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On 5 March 2019, the Council of the EU approved a new framework to screen foreign direct investments (“FDI”) coming into the EU. This concludes a legislative process kicked off in 2017. The newly adopted Regulation aims to protect the EU’s strategic critical assets against investments that are detrimental to the legitimate interests of the Union or its Member States. It sits well with the more ambitious move by France and Germany to shape a European industrial strategy,1 which acknowledges FDI screening as one of its centrepieces.
THE NEW ENABLING FRAMEWORK
The Regulation does not establish EU-level screening nor does it harmonise existing screening mechanisms or obligate Member States to create an FDI screening mechanism. Instead, it confirms that Member States may maintain, amend or adopt FDI screening mechanisms on grounds of security or public order under the conditions spelled out in the Regulation. It also acknowledges that Member States will retain their final decision-making power on FDI.
The Regulation seeks to set in place a framework that will enable structured cooperation between the European Commission (EC) and the Member States, while allowing decentralised FDI investment screening by the Member States.
To that end the new framework will:
This cooperation process also applies to FDIs in Member States without a screening mechanism. Thus, the Regulation empowers Member States and the EC to comment on FDI that are not subject to an official screening.
The Regulation covers a broad range of investments which aim to establish or maintain lasting links between a non-EU investor (including state entities) and an undertaking carrying out economic activity in a Member State.
It sets out an indicative list of factors which the Member States / EC should consider when determining whether an investment is likely to affect security or public order. This includes effects of the investment on critical infrastructure, critical technologies, supply of critical inputs (e.g. energy or raw materials), access to sensitive information or the ability to control information, and the freedom and pluralism of the media.
THOUGHTS
While the EU will remain an open economy for investments, the new FDI screening is anticipated to increase scrutiny of foreign acquisition. Currently 14 Member States have FDI screening mechanisms in place, while several others are in the process of reforming them or adopting new ones.
In Central Eastern Europe, Austria, Hungary and Poland have FDI screening mechanisms. It is anticipated that the new EU-level screening framework will accelerate the convergence of existing FDI review rules, but also may encourage the adoption of new laws in those countries which currently do not foresee FDI screening.
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