On October 11, 2020, the EU FDI Screening Regulation (EU) 2019/452 – the “Regulation”) entered fully into force.

The Regulation, which was approved and adopted in March 2019, establishes a framework for the screening of foreign direct investments (“FDI”) by EU Member States in which decision-making powers rest at the Member State level. Significantly, from October 11, an element of EU-level cooperation in FDI is introduced and in particular will bring into effect (i) regular information sharing among Member States and the European Commission about transactions subject to national FDI screening, and (ii) a mechanism through which other Member States and the European Commission can coordinate and comment on FDI that has an “EU-dimension”.

In this blogpost, we look at the overall status of national measures in FDI at this juncture and describe in overview the EU-level cooperation and information sharing mechanisms.

National investment screening mechanisms

While the Regulation does not require Member States to introduce their own screening mechanism at a national level, the European Commission has recommended that all Member States do so – and particularly encouraged this in the context of the COVID-19 pandemic (see our earlier alert and blog post). Accordingly, and in order to fully implement the Regulation, Member State laws have been (or are being) adapted to allow local regulators to take account of national security concerns of other Member States.

Fifteen Member States – Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Romania, Spain and Slovenia (and Norway and the United Kingdom) – currently have national investment screening mechanisms in place. Several other Member States are in the course of reforming their FDI laws or adopting new FDI screening measures.

Upfront FDI filing analysis becomes crucial – further Member State developments ahead

The FDI landscape in the EU has therefore been very dynamic in recent months and changes continue at pace. Many Member States have introduced mandatory filing requirements with standstill obligations until clearance is received.  Often these filing obligations are triggered at very low thresholds. These FDI filing requirements are so significant and varied that FDI has become a key issue to consider upfront in M&A transactions involving foreign investors – and at the same importance as the merger control filing analysis.. In addition to adopting new long-term measures in FDI screening, several Member States (such as France, Germany, Italy and Spain) adopted emergency measures related to COVID-19, and some of which have temporary application (until the end of the calendar year or for the duration of the pandemic).

FDI laws are also proving not to be settled once adopted, with a range of Member States having reviewed applicable thresholds or revisited sectoral definitions in recent months. Looking ahead in the short term, Germany, Finland, and the Netherlands are examples of countries planning to change their rules for these, or similar reasons, within the coming months.

A number of Member States are also amending existing FDI regimes simply to accommodate EU coordination on FDI. The Romanian Competition Council, for example, has recently published new draft legislation aimed to tighten the existing FDI screening rules and implement the requirements under the Regulation. And, on October 7, 2020, the German Federal Ministry for Economic Affairs and Energy (“BMWi”) announced that the Federal Cabinet has approved an amendment to the German Foreign Trade and Payments Ordinance (“AWV”) enabling Germany’s participation in the EU-level cooperation and information-sharing activities under the Regulation and establishing the BMWi as Germany’s primary contact for purposes of the Regulation.

Several countries that currently have not yet notified an FDI regime to the EU Commission have also reported working on adopting FDI screening mechanisms, such as Belgium, Ireland, Sweden, Slovakia, and Czech Republic (and Switzerland). On April 6, 2020, the Czech Government approved a bill of a new act that aims to strengthen the control of foreign direct investments in the Czech Republic – the Act on Foreign Investment Control and Amendments of Related Legislation. This proposed new law remains subject to debate in both chambers of the Czech Parliament and is currently anticipated to be adopted during October 2020.

UK on a substantially separate path for FDI

We have noted previously that, with Brexit pending, the UK will not be a participant in the EU-level cooperation and information sharing in FDI – in particular, following a Commission decision taken in June 2020 not to treat the UK as a Member State for the purposes of the relevant parts of the Regulation. As such, the UK is already substantially on its own path in terms of regulating FDI and also is poised to update its FDI regime in the coming months, through which it is expected that the UK may introduce requirements for mandatory FDI filings (at least in critical areas) for the first time.

From the perspective of the EU Member States, investors who are nationals of the UK, or registered legal entities in the UK, will also typically become “foreign” in FDI terms as from the end of the Brexit transition period – expected to end on December 31, 2020. Under many of the Member State laws, FDI screening is applied only, or is applied at different (typically lower) thresholds, to any investor that is a Non-EU or a Non-EEA investor. The exception to this is Poland, which has chosen to exempt all OECD investors from its FDI filing and screening requirements.

EU-level information-sharing and coordination

The EU-level cooperation in FDI that that has effect as from October 11 has two elements – (i) routine information sharing between the Member States and the Commission and (ii) coordination and comment on transactions with an “EU-dimension”. The Commission published a helpful Memo providing information on “Frequently asked questions” clarifying that the obligation of a Member State to notify FDI undergoing screening within the new cooperation mechanism applies to transactions where the decision to screen is taken by the Member States (i.e. the national procedure is started) on, or after, October 11. This means that screening procedures that are pre-existing and currently in progress are not to be notified to the Commission / other Member States.

For investors, these measures potentially introduce additional interested parties and another layer of procedure, as well as wider sharing of transaction information.

Information Sharing

As a matter of routine, under Articles 6(1) and 9(2) of the Regulation, Member States are now required to supply to the European Commission and all other Member States an outline of each transaction undergoing screening under national FDI laws. The information is to be supplied as soon as possible and comprise details about the FDI comprising:

  • the ownership structure of the foreign investor and target;
  • the approximate value of the foreign direct investment;
  • the products, services and business operations of the foreign investor and target;
  • the Member States in which the foreign investor and the target conduct relevant business operations;
  • the funding of the investment and its source; and
  • the date for the investment.

It is also possible for the recipient Member States and/or the European Commission to request additional information regarding the proposed FDI.

For the benefit of investors, the Regulation confirms that such information as is shared among Member States concerning FDI is to be treated confidentially by the recipient Member States and the European Commission. Such information is also only to be processed for the purpose for which it was provided.

Coordination on FDI with an “EU-dimension”

Where FDI has an “EU-dimension”, there are provisions to enable other Member States and the Commission to comment on an FDI subject to screening in a Member State. An FDI has an “EU dimension” if: (i) it is subject to screening in more than one Member State; and/or (ii) the European Commission believes it holds relevant information concerning the FDI.

Very broadly, a Member State will have a 15 calendar day period (from receipt of the information outlined above) in which to inform the notifying Member State that it wishes to comment on an FDI on-going in that Member State. Those comments must then be delivered to the notifying Member State within 35 calendar days. If the European Commission wishes to provide its opinion on an FDI on-going in a Member State then similar time periods will apply. In addition, the Commission will have a right to provide an opinion on an FDI occurring in any one or more Member States where the target of the FDI has received funding from certain EU-level programmes, such as Galileo, EGNOS, Copernicus and Horizon 2020 (among others). All comments and opinions rendered in the FDI screening process are strictly confidential and hence will not published.

Added to this and enhancing the reciprocal nature of exchange in FDI, a Member State where an FDI screening is taking place can also request comments/opinions from other Member States and the European Commission in respect of the proposed investment before rendering its domestic decision. And Member States and the Commission are able to write to another Member State with comments or an opinion (as applicable) regarding an FDI screening even if the screening of that transaction is not subject to screening under the laws of that other Member State.

It is yet to be seen, of course, how the Member States and the European Commission will apply in practice the new coordination measures for FDI review.  There is evident complexity here for investors, in particular if it is considered that a “stop-the-clock” mechanism will apply where further information is requested by a Member State or the Commission in order to fully understand the nature of a proposed FDI. Member States are also not prevented from acting more quickly to address an FDI and therefore need not wait for anticipated views of the European Commission or another Member State if national security or public order is considered to be urgently at risk.

Member States have the last word

On receipt of comments on an FDI from another Member State or an opinion from the European Commission concerning an FDI, a Member State is expected to give “due consideration” to those views expressed. If the Commission’s opinion concerns a target in receipt of funding from an EU programme, then its views must be given “utmost regard” by the recipient Member State. A Member State will also need to explain if they do not follow the opinion of the Commission, in either instance.

Nevertheless, each Member State will make the final decision on whether or not an FDI should be allowed in its territory and, if so, under which conditions.

Conclusion

This EU-wide cooperation mechanism now in force will allow the Commission and Member States to trace the pan-EU investment behavior / strategy of foreign investors – a tool that has been much sought after by many FDI regulators.

Since its adoption in March 2019, the Regulation has caused many Member States to introduce new or tighten existing FDI regimes. This alone has brought significant changes in the EU FDI landscape. In addition, the cooperation mechanism established by the Regulation has the potential to render FDI screenings more complex and time-consuming. However, for the vast majority of matters we do not foresee significant effects –

  • first, we understand the Commission will use the new mechanism with caution and will provide an opinion only in respect of significant matters and where it has important issues to address; and
  • second, because the activities of the target company may vary considerably in scope and FDI relevance in each of the Member States so that aspects that are relevant in one Member State may not necessarily be relevant in others and hence do not solicit a comment.

We note however, that the introduction of new tools have often proven to develop their own specific dynamics within the EU. Thus, it will have to been seen how the Commission and the Member States will deal with this new instrument in practice. The Commission will evaluate the functioning and effectiveness of the Regulation and present a report to the European Parliament and to the Council by 12 October 2023 and then every five years.