Update on the new EU foreign direct investment screening framework

• Europe

• Competition, EU and Trade - Foreign investment regimes

12-10-2020

EU countries expand or introduce new foreign investment screening regimes as EU-wide foreign investment screening regime becomes fully applicable.

On 11 October 2020, following an 18 month implementation period, the EU regulation establishing a European screening mechanism for foreign direct investment (“FDI”) (the “Regulation”) became fully applicable in each EU Member State and the cooperation mechanism envisaged by the Regulation is now operational. This means that (i) a Member State must now notify the European Commission (“Commission”) and the other Member States of any FDI transaction in their territory that is undergoing screening; and (ii) the Commission and Member States can intervene in relation to transactions which affect Member States’ security or public order (whether or not these are being, or have been, screened).

The new regime is a step change from the EU’s historically more relaxed attitude to FDI and follows significant recent, as well as forthcoming, expansion of domestic FDI regimes in key Member States, for example in France, Germany, Italy and Spain as well as in the UK.

The new regime is not limited to any specific sectors or size of transaction and enables interventions on grounds of security and public order - it is therefore most likely to affect transactions related to, for example, critical infrastructure, critical technologies or critical inputs of a Member State. However, what is regarded as critical infrastructure, critical technologies or critical inputs covers a broad range of sectors and activities covering everything from media to energy to health to companies holding personal data and to those involved in the food supply chain (and many more). As such, the EU-wide regime has potentially wide application and its impact can already be seen from the large number of Member States introducing new FDI regimes or updating pre-existing regimes.

With the European Commission actively encouraging the use of FDI screening to protect EU businesses and assets during the COVID-19 pandemic, it is more important than ever for companies to consider FDI regimes in M&A deals at an early stage in the process, in order to manage and mitigate the impact of FDI screening on the substance and timing of a transaction.

The Regulation’s impact on FDI screening in the EU: Eversheds Sutherland research

A key objective of the Regulation was to encourage more FDI protections at Member State level and to ensure minimum standards for national FDI regimes across the EU. The COVID-19 crisis has led to a substantially greater focus on Member States’ screening of FDI with the Commission explicitly encouraging Member States to use existing domestic FDI regimes or, in the absence of these, “all other available options” to guard against opportunistic foreign takeovers in healthcare and other sectors^[1].

Research carried out by Eversheds Sutherland shows that the Regulation and the Commission’s ‘call to arms’ has had a galvanising effect on Member States’ efforts to expand existing FDI regimes or implement new screening mechanisms.

Prior to 19 March 2019, when the Regulation was adopted, 13 of the 27 Member States did not have an FDI regime. Our research shows that as of today, 24 of the 27 Member States either have domestic FDI regimes or are in the process of implementing new regimes: 15 Member States including France, Germany, Italy and Spain have domestic FDI regimes in place^[2] and a further nine are taking steps towards implementation. While three Member States have not taken steps towards implementing their own domestic regimes, as with all Member States, the Regulation will apply automatically in these jurisdictions in any event.

In addition, according to our research, of the 15 Member States with fully operational regimes, 13 have expanded their regimes and one has established a new regime since the Regulation was adopted^[3].

Table One: Impact of the Regulation on domestic Member State FDI regimes

New cooperation mechanism takes effect

From the 11 October 2020, the Regulation is directly applicable in all Member States. This means that the minimum standards for FDI screening and the cooperation obligations set out in the Regulation are now considered part of Member States’ domestic law – whether or not they have been specifically implemented through domestic legislation.

Pursuant to the Regulation, a Member State must now notify the Commission and the other Member States of any FDI transaction in their territory that is undergoing FDI screening. The following information must be provided: (i) who the investor and target company are; (ii) in which sectors and where they operate; (iii) the value of the investment and where the funding is coming from; and (iv) when the transaction is due to take place. This information must be exchanged securely between Member State and Commission ‘contact points’ set up expressly for the purposes of the Regulation.

The final decision on whether or not to allow the foreign investment remains with the Member State undertaking the screening. However, the new regime will enable the European Commission to assess and issue opinions on foreign investment which has an impact on the security or public order of multiple Member States. Similarly, a Member State can also provide comments on a foreign investment being undertaken in another Member State if it considers that the foreign investment is likely to affect its own security or public order (or if the Member State has information relevant for such screening). The Member State undertaking the screening must then give due consideration to (or take utmost account of in certain circumstances) the comments of other Member States and / or the Commission’s opinion, before coming to a decision pursuant to its domestic rules.

The Commission is now also able to intervene and issue opinions regarding transactions (including completed transactions) of its own initiative, even where these were not initially notified by a Member State. In some instances, this  is likely to prompt Member States to review deals they would not have otherwise considered.

EU FDI screening – what does it mean in practice?

New separate process

The new EU regime is entirely separate from the merger control process and is not in and of itself a new filing requirement for merging parties. Rather, it makes it mandatory for Member States which are screening transactions under their own national foreign investment rules to notify the Commission and the other Member States that they are doing so. 

No thresholds and no excluded sectors

The Regulation captures investments of any kind made by a foreign investor aiming to establish or maintain lasting and direct links with the relevant entrepreneur or undertaking in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity. Significantly, there are no threshold tests (e.g. value of investment or share acquisition percentage) for transactions and the Regulation is not limited to certain sectors.

As noted above, interventions under the Regulation are limited to transactions which are likely to affect Member State security or public order. However, the types of transactions which are most likely to be caught are broad and cover:

• critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
• critical technologies and dual-use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;
• supply of critical inputs, including energy or raw materials, as well as food security;
• access to sensitive information, including personal data, or the ability to control such information; or
• the freedom and pluralism of the media.

It is also important to note that while the Regulation itself does not impose any threshold tests or sector exclusions, Member State domestic screening regimes can and do impose these.

Scope for completed transactions to be reviewed

Importantly, Member States may provide comments and the Commission may provide an opinion for up to 15 months after the foreign investment has been completed. In practice, this means that a foreign investment completed in, for example, March 2020 already falls under the Regulation and could now be subject to ex post comments by Member States or opinions by the Commission until June 2021.

Timing for interventions pursuant to the Regulation

At a high level, for transactions undergoing screening in a Member State, the Regulation envisages that other Member States should provide comments within 35 calendar days of being notified of the investment. The Commission may issue an opinion following comments from other Member States where possible within the deadline of 35 calendar days, and in any case no later than 5 calendar days after this deadline expires.

For transactions not undergoing screening, comments or opinions must be addressed to the Member State where the foreign direct investment is planned or has been completed within a reasonable period of time, and in any case no later than 35 calendar days following receipt of the requested information. In cases where the opinion of the Commission follows comments from other Member States, the Commission has an additional 15 calendar days for issuing that opinion.

Our comment

The EU FDI landscape has recently seen significant expansion to domestic regimes in some of the major Member States, such as Germany and France, and new regimes or powers have come on stream in Spain and Italy during the COVID crisis. A separate, but related, piece of the European FDI equation is the expanded UK regime, which is expected to be introduced before the UK Parliament shortly.

Our research further shows that the Regulation, and the Commission’s broader ‘call to arms’ on FDI, have resulted in an even larger number of Member States implementing or updating their FDI screening mechanisms. These developments, combined with the sector-agnostic nature of the Regulation suggest that it will impact an increasing number and variety of transactions going forward, particularly given the lack of thresholds set by the Regulation.

Whilst the Commission does not have binding decision making powers, it is likely to wield significant influence on Member State authorities. Although it remains to be seen how in-depth its investigations and opinions will be, it is clear that there is scope for the Commission to add a significant additional burden on both Member States and merging parties.

Interestingly, the Commission, much like the UK’s Competition and Markets Authority, will now be able to intervene in transactions post-closing. This raises a spectre of uncertainty for merging parties which may be unwelcome in some quarters with companies seeking assurances from their legal teams. The Commission will be able to ask Member States for information on, and issue opinions in respect of, completed transactions which had not undergone screening but which it considers affect Member States’ security or public order. Other Member States will be able to issue comments on completed deals on the same basis. This may prompt Member States to consider/reconsider transactions which they would have otherwise left alone and will almost certainly increase interventions in transactions across the EU.

From a practical perspective, the new EU regime raises a number of questions for companies involved in transactions across a wide range of sectors. For these transactions parties will need to consider potential EU and national intervention at the earliest stages of transaction planning. This includes considering how to engage pro-actively with Governments and regulators. This is likely to add another layer of complexity and work into transactions of all sizes, creating greater uncertainty for deal timetable and increasing the importance of appropriately drafted conditions precedent and cooperation provisions in transaction documents. The lack of financial thresholds both at EU level and in a number of Member States means that even small transactions or investments could receive significant scrutiny.  

^[1] See the Commission’s FDI COVID guidelines. COVID-related changes have since been introduced in a number of Member States, including France, Germany, Italy and Spain.

^[2] The Regulation requires the Commission to maintain a registry of domestic screening laws; see the "List of screening mechanisms notified by Member States".

^[3] Note that in some cases, these changes are yet to come into force.

^[4] Our research indicates that only one Member State, Portugal, which had a pre-existing FDI regime, has not taken steps to expand its regime since the Regulation was adopted.