The European Commission (the “Commission”) issued a White Paper on Outbound Investments (the “White Paper”) on 24 January 2024, setting out non-binding proposals for a detailed analysis of EU outbound investment. With its initiative, the Commission aims to understand whether the current limited regulation in the area of outbound investments is allowing leakage of strategic technologies and leading to potential risks to security. The conclusions of any review would inform possible EU policy responses, including whether to adopt EU-level rules regarding the screening of outbound investment to third countries. The White Paper is one of five initiatives set out in the Commission’s European Economic Security Package (the “EESP”) that aim to address the national security and public order concerns that the Commission has identified (see our Global Policy Watch blog).

In this blogpost, we discuss the key aspects of the outbound investment White Paper at the EU level. These are the main takeaways:

• The White Paper does not introduce any immediate change to legislation or create an EU- level outbound investment screening framework, but is a step towards the EU identifying whether (and what) legislation may be necessary to close perceived ‘gaps’ in regulation that permit outbound investments made by EU businesses which could lead to potential security risks.
• The White Paper envisages a joint effort by the Commission and Member States to explore the need to regulate and control outbound investment, prompted by the Commission’s perception of growing geopolitical tensions and technological shifts.
• The Commission suggests a multi-stage process to evaluate risks potentially associated with outbound investments. This process began with a consultation (following the White Paper’s publication) followed by a monitoring period. Based on the findings of both the public consultation and monitoring, the Commission will assess the need and possible content of any policy response in Autumn 2025.

Context and background of the White Paper

The White Paper published by the Commission is part of a global trend towards greater scrutiny of cross-border investments, which has created a wide geographic patchwork of inbound foreign investment controls and, more recently, included moves to strengthen the tools available to countries to review outbound investments. As part of the Atlantic Declaration in June 2023, the USA and UK committed to taking steps to address security risks posed by certain types of outbound investment, with the UK initiating consultations with industry, and the USA shortly thereafter publishing a detailed proposal for outbound investment review in an Executive Order and subsequent Advance Notice of Proposed Rule Making, which we discussed in our blogpost “U.S. Launches Outbound Investment Screening Targeting China with Further Developments Forthcoming”. The US Treasury Department is expected to publish a proposed Final Rule as soon as early 2024.

The Commission’s plans to introduce screening powers for outbound investments were first announced as part of the European Economic Security Strategy (the “EESS”) in June 2023. The Commission indicated its concerns about ‘leakage’ of sensitive EU-developed technologies that could be used by actors in third countries in order to develop adverse military and intelligence capabilities which could threaten international peace and security; or the potential for risks and vulnerabilities to emerge in technology supply chains and ecosystems for critical technology. Following the adoption of the EESS, the Commission formed an Expert Group on Outbound Investment (the “Expert Group”) combining expertise from the Commission and Member States. The initial findings of the Expert Group suggested that (i) there was a significant knowledge gap concerning the outbound investments made by EU investors, and (ii) that, since many Member States do not systematically review outbound investments for security purposes, some risks might be overlooked.

Proposals under the White Paper

The White Paper proposes a three-step analysis of outbound investments to understand whether, and to what extent, they could pose a risk to European security:

1. A three-month stakeholder consultation on the proposed monitoring and review of certain outbound investments, which will be concluded by a Commission Recommendation to Member States to launch the monitoring and review of outbound investments in Summer 2024;
2. A twelve-month monitoring stage during which the Member States will monitor and review relevant outbound investments; and
3. In Autumn 2025, the publication of the Commission’s assessment of whether it considers a policy response warranted, including potential options for regulation.

The White Paper proposes monitoring a broad range of outbound investments and invites interested parties to comment on its key aspects:

• Focus on key technologies. The Commission proposes an initial focus on advanced semiconductors, artificial intelligence, quantum technologies, and biotechnologies. These are the technologies that were identified in the October 2023 Council Recommendation as representing the most sensitive and immediate risks of technology security and leakage;
• Wide range of transactions in scope. The Commission proposes the monitoring of a wide range of transactions by EU investors, including direct investments which would result in economic activity being conducted outside the EU, such as through mergers, acquisitions, asset transfers, joint ventures, or venture capital transactions. The proposed monitoring would also cover indirect investments made by EU investors, for example when conducted through a third-country investment vehicle;
• Possible monitoring of cooperation, R&D and recruitment activities. The Commission invites comments on whether it should recommend monitoring of further activities (such as research and development cooperations including with academic institutions; activities to attract highly specialised personnel; or activities that result in access to intellectual property) in the four critical technology areas that it perceives as being potentially sensitive;
• Geographical coverage. The Commission suggests that Member States should prioritise their monitoring based on their assessment of risk profiles of certain countries. While the White Paper does not exclude or suggest specific countries, it recommends evaluating the risk profiles of certain countries based on, for example, past violations of the UN Charter, or the possibility of technologies being used in war or conflict situations, for human rights’ breaches, or to facilitate the creation of weapons of mass destruction;
• Information to be gathered. The White Paper suggests that the minimum information to be captured should include the transaction parties and their ultimate owners, the type and value of the investment, the products, services and business operations involved that relate to critical technologies, the date of planned or actual completion of the investment, and information about previous or contemplated future transactions; and
• Monitoring tools to be used. Member States would be required to have adequate monitoring tools in place. Where this is not the case, Member States should consider adapting existing tools or introducing new tools. In that context, the White Paper invites comments on the tools that might be needed for effective monitoring, their feasibility, and how to balance the burden related to the information gathering.

Comments on the White Paper

The White Paper marks a major step towards outbound investment regulation in the EU. While certain Member States, such as Austria, Germany, and Spain, already have instruments in place that allow for a limited degree of outbound investment monitoring, there is presently no consistent EU-wide approach. The Commission rightly acknowledges the sensitivity and complexity of any potential step towards comprehensive or sectoral regulation of outbound investments. While the Commission’s proposal can be seen as a cautious step, there are many questions which remain to be answered – including whether any security risk is revealed by the monitoring, and whether outbound investment regulation is the appropriate tool to address any concerns.

Covington will continue to monitor these important developments. In the meantime, if you have any questions concerning the material discussed in this blog, please contact the members of our FDI and public policy practices.