By Dr. Philipp Stompfe, LL.M. (London)*
In March 2018, following an initiative of Germany, France and Italy, the Council of the European Union (“EU”) approved a Regulation on establishing a framework for screening of foreign direct investments (“FDI”) into the European Union (“Regulation”).
The new Regulation entered into force on 10 April 2019 and will apply from 11 October 2020.
The Regulation creates an enabling framework for Member States to screen foreign direct investments on grounds of security and public order. The Regulation does not require Member States to adopt a screening mechanism for foreign direct investment, nor does it exhaustively mandate the substantive or procedural features for screening mechanisms. It only sets out basic requirements that should be common to Member States’ screening mechanisms.
Furthermore, the Regulation creates a co-operation mechanism between Member States to share information about foreign direct investment planned or completed on the territory of one or several Member States. It also provides the possibility for other Member States and the Commission to comment on such investment, but leaves the final decision on the appropriate response to the Member States in which the investment is planned or completed.
Moreover, the Regulation introduces the possibility for the Commission to screen foreign direct investments which are likely to affect projects or programmes of Union interest on security and public order grounds.
At least according to official EU announcements, the new Regulation does not attempt to harmonize the existing investment screening mechanisms of the Member States or to introduce an EU-wide screening mechanism. However, there is no doubt that the Regulation will have a very practical impact on foreign direct investments into the EU, both in substance and procedure.
The European Commission (“EC”) constantly emphasizes that the EU maintains an open investment environment and welcomes foreign investment.
In its recent Reflection Paper on “Harnessing Globalisation” issued on 10 May 2017, the EC confirmed that openness to foreign investment remains a key principle for the EU and a major source of growth, but at the same time it recognised that there have been some concerns about foreign investors, notably state-owned enterprises, taking over European companies with key technologies for strategic reasons, and that EU investors often do not enjoy the same rights to invest in the country from which the investment originates.
The list of controversial company takeovers and acquisitions of major European companies is getting longer and longer. Kuka, Aixtron or OSRAM light are just a few examples.
Against this backdrop, the growing political will to more actively screen, control, and ultimately even prevent foreign direct investments flowing into Europe does not come as a surprise.
In this regard, screening mechanisms on the national level are not a novel tool. Rather, almost half of the EU Member States maintain foreign investment control regimes, i.e. Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the United Kingdom.
In particular, the new EU Regulation is to be seen in the context of recent amendments to foreign investment review laws in Europe’s major economies, Germany and France.
On 19 December 2018, the German government passed amendments to the German Foreign Trade and Payments Act (“AWG”) and to the German Foreign Trade and Payment Ordinance (“AWV”).
In this regard, the German legislator has lowered the threshold for the screening of FDI to the acquisition of 10% of the voting rights of a German company being active in the military and encryption sector and of German companies which are operating in the field of critical infrastructure according to the Regulation for Identifying Critical Infrastructure.
At first, the French foreign investment review regime was limited to a small number of business activities, in particular to gambling, private security services, weapons, warfare equipment and cryptology. However, due to serious amendments to the French Monetary and Financial Code by Decree No. 2014-479 dated 14 May 2014 and Decree No. 2018-1057 dated 29 November 2018, the right of the French Ministry to review and restrict foreign investment has been substantially increased.
With solid and reasonable arguments it can be concluded that the Regulation as well as the relevant national laws seriously struggle to establish an appropriate balance between addressing legitimate concerns with regard to certain FDIs, in particular those originating from state-owned enterprises and sovereign wealth funds, and the need to maintain an open and positive regime for such investment into the EU.
The new EU investment screening regime
In general, the overriding objective of the Regulation is to provide a framework of substantial and procedural rules for the Member States, and the EC to screen and control FDI in the EU. The precondition for issuing any screening decisions are impairing grounds on “public order and security”.
The main features of the Regulation are the following:
Scope of application
One main characteristic of the Regulation is a broad definition of FDI.
The Regulation defines FDI as an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available, in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity.
In addition, “foreign investor” means a natural person of a third country or a legal entity (undertaking) of a third country, intending to make or having made a foreign direct investment.
It must be highlighted that any post-Brexit UK investors are going to be qualified as “foreign investors” within the meaning of the Regulation.
Relevant economic sectors
The Regulation introduces a wide scope of economic sectors that may be controlled and reviewed:
- critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
- critical technologies and dual use items including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;
- supply of critical inputs, including energy or raw materials, as well as food security;
- access to sensitive information, including personal data, or the ability to control such information; or
- the freedom and pluralism of the media.
In that regard, it is also possible for Member States and the EC to take into account the context and circumstances of the FDI, in particular whether a foreign investor is controlled directly or indirectly by foreign governments, for example through significant funding, including subsidies, or is pursuing State-led outward projects or programmes.
No minimum threshold
It must explicitly be pointed out that the Regulation, contrary to national regulations such as in Germany and France, does not impose any minimum threshold for the screening of FDI, neither regarding the total amount nor pertaining to the corporate stake.
The Regulation establishes framework rules which Member States must adhere to that already maintain an FDI screening regime or wish to adopt one. These rules, inter alia, include the following:
- Member States shall set out the circumstances triggering the screening, the grounds for screening and the applicable detailed procedural rules;
- Member States shall apply timeframes under their screening mechanisms;
- Confidential information, including commercially-sensitive information, made available to the Member State undertaking the screening shall be protected;
- Foreign investors and the undertakings concerned shall have the possibility to seek recourse against screening decisions of the national authorities;
- Member States which have a screening mechanism in place shall maintain, amend or adopt measures necessary to identify and prevent circumvention of the screening mechanisms and screening decisions.
Co-operation mechanism regarding FDI undergoing screening
The Regulation introduces a co-operation mechanism between Member States and the EC. In this context, Member States shall notify the EC and the other Member States of any foreign direct investment in their territory that is undergoing screening by providing the following information as soon as possible:
- Whether the ownership structure of the foreign investor and of the undertaking in which the foreign direct investment is planned or has been completed;
- the approximate value of the foreign direct investment;
- Whether the products, services and business operations of the foreign investor and of the undertaking in which the FDI is planned or has been completed;
- Whether the Member States in which the foreign investor and the undertaking in which the foreign direct investment is planned or has been completed conduct relevant business operations;
- the funding of the investment and its source, on the basis of the best information available to the Member State;
- the date when the foreign direct investment is planned to be completed or has been completed.
Based on the information received, Member States are entitled to make comments on FDI in another Member State, if that FDI is likely to affect its security or public order, or has information relevant for such screening.
Where the EC considers that a foreign direct investment undergoing screening is likely to affect security or public order in more than one Member State, or has relevant information in relation to that foreign direct investment, it may issue an opinion addressed to the Member State undertaking the screening. The EC may issue an opinion irrespective of whether other Member States have provided comments.
Generally, comments or opinions shall be addressed to the Member State undertaking the screening and shall be sent to it within a reasonable period of time, and in any case no later than 35 calendar days following receipt of the information stated above. It must be considered though, that this timeframe may be extended to an additional 20 days in cases in which additional information were requested.
In any event, the Member State undertaking the screening shall give due consideration to the comments of the other Member States and to the opinion of the EC. However, the final screening decision shall be taken by the Member State undertaking the screening.
Co-operation mechanism regarding FDI not undergoing screening
Where a Member State considers that an FDI planned or completed in another Member State which is not undergoing screening in that Member State is likely to affect its security or public order, or has relevant information in relation to that foreign direct investment, it may provide comments to that other Member State.
The same applies to the EC which is entitled to issue an opinion in cases where FDI is not undergoing screening in the relevant Member State.
The most controversial element in this regard, resulting in great legal uncertainty for planned and even completed FDI, is that making comments and issuing an opinion is allowed up to 15 months after the FDI has been “successfully” completed.
FDI likely to affect projects or programmes of Union interest
Where the EC considers that an FDI is likely to affect projects or programmes of Union interest on grounds of security or public order, the EC may issue an opinion addressed to the Member State where the foreign direct investment is planned or has been completed.
In this regard, projects or programmes of Union interest shall include those projects and programmes which involve a substantial amount or a significant share of Union funding, or which are covered by Union law regarding critical infrastructure, critical technologies or critical inputs which are essential for security or public order.
In particular, this includes the following projects or programmes: Galileo & EGNOS, Copernicus, Horizon 2020, TEN-T (Trans-European Networks for Transport) and TEN-E (Trana-European Networks for Energy).
The mechanisms on foreign investment screening have become an increasingly relevant issue in cross-border transactions that require in-depth legal risk assessment and management prior to concluding the transaction. As a direct consequence thereof, foreign investors are well-advised to seek comprehensive legal and legal policy advice prior to conducting any investment activities in the EU.
In particular, the new reguation will lead to the following:
- The lack of any minimum threshold grants the EC and other Member States wide authority to directly interfere in the screening process of FDI in a specific Member State.
- Due to the right to directly interfere in the FDI screening of a particular Member State it cannot be ruled out that major European economies are going to force smaller Member States to impede certain FDI, in particular in sensitive sectors.
- The Regulation in conjunction with the current amendments of relevant national laws in major European economies further enlarges legal policy protectionism towards FDI.
- The new Regulation establishes a dual-system of review and control of FDI on the European level. In addition to screening acquisition transactions under a merger control perspective pursuant to the EC Merger Regulation, the EC now has the competence to review transactions and issue opinions from an FDI perspective.
- The Regulation will have a serious impact on the timing of FDI screening. Due to the right of other affected Member States to provide comments and the right of the EC to issue an opinion, flanked by the obligation of the host state (the state where the investment is made) to properly consider those comments and opinions, national scrutiny procedures are likely to be delayed. Furthermore, as a direct consequence, the Regulation will decouple national scrutiny procedures from the short initial review phase pertaining merger control pursuant to Article 10 EC Merger Regulation.
- The statutory right of Member States and the EC to provide comments, and to issue an opinion, respectively, for up to 15 months after the relevant transaction has already been completed, creates great legal uncertainty. Especially taking into consideration that, e.g. in Germany and France, the transaction shall remain pending and ineffective until the final approval of the competent government authority. In consequence, this procedural element by itself may further tremendously delay the finalization of cross-border M&A transactions.
- The Regulation, inevitably, will raise further awareness of the sensitivities originating from FDI, which in turn may lead to an alignment of substantial and procedural rules of Member States that, until now, have a less comprehensive investment review regime.
- This is not the end – it is just the beginning: until today, the new Regulation only grants the EC a “coordinating role”. However, the EC, on a regular basis, in its own publications, emphasizes that other elements will be further assessed accompanying the Regulation. Therefore, considering the unstoppable regulatory craze in Brussels, it is to be expected that the competences of the EC, regarding the review and control of FDI, will be substantially enlarged in the near future.
- One major missing element: the Regulation does not contain any default provision for cases where Member States fail to duly consider the comments of other Member States or the opinion of the EC, or even completely fail to duly inform other Member States likely to be affected by the FDI in question.
*Dr. Philipp Stompfe, LL.M. (London) is attorney at law at Alexander & Partner (Berlin/Stuttgart/Paris/Vienna/Doha/Riyadh/Ras Al Khaimah/Cairo/Muscat). Within the team of Alexander & Partner, Dr. Philipp Stompfe is primarily involved in international litigation and arbitration. He is constantly acting as counsel in commercial and investment arbitrations before all of the major arbitral institutions mainly related to construction, energy, distribution, real estate and M&A disputes. He is specialized in international investment law and further advises on international contract and corporate law and on the structuring and implementation of cross-border investment projects, in particular in the Near and Middle East.