On 11 October 2020, Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union (the "FDI Regulation") became fully applicable. In the 18 months since the FDI Regulation was enacted, the Regulation and the European Commission's ("Commission") guidance have influenced FDI screening regimes across the EU.
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- As of 14 October 2020, 15 EU Member States (plus the UK) have implemented FDI screening mechanisms.
- From 11 October 2020, Member States that have implemented screening mechanisms are bound by the minimum standards set out in the FDI Regulation and are required to participate in an EU cooperation mechanism. The FDI Regulation also sets out certain non-exhaustive criteria Member States can take into account when assessing an investment.
- However, there is relatively low regulatory convergence at this stage of development of the EU FDI screening system and some regimes remain opaque to international investors. Investors should nevertheless be mindful of the potentially severe consequences of failing to notify an investment in a Member State.
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Background and the FDI Regulation
Under the FDI Regulation, from 19 March 2019, Member States were required to notify FDI screening mechanisms, or any modifications thereto, to the Commission. The Commission maintains a directory of these regimes. As at 27 October 2020, 16 jurisdictions (including the UK) had notified some form of FDI screening mechanism. A number of these have undergone amendments in recent months, typically to enhance scrutiny of transactions potentially posing a risk to critical health infrastructure, the supply of critical inputs and other critical sectors as a result of the COVID-19 pandemic.
From 11 October 2020, national FDI screening mechanisms in EU Member States must comply with certain minimum standards, relating to transparency, non-discriminatory rules and procedures, explicit timeframes and review procedures (see our previous summary here). The FDI Regulation also sets out a non-exhaustive list of criteria the Commission and Member States may take into account in determining whether FDI is likely to affect security or public order.
Member States that have implemented FDI screening mechanisms must also participate in an EU cooperation mechanism. Member States retain the final say on whether to approve an investment, but are required to provide the Commission and other Member States with information on ongoing screening. The Commission and other Member States are able to provide opinions and comments on the relevant investment, to which the host Member State must give due consideration.
Early stages
However, the decentralised EU screening system is still in its early stages and presents a low degree of regulatory convergence. Certain national regimes remain opaque to international investors and there is often scarce precedent to rely on to interpret their provisions.
Nevertheless, investors have an incentive to dedicate time and attention to this issue as, although the FDI Regulation itself does not give the Commission or Member States the power to block (or permit) foreign acquisitions:
- the potential consequences of overlooking screening rules can be severe under local laws, extending as far as prohibition, and in some jurisdictions, criminal sanctions; and
- the EU FDI screening process may have an impact on transaction timing as Member States will in most cases need to wait for the outcome of the EU screening process before issuing their final decision.
With thanks to Zac Davies of Ashurst for his contribution.
