and will report more here.
*Julien Blanquart is a summer associate at Sheppard Mullin.
 Including energy, transport, communication, data storage, space or financial infrastructure as well as sensitive facilities
 Including artificial intelligence, robotics, semiconductors, technologies with potential dual-use applications, cybersecurity, space or nuclear technology.