New EU framework for screening foreign direct investment

On 21 March 2019, the European Union agreed new rules on screening foreign direct investment ("FDI") for threats to security and public order in Regulation 2019/452 (the "Regulation"). The new rules come into force on 11 October 2020.

Member State FDI screening mechanisms 

The Regulation does not oblige Member States to adopt FDI screening mechanisms. However, where Member States do have such mechanisms, the Regulation sets out a number of minimum requirements, including transparent and non-discriminatory rules and procedures, explicit timeframes and the ability to challenge screening decisions.

The 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. These include:

• The potential effects of the FDI on:
• critical infrastructure in various sectors including energy, transport, water, communications, aerospace and defence, amongst others; 
• critical technologies and dual-use items, including artificial intelligence, robotics, cybersecurity, quantum and nuclear technology, and nanotechnology;
• the supply of critical inputs;
• access to sensitive information; or 
• freedom and pluralism of the media. 
• Whether the investor:
• is directly or indirectly controlled by the government of a third country; or 
• has already been involved in activities affecting security or public order in a Member State. 
• Whether there is a serious risk that the foreign investor engages in illegal or criminal activities.

EU cooperation mechanism

The Regulation creates a framework for the Commission and other Member States to share their views on FDI. The rules differ depending on whether the host Member State has a screening mechanism in place, and are reinforced where FDI affects projects or programmes of EU interest, such as the Trans-European Networks for Transport, Energy and Telecommunications. Features of this cooperation mechanism include the following:

• Member States are required to notify and provide the Commission and other Member States with information on any FDI undergoing screening as soon as possible.
• Other Member States can submit comments to the host Member State if they consider the FDI is likely to affect security or public order.
• The Commission can issue opinions if it considers that the FDI is likely to affect security or public order in more than one Member State.
• The Commission and Member States must state their intention to submit views within 15 days of notification, and have a further 20 days to do so. If additional information is requested by them, the deadline is extended by a further 20 days following the receipt of that information.
• The host Member State must give due consideration to comments and opinions - and take utmost account of Commission opinions concerning projects or programmes of Union interest - but remains in all cases the final decision-maker.

Concluding remarks

The EU screening mechanism should be set in the context of increasing concerns regarding the possible access of foreign powers to critical infrastructure and assets. This is leading many countries, both within and outside the EU, to adopt or enhance foreign investment rules. For example, the rules in the USA, France and Germany have recently been strengthened, and the UK is planning to introduce a specific foreign investment regime.

Although the EU mechanism does not give the Commission or other Member States the power to block (or permit) foreign acquisitions, it 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.