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European Commission publishes second annual FDI screening report reflecting first full year in operation

  • United Kingdom
  • Europe
  • Competition, EU and Trade - Foreign investment regimes
  • Corporate
  • Mergers and acquisitions


Executive Summary

On 2 September 2022 the European Commission (the “Commission”) released its second annual report (“Second FDI Report”) on the operation of the new FDI investment screening mechanism (the “FDI Mechanism”), which came into force on 11 October 2020. The report covers FDI into the single market in 2021, and follows the first annual report (“First FDI Report”), which was published in December 2021.

Foreign Direct Investment (FDI)

FDI screening continues to be done at Member State level, with the majority of Member States now having a screening mechanism in place or being developed. The FDI Mechanism does not require an additional notification or screening regime, but formalises EU-level cooperation across the separate regimes. The Commission can issue an opinion in respect of a given transaction, but does not have the power to formally intervene or prohibit a transaction itself.

Under the FDI Mechanism, all transactions notified by Member States are reviewed at Phase 1, with those of most concern proceeding to Phase 2. This involves a more detailed assessment of cases that could affect security or public order in more than one Member State, or be a risk to projects of Union interest.

Key Takeaways

Most notifications were not notified to the FDI Mechanism, but the total is still significant.

A total of 1,563 requests for authorisations were made to national authorities in 2021. Of these, just over 450 were reviewed at Member State level (or 29%, up from 20% in 2020) and 414 were notified to the FDI Mechanism by 13 Member States.

Of these, the vast majority were closed following Phase 1 review, with only 11% proceeding to Phase 2 with additional information being requested from the notifying Member State.

However, opinions were issued by the Commission in less than 3% of all cases notified (and only where there was significant investor risk linked to a critical target). This compares to 7% which were either prohibited by Member States, or approved with conditions. Therefore, investors face most risk at the Member State level; where a filing is made under a Member State’s regime, the deal is unlikely to be subject to additional commentary from the Commission.

In contrast, of 396 decisions issued by the Commission under the EU Merger Regulation (“EUMR”) over the same period, 97% were cleared at Phase 1 (78% under the simplified procedure, and 19% under the non-simplified procedure). Only 3% were reviewed at Phase 2, and interventions were imposed in each case.

No surprises on sectors of concern

The top three sectors subject to a Phase 2 review were manufacturing (44%), ICT (32%) and financial activities (10%). Within manufacturing, defence, energy, aerospace and semiconductors made up 84% of all investments subject to Phase 2 review, with pharmaceuticals also making up a number of reviews. This is broadly in line with investments notified for Phase 1 review, although wholesale and retail activities and construction also featured.

Foreign investment regimes at Member State level tend to focus on areas of most concern to national security. Key themes include advanced technologies (such as cybersecurity and quantum computing), critical infrastructure (physical and virtual, such as transport systems, utilities and financial systems) and defence. It is no surprise that investments in manufacturing of these sectors was most frequently reviewed, nor that ICT and financial activities were also of interest. It is also no surprise that investments in sectors such as wholesale and retail were resolved at Phase 1; whilst Member States want to protect consumer access to certain goods (such as groceries), this is not the main focus of most regimes.

The usual suspects have been most active

Of the 414 transactions notified to the FDI Mechanism, five were responsible for over 85% of these notifications. These were Austria, France, Germany, Italy and Spain, reflecting the Member States with the most established, and often broadest, regimes. This will come as no surprise to investors who have considered the need to file, as these jurisdictions and where there is most concern around FDI filings and approvals.

“Friendly” countries do not escape review

Of investments notified to the FDI Mechanism, the five main countries of origin were the US, the UK, China, the Cayman Islands and Canada. Russia accounted for only 1.5%, with Belarus accounting for 0.2%.

Whilst this broadly aligns with the investor origin for investment overall, China did not feature in the top five for total number of acquisitions (although it did invest more heavily in greenfield projects). This indicates investments originating from China are more likely than average to raise concerns and be subject to further review, whilst investment from countries such as Switzerland are less likely to be reviewed.

Also worth noting is the number of large number of reviews of investments originating from the UK post-Brexit. The country of origin is often only considered if a review is launched, rather than as a criteria of whether to file. Whilst investors from some countries may be considered to pose lower risks than others, this will not exclude them from the review process. UK businesses used to hassle-free investming in the EU must bear in mind that investments in sensitive sectors may require a filing. In these cases, additional time will need to be built into the deal timeline.

National FDI screening regimes continue to gain momentum

As of June 2022, 25 out of 27 Member States either have an FDI screening mechanism, or are considering, planning or in the process of adopting one. Only Bulgaria and Cyprus are not considering introducing one.

In 2021, seven Member States (Belgium, Croatia, Estonia, Greece, Ireland, Luxembourg and Sweden) initiated consultative or legislative processes to establish a national screening mechanisms. A further three Member States adopted new national screening mechanisms, and six Member States amended their existing regimes in line with the areas of concern in the FDI Mechanism.

Deals of all sizes may be reviewed

Many national screening regimes have no value threshold for a deal to fall within scope. When categorised by value, the single largest group of investments notified to the FDI Mechanism were over €500 million (34%). However, deals of all values have been reviewed, including less than €10 million. Investors should not assume that small deals are less likely to be reviewed.

Inbound FDI into the EU has yet to rebound following the COVID-19 pandemic

As the global economy recovers from the COVID-19 pandemic, the EU received €117 billion of inward FDI in 2021 (down from €362 billion in 2019, and €170 billion in 2020). As well as the impact of the pandemic, the decrease was driven by reduced investment in key economics such as Ireland, Germany and Luxembourg, and disinvestments in the Netherlands. Globally, FDI returned to above 2019 levels, but this growth has yet to extend to the EU.

As the FDI Mechanism was not in force prior to the pandemic, it is hard to predict how screening activity will change if FDI recovers to 2019 levels. However, as national screening mechanisms usually look at the sector of the investment, the proportion of transactions reviewed is likely to remain fairly consistent unless the existence of screening mechanisms pushes investors into less scrutinised sectors.

National regimes are most likely to delay transactions

At Phase 1 under the FDI Mechanism, most deals were assessed within the prescribed 15 days.

Where deals were referred to Phase 2 under the FDI Mechanism, Member States on average provided the requested information in 22 days (although this range from 3 to 101 days). This compared to 31 days in the period of the First FDI Report, indicating Member States are now familiar with the FDI Mechanism and how to use it alongside their national regimes.

As obtaining FDI approvals can take one to two months even in straightforward cases (and longer where the transaction causes concerns), the FDI Mechanism should not impact deal timelines beyond what has already been accounted for to file under national regimes.

Lessons for Businesses

The findings from the Second FDI Report are broadly in line with those from the First FDI Report, and do not present any surprises. The recent trend of ever increasing FDI regimes across the EU continues, and whilst the FDI Mechanism suggests certain key sectors to screen, there continues to be significant variation across the EU. This applies to sectors of concern and substantive impact, but also to trigger events and timelines. Businesses should also bear in mind that filings under foreign investment regimes are more likely to be reviewed at Phase 2 than the equivalent under the EUMR, although the majority are then approved subject to conditions rather than being prohibited outright. Phase 1 reviews in FDI regimes may also be more involved than under the EUMR, as many jurisdictions will screen the filing prior to advancing it to Phase 1 review, rather than treating this initial screening as Phase 1.

Foreign investors investing within the EU should seriously consider the proposed target, and whether any filings are required. Based on the Second FDI Report, there are unlikely to be surprises. Whilst a large number of transactions will continue to be reviewed, most deals likely to concern Member States can be identified during the preparation and due diligence stage. Careful deal preparation and timetabling can minimise the risk of delays, and FDI approvals can often be received in a similar timeframe as merger control approvals.

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