European Commission reinforces FDI screening regulation

• proposed reforms to strengthen the EU FDI Screening Regulation, first introduced in October 2020 (the “FDI Regulation”); and
• a number of white papers relating to potential new measures to protect EU interests in the global economy, namely an EU outbound investment regime, a common approach to export control of dual-use technologies, and options for enhancing EU support for R&D involving technologies with dual-use potential. The Package also includes a recommendation for enhancing research security.

Comment

The introduction of an EU outbound investment regime has attracted interest in recent months. Whilst this Package does discuss such a regime, it is clear that the EU is still some way off (arguably similar to the current approach being taken by the US).

The proposed changes to the FDI regime are likely to have a more immediate impact on M&A across Europe once brought into effect. Whilst the changes are more procedural than substantive, they do reflect the importance that the Commission attaches to the FDI Regulation and a desire to ensure that all Member States are screening FDI and doing so in a similar and coordinated manner.

The introduction of the Package is particularly significant against the backdrop of instability arising from global conflicts and geopolitical tension, as well as the rapid advancement in technologies, and will have knock-on impacts for businesses investing in, and trading from and with the EU.

What are the key takeaways from the FDI Proposal?

The FDI Regulation was introduced in 2020 to encourage cooperation and coordination between Member States on foreign investment, and to encourage Member States to adopt national screening mechanisms (unlike merger control, there is no ‘one-stop shop’ for EU foreign investment regulation).

Three years on, various consultations and reviews have identified shortcomings in the FDI Regulation/EU approach, including a lack of harmonisation between Member State regimes, and issues with the cooperation procedures. The proposal issued on 24 January 2024 (the “FDI Proposal”) is designed to remedy this.

The key elements of the FDI Proposal are as follows:

• Member States must put in place FDI screening mechanisms within 15 months of the amended Regulation entering into force, which adhere to certain minimum requirements (e.g. they must screen transactions pre-completion, they must protect confidential information and engage due process rules, amongst other matters);
• Regimes must screen investments in certain critical sectors e.g. semiconductors, AI, critical medicine, dual-use and military items;
• Enhanced provisions relating to coordination and cooperation between Member States and the Commission;
• Introduction of an own initiative procedure enabling Member States and/or the Commission to open their own investigation in certain circumstances, within 15 months after the foreign investment has been completed; and
• In multi-jurisdictional transactions, foreign investors will be required to file all Member State FDI notifications on the same day, with each referencing the other Member States involved. The FDI proposal does not, however, impose a uniform deadline for Member States to issue their screening decision.
• The FDI Proposal also confirms that the regime covers both direct investment by foreign entities and indirect investments by foreign entities through ownership of EU entities , as well as investments which establish or maintain a lasting economic link between a foreign investor and an EU target, which includes greenfield investments.

What does this mean for investors?

Increased cooperation between Member States and the Commission is likely to reduce the risk of what the Commission refers to as ‘risky transactions’ slipping through the cracks, but will also hopefully ensure that the focus is on those cases which present the highest risks to EU security.

From an M&A perspective, a specific list of security critical areas is helpful to understand where filings will be required. In terms of deal timetables, as referred to above, while the FDI Proposal requires that all EU-related FDI filings are filed on the same day, there is no requirement for Member States to issue decisions on the same deadline, and each regime will continue to run to its own timelines. As such, timelines to approval may still vary from jurisdiction to jurisdiction.

In terms of timing, the FDI Proposal will need to be approved by the European Parliament and the Council of the EU. This process may be delayed given the upcoming European Parliamentary elections in June.

Tentative steps towards a new outbound investment screening regime?

The European Security Package includes a White Paper on outbound investments to address concerns that, when EU companies invest in non-EU countries, sensitive technologies and know-how could end up in the wrong hands and could be used to strengthen military and intelligence capabilities risking EU security. The EU is not the first jurisdiction to consider introducing an outbound investment regime; regimes already exist in China and Japan, and the US is in the process of adopting its own screening regime. Please see our previous briefing.

The white paper includes a road map to Autumn 2025 to enable the Commission to determine if the potential risks from outbound investments merit any policy action, starting with a 12-week public consultation on the proposals in the White Paper.

Member States are asked to conduct a monitoring exercise to review outbound investments from 1 January 2019 onwards involving semiconductors, AI, quantum technologies and biotechnologies. The Commission has not identified specific countries of focus, but has suggested that Member States prioritise “countries where the possibility of the sensitive technologies being used in war or conflict situations, for breaches of human rights or to enable the proliferation of weapons of mass destruction is higher, based on the past behaviour of the country concerned”.

Although the Commission has tabled an EU outbound investment screening regime, there is still a long way to go before it could be introduced.

A common approach to export controls of dual-use technologies

The Package also includes a White Paper on export controls concerning dual-use technologies which impact the EU’s security, with the aim of further revising the EU Dual-Use Regulation to take into account:

• rapid technological developments;
• the changing global context for export controls, particularly in light of Russia’s war of aggression against Ukraine;
• the increased use of unilateral export controls internationally (e.g. US in 2022, and Japan and China separately in 2023); and
• the fact that the EU does not have the necessary legal provisions to adopt EU-level uniform export controls, independently from those adopted in multilateral regimes (except in very limited areas).

The proposed amendments aim to enable more rapid and coordinated action, and tighten coordination between Member States and the Commission, either through:

• the expansion of Annex I to the EU’s Dual-Use Regulation; or
• through the introduction of a Commission delegated act.

New research and innovation initiatives

The Package also includes two proposals related to research and innovation:

• A White Paper for enhancing support for R&D for technologies with dual-use potential. The Commission is seeking feedback on the level of EU support needed in this space, with the aim of exploring options to improve integration of civil and defence technologies across the EU. The public consultation on the White Paper closes on 30 April 2024.
• A Recommendation relating to international cooperation in research, which sets out a number of core principles for Member States designed to ensure research security within the EU and to manage potential risks e.g. undesirable transfer of critical technology, malign influence on research, etc. Once adopted, Member States will have 9 months to establish a policy framework for research security.