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As part of its European Economic Security Package, the European Commission (‘Commission’) has recently proposed a number of legislative proposals and White Papers intended to better protect Europe’s strategic interests. We have covered the wider initiative here.

This blog post discusses one specific aspect: the proposal for a revised FDI Screening Regulation (‘Proposal’). The Proposal is intended to repeal and replace the existing legal instrument enacted to provide a handle on the acquisition of foreign control over strategic EU assets, Regulation 2019/452, commonly known as the FDI Screening Regulation

The story so far: the current FDI Screening Regulation, a toothless tiger?

FDI screening mechanisms at Member State level, once critically scrutinized by the Commission as a restriction of the EU’s fundamental freedoms, have grown in popularity steadily since the 2010s. At some point, the Commission also endorsed this trend and tried to bring some order in the blooming diversity of national mechanisms. Yet, the Commission was cautious not to encroach on Member States’ prerogatives concerning national security.

The result of this balancing of interests was the FDI Screening Regulation, entering into force in October 2020. It introduced only light-touch rules obliging the Member States to notify and coordinate with the Commission and other Member States when screening FDIs. As it was rather meant to enable, encourage and sensibilize the Member States, it did not provide for a duty to screen certain FDIs, nor a decision-making power of the Commission.

Hence, national mechanisms continue to vary in scope, timelines, substantive and procedural criteria. Some Member States even have not yet introduced any FDI screening mechanisms at all (Bulgaria, Cyprus, Greece and Ireland are in the process of adopting such legislation, Croatia being the only EU Member State with no such legislation or current plan to adopt one), others cover only a limited number of sectors. A stakeholder consultation and an OECD evaluation identified this fragmentation as a major problem, since it leaves a regulatory gap to be exploited by potentially problematic foreign investors. This is aggravated by the fact that the FDI Screening Regulation is not applicable to indirect FDIs, i.e. those were an intra-EU vehicle controlled by a foreign entity is the one formally undertaking the transaction, as confirmed by the CJEU’s Xella judgment. However, most of the national FDI mechanisms in the EU do catch indirect FDI.

And given that the geopolitical environment has become ever more unstable since the adoption of the FDI Screening Regulation (think Covid-19, think Russia’s invasion of Ukraine), the Commission’s Proposal now intends to remedy some of the perceived shortcomings of the FDI Screening Regulation.

What’s new in the Proposal?

Indirect and greenfield investments covered

EU-based entities controlled by a foreign shareholder will fall within the scope of the FDI Screening Regulation. This is a significant change compared to the previous situation, and one which required the Commission to choose Article 114 TFEU, the empowerment to harmonize the internal market, as the legal basis of the revised Regulation (in addition to Art. 207 TFEU concerning the common commercial policy).

Additionally, the Commission clarifies that it considers greenfield investments to fall within the scope of the FDI Screening Regulation and that it encourages Member States to include those into their screening mechanisms (Proposal, Recital 17).

FDI screening now mandatory for several sectors

Another big change: Member States will not have the option anymore to foresee no FDI screening mechanisms at all. The Proposal stipulates that for certain FDIs, screening will be mandatory. This concerns investments in (i) projects or programmes of EU interest (as further defined in Annex I, which mostly relates to a number of EU-funded initiatives), and (ii) investments in companies active in a specified list of sectors (as defined in Annex II).

Annex II includes some unsurprising fields such as military/dual-use goods. It further lists semiconductors, AI, quantum technologies, biotechnologies, advanced digital and electronics, space and propulsion technologies as sensitive industries. Additionally, energy-related technologies, robotics, advanced manufacturing and certain resource extraction technologies are included in the must-screen sectors. Lastly, certain deals concerning critical medicines and the financial sector will also require screening.

Clarification on what deals need to be notified

The current FDI Screening Regulation obliges the Member States to inform the Commission about all FDIs undergoing screening. The Proposal opts for a more targeted approach and stipulates that requirement only for those transactions for which screening is mandatory under the new rules, and which fulfill certain other criteria. These additional criteria relate to investors controlled by third-country governments, linked to a sanctioned entity, and investors which were already subject to a prohibition or remedy decision (Proposal, Art. 5(1)). In addition, all Phase II investigations must be notified (Proposal, Art. 5(2). See below on that). All other FDIs may be notified, if the relevant Member State considers it useful (Proposal, Art. 5(3)).

The links between an investor and any sanctioned entities (or the risk of circumvention of sanctions) were also added to the list of factors which shall be taken into account by Member States when deciding on FDIs (Proposal, Art. 13(4)(b) and (d)).

More detailed procedural requirements

Furthermore, all Member State screening mechanisms shall in the future conform to a stricter set of procedural minimum requirements. The current FDI Screening Regulation only foresees very high-level standards for Member States, such as non-discrimination, time limits, and possibilities to seek legal recourse. The Proposal now adds to that inter alia the following:

  • A Phase I – Phase II model known from merger control proceedings (Proposal, Art. 4(2)(a)).
  • An empowerment of the competent Member State authorities to initiate ex post-investigations into non-notifiable transactions for at least 15 months after completion (Proposal, Art. 4(2)(c)). A corresponding right to intervene for the Commission, or Member States considering that they may be affected by a non-notifiable FDI taking place in a different Member State, is foreseen for up to 15 months after completion of the transaction as well (Proposal, Art. 9).
  • As far as mandatory screening is concerned, the requirement to issue a decision before completion of the transaction (Proposal, Art. 4(g)).
  • Powers to effectively combat gun-jumping of must-screen transactions (Proposal, Art. 4(2)(h)).
  • A right to be heard for investors facing a prohibition or the imposition of mitigating measures (Proposal, Art. 4(3)).
  • The possibility to obtain information also from third parties (Proposal, Art. 10(4) and (5)).

In cases where a Member State or the Commission express concerns regarding a FDI, the Proposal includes strengthened language. The Member State in charge of a screening must now give ‘utmost consideration’ to such comments (Proposal, Art. 7(5)). In addition, that Member State must discuss and motivate its decision in case it disagrees with the expressed concerns (Proposal, Art. 7(6), (8)(b) and (9)).

Multi-jurisdictional FDI screening now addressed

It is not uncommon that the target of an M&A transaction owns subsidiaries established in a number of Member States. As a consequence, multiple parallel FDI screening filings may be necessary. To ease the complexity and uncertainty of this exercise, the Proposal stipulates that multi-jurisdictional filings shall be made simultaneously to all concerned Member States, which are then called upon to coordinate their review process. Necessary parallel notifications by several Member States to the cooperation mechanism shall also be made on the same day (Proposal, Art. 6(2)). Decisions, including conditional clearances, shall be coordinated among the Member States concerned (Proposal, Art. 7(6)), and deadlines for comments etc. shall be aligned (Proposal, Art. 8(8)).

What will be the impact?

The consequences of the tightened EU FDI Screening Regulation will certainly be significant, but should not be exaggerated. For investors, the relevant national legislations remain key, and some of those national screening mechanisms will not require much adaption once the Proposal is adopted. Many Member States are already screening intra-EU investments and indirect FDIs for instance. The impact will rather be felt in Member States which hitherto had no or only a limited screening mechanism in place. These countries will need to expand their screening activities. However, in important jurisdictions like Germany, Italy or France, where robust screening rules had been introduced years ago already, the changes will be less substantial.

On the other hand, the greater level of harmonization and coordination will come as a relief for investors who were so far faced with complex multi-jurisdictional filings in a heterogeneous legal landscape. Still, many divergences will remain: Member States are still free to expand the scope of their screening requirements beyond the minimum required by the proposed Regulation, and may still design many aspects of procedure as they wish – such as the ultimate deadlines for approval.

Lastly, the proposed power to intervene in transactions for 15 months after completion, even in situations where the applicable rules did not require a filing, is potentially quite explosive. Faced with the possibility to be forced to unwind completed deals later on, we may see many investors filing for precautionary reasons or otherwise applying for comfort even in connection with seemingly innocuous deals. Hence, the intended goal of the Proposal to provide more legal certainty could very well turn into the opposite.

However, the Proposal is so far just that – a proposal. It remains to be seen to what extent it will be transformed in the legislative negotiations with the European Parliament and the Council which are about to begin.