Practical Implications of the New Legal Framework for Foreign Direct Investment in the European Union

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.

Background

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.

Minimum requirements

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).

Practical implications

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:

  1. 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.
  2. 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.
  3. The Regulation in conjunction with the current amendments of relevant national laws in major European economies further enlarges legal policy protectionism towards FDI.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.

The new EU Regulation on the screening of foreign direct investments: A tool for disguised protectionism?

Prof. Nikos Lavranos, Secretary General of EFILA

In December 2018, the EU institutions agreed on the text for an EU Regulation establishing a mechanism for screening all foreign investments into the EU.

In just over a year the EU institutions adopted this Regulation, which is unusually fast and reflects the apparent political will of the institutions involved to deliver something tangible that would address the fear against Chinese investments that would essentially take over the European economies.

The Regulation is in particular noteworthy because it introduces an EU-wide screening mechanism at the EU level as well as at the Member States’ level, which in many ways is similar to the US screening mechanism (CFIUS) whose scope of application was recently also significantly expanded. (The revised CFIUS text is part of the very extensive National Defense Authorization Act for Fiscal Year 2019, sections 1701 et seq.)

The EU Regulation is also significant in that it gives the Commission and other Member States the power to directly interfere in the screening of FDI in a particular Member State.

At the Member States’ level, it should be noted that there is a disparity among them regarding their approach of whether or not to screen FDI, and if so, under which conditions and procedures.

According to the Commission, about half of the Member States have currently no screening mechanism at all, while the other half does have one. In addition, the conditions and procedures of the existing screen mechanisms differ.

Accordingly, the Regulation aims to harmonize this situation by grandfathering all existing screenings mechanisms and by encouraging all Member States, which have not yet one, to establish such a mechanism. In addition, common basic criteria for the screening of FDI are laid down in this Regulation. Indeed, all Member States are required to register all incoming FDI and to report them to the Commission and to all other Member States. In fact, the Member States and the Commission are required to set up a dedicated contact point for that purpose.

At the European level, the Regulation gives the Commission – for the first time – the power to actively screen FDI – not only those that are “likely to affect projects or programmes of Union interest on grounds of security or public order”, but also those that are “likely to affect security or public order in more than one Member State”.

The Commission may issue opinions, which the Member State concerned is required to duly take into consideration. Similarly, Member States can comment on the screening of FDI in other Member States.

However, what is most interesting is the wide scope of the sectors that may be screened, which covers, inter alia, the following areas:

(a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, as well as sensitive facilities and investments in land and real estate, crucial for the use of such infrastructure;

(b) critical technologies and dual use items as defined in Article 2.1 of Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, quantum, aerospace, defence, energy storage, nuclear technologies, nanotechnologies and biotechnologies;

(c) supply of critical inputs, including energy or raw materials, as well as food security;

(d) access to sensitive information, including personal data, or the ability to control such information; or

(e) the freedom and pluralism of the media.

Also, noteworthy is the fact that there is no minimum threshold of the amount of the FDI for screening, which means that potentially any FDI from 1 to 100 billion euros could be screened.

While the fear against a Chinese takeover of the European economies is widespread and understandable, it is not supported by facts. Indeed, as a recent study by the well-respected Copenhagen Economics institute shows that countries other than China invest much more into the EU.

According to this study the US is by far the largest investor in the EU and accounted for 51.1% of the M&As by third country investors, followed by Switzerland (10.8%), Norway (4.6%) Canada (3.8%), while China comes only fourth with a meager 2.8%.

When it comes to investments by State Owned Enterprises (SOEs) from third states, Russian investors accounted for 16.6% of M&As, followed by Norway (15.8%), Switzerland (11.8%), while Chinese SOEs account only for 11% of the M&As.

In other words, the amount of Chinese FDI are far lower than from several other third countries, but which seemingly are considered friendlier and thus approached with less hostility.

Be that as it may, the real risk of this Regulation is not so much the screening of FDI but that it could be abused as a tool for disguised protectionism and classic state-governed economic nationalism.

This is so because the big Member States will be able to force smaller Member States to block FDI, for example from China, in order to give preference instead to French, German or Spanish investors.

Similarly, the Commission may force a Member State to block an FDI for unrelated more important geopolitical reasons.

This can also raise the tension among EU Member States which are competing for FDI. For example, if the Rotterdam harbour wants to attract Chinese investments for upgrading and expanding its facilities in order to be able to better compete against the harbour of Hamburg, Germany might very well use the argument of “security or public order” in this Regulation to force the Netherlands to block the Chinese investor and rather accept a European investor instead, or forget about the whole project altogether.

This is not to say that one should be naïve about Chinese, American or Russian investments, which are often connected with geopolitical aims or potentially (business) espionage. The example of Huawei, which has been restricted in developing the 5G network in some Western countries, is telling. At the same time, one should not forget that EU Member States are competing with each other to attract FDI and have the vested interests of their national champions always in mind.

Thus, the line between genuine protection of “security and public order” and disguised protectionism is very thin and tempting to cross for short term political and/or economic gains. However, this Regulation – unsurprisingly – does not contain any effective mechanisms to mitigate this risk.

Therefore, when this EU Regulation enters into force, foreign investors are well-advised to seek proper in-depth advice prior to investing into the EU.

Chinese SOE Investment: An Economic Statecraft

Bashar H. Malkawi*

China’s rising economic preeminence has been stunning, firmly ensconcing China as the second most powerful world economy replacing previously second-ranked Japan. In a remarkably short span, less than 15 years, the US economy has experienced a relatively huge decline vis-à-vis China on a nominal GDP basis.

China’s remarkable economic juggernaut has been fueled by an opening of markets, globalization and booming free trade which has provided immense financial benefit to Chinese companies. The free market open rules trading system led to the establishment of China as a major global exporter. As China’s economy has boomed, China has looked increasingly abroad for investment opportunities to both employ its cash hoard and provide long-term growth for its citizens.

In China, many large companies are state-owned enterprises (SOEs), and are the most common form of entity that are involved investment. Chinese SOEs receive preferential treatment in terms of access to capital and obtaining regulatory approvals[1] and are employed in the advancement of Chinese governmental aims “serv[ing] political goals, including fostering indigenous innovation, supporting social stability and crisis response in China, and advancing economic initiatives abroad such as ‘One Belt, One Road.’”[2]

By definition, all SOEs raise concerns because of their connection to their home states. These anxieties over state-owned businesses are not unique to China and relate to all SOEs in general. Investments made by states trigger different regulatory sensitivities compared to considerations raised by private companies because of the possibility that in conducting business government owned or controlled entities may utilize non-profit motivations and substitute political ambitions instead of or in addition to profit-making.

Thus, these concerns are tied to any government-owned business which potentially subjugates (or at a minimum is an additional motivation) private market interests to the political interests of the state.[3] Indeed, such concerns are not entirely new. As an illustration of prior concerns with respect to government-owned businesses and their investment decisions was the opposition over Dubai Ports’ attempt to invest in the U.S.  In 2007, the Dubai government-owned Dubai Ports World sought to acquire port terminals located in the U.S.  Members of the U.S. Congress, concerned about a foreign government controlling the flow of goods and people into the U.S. voiced strenuous opposition on national security grounds.[4] In this respect, Chinese SOEs are no different than other state-owned businesses.

However, there are additional factors with respect to China’s SOEs which increase national security concerns of FDI recipient nations; China’s political structure and unique state dominance/control of SOEs presents a different type of investor.  China is a communist economic order and the state is purposely directly involved in all critical economic sectors. “The way that the Chinese government exercises ‘state capitalism’ is that it directly or indirectly controls a large number of powerful SOEs, especially in the strategic and key sectors.”[5]

The raison d’être of the Chinese SOE is the advancement of the CCP’s objectives thus amplifying the general “state-ownership” concerns. China is ruled by one political party, the CCP, and its domination of Chinese SOEs is of critical importance.  The CCP wields near total non-financial control over its citizenry; singularly legislates the law of the land and CCP appointed judges rule on the interpretation of law in courts. These facts are not meant as a criticism of China which has expressed no intent of aggressively advancing such goals. Nevertheless, Chinese SOEs may have motivations that align with CCP goals and those aims may not necessarily correlate with other countries’ national interests.

While the U.S. government also wishes to advance its geo-political goals, the key distinction is that the U.S. government’s pursuit of policies is not part of private U.S. company investment decision making.  In evaluating FDI from U.S. companies, the presumption is the decision to invest is 100 percent profit motivated; but the same cannot be said of Chinese SOE investment. It is thus crucial to internalize that Chinese SOEs related investments may very well harbor an agenda to advance strategic goals for the CCP. These concerns can be expected to grow.  The CCP is apparently strengthening its control over SOEs.

The potential motivation to further the goals of an alternative vision of global governance by a private entity investing and buying companies is a very different context for review than traditional corporate acquirers. In addition, investments and joint ventures from SOEs may not be an efficient allocation of resources or be a profit-generator.[6] If investments are not based upon pure economic motivations, the investments may prove to be less than stellar performers or at a minimum, fail to achieve the potential return. Crucially, such motivations bring potential economic risk/loss of potential into the calculus for a recipient nation.

China has acknowledged the crucial need to reform its inefficient SOEs and doing so would lend confidence to recipient nations and lower concerns.[7]  However, economic considerations have not trumped political considerations. Rather than utilizing pure economic factors as the benchmark for SOE reform, political factors are considered which may impinge on the profit-making calculus private sector companies engage in.[8] In terms of enacting reforms to China’s SOEs, economic performance is surely a factor but not the controlling factor as it would be in a private sector business. This demonstrates that SOE investment in other countries may potentially be made based at least in part upon non-economic factors.  The fact that some SOEs investments may not have pure economic profit as the driving factor may constitute an inefficient allocation of financial resources and economic potential in addition to raising security concerns.

Although FDI is acknowledged as beneficial and an important enabler of economic vitality, many governments are concerned about national security implications of FDI. Chinese FDI has come under more stringent scrutiny in recent years sparked by political. concerns about foreign ownership in Europe and the U.S. Some in the U.S. have urged a complete ban on Chinese SOE investment. It is not only the U.S. that has signaled a reassessment is being considered. The EU has also expressed concerns regarding China’s FDI into the EU and the associated national security risks of OBOR-driven investment.  EU diplomats gave expressed “suspicions ran deep over China’s geopolitical intentions in Europe, particularly with its massive trade and infrastructure plan, the ‘Belt and Road Initiative’.

In the U.S., CFIUS is the primary vetting mechanism and wields power to review a “covered transaction,” defined as any merger, acquisition or takeover … by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.  The term “national security” is not strictly defined and CFIUS focuses on certain strategic national security spheres such as energy, defense and technology.[9]  The U.S. President is specifically empowered to “suspend or prohibit any covered transaction that threatens to impair the national security of the United States.” In every other country, a CFIUS style review mechanism is an option that should be examined as a potential solution to the upcoming challenges of increasing Chinese investment worldwide.


* Bashar H. Malkawi is Dean and Professor of Law at the University of Sharjah, United Arab Emirates. He holds S.J.D in International Trade Law from American University, Washington College of Law and LL.M in International Trade Law from the University of Arizona.


[1] See Wendy Leutert, China’s Reform of State-Owned Enterprises, 21 ASIA POLICY 83, 86 (2016).

[2] Id.

[3] See Sovereign Wealth Fund Acquisitions and Other Foreign Government Investments in the United States: Assessing the Economic and National Security Implications: Testimony Before the Comm. on Banking, Housing, and Urban Affairs, 110th Cong. 4 (2007) (testimony of Edwin M. Truman, Senior Fellow, Peterson Institute for International Economics), available at http://
banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_
id=e4fe589e-90aa-46e0-afe9-lefb57fcd69c.

[4] See Bashar H. Malkawi, Balancing Open Investment with National Security: Review of U.S. and UAE Laws with DP World as a Case Study, 13 The University of Notre Dame Australia Law Review 153, 161 (2011).

[5] Julien Chaisse, Demystifying Public Security exception and Limitations on Capital Movement: Hard Law, Soft Law and Sovereign Investments in the EU Internal Market, 37 U. Pa. J. Int’l L. 583

[6] See, e.g., Debt risk for main state-owned enterprises is controllable: China, THE ECONOMIC TIMES (India) (Jan. 27, 2017), http://economictimes.indiatimes.com/articleshow/56806126.cms?utm_source=contentofinterest&utm_medium=t ext&utm_campaign=cppst (“While many state companies are bloated and inefficient, China has relied on them more heavily over the past year to generate economic growth in the face of cooling private investment.”)

[7] For an excellent discussion of SOE reforms see Wendy Leutert, supra note 1.

[8] See id. Wendy Leutert, China’s Reform of State-Owned Enterprises, 21 ASIA POLICY 83, 86 (2016), available at https://www.brookings.edu/wp-content/uploads/2016/07/Wendy-Leutert-Challenges-ahead-in-Chinas-reform-ofstateowned-enterprises.pdf.

[9] See https://www.wsgr.com/CFIUS/pdf/section-721.pdf (noting the list of factors CFIUS will consider include defense, energy and technology). Note there are calls to expand the list of areas.  See https://www.agriculture.senate.gov/newsroom/dem/press/release/senators-stabenow-and-grassley-introduce-bipartisan-legislation-to-protect-american-agricultural-interests-in-foreign-acquisitions (proposal to add food security to list).

 

The EU’s foreign investment screening proposal: Towards more protectionism in the EU

by Prof. Nikos Lavranos, Secretary General of EFILA

Last September, European Commission President Juncker presented a proposal for a European foreign investment screening regulation – apparently following a request by Germany, France and Italy.

The proposal fits the protectionist mood that has taken hold in Brussels and in many EU Member States. The backlash against TTIP, CETA and ISDS – suddenly supported by once free trade minded countries such as Germany and the Netherlands – has prepared the ground for this proposal.

Indeed, the EU has failed to deliver so far anything on its competence on Foreign Direct Investment (FDI). TTIP has been put in the freezer; the CETA investment chapter is on hold because it is awaiting adjudication by the Court of Justice of the EU (CJEU) and in the new envisaged trade agreements with Japan, New Zealand and Australia the investment chapter is left out altogether.

So, instead of promoting and protecting foreign direct investments – especially European foreign direct investments abroad – the EU has followed suit on populist calls for protecting Europe from perceived dangerous Chinese and other foreign investors, which aim at supposedly buying up strategic European companies.

As often is the case, the main argument for this European screening mechanism for foreign investments is “harmonization”, since several EU Member States already have a national screening mechanism while other Member States don’t.

Accordingly, the proposal first and foremost claims to provide legal certainty for Member States that maintain a screening mechanism or wish to adopt one. In other words, this Regulation would empower Member States to maintain their mechanisms or to create new ones in line with this Regulation.

Second, the Regulation aims at creating a “cooperation mechanism” between the Member States and the European Commission to inform each other of foreign direct investments that may threaten the “security” or “public order”. This cooperation mechanism enables other Member States and the Commission to raise concerns against envisaged investments and requires the Member State concerned to take these concerns duly into account. In other words, this “cooperation mechanism” is an “intervention mechanism” in disguise by given the Member States and the Commission a tool to review and intervene against planned foreign investments in other Member States.

Third, the proposal also enables the Commission itself to screen foreign investments on grounds of security and public order in case they “may affect projects or programmes of Union interest”.

In short, Member States and the Commission will effectively be enabled to review any screening of any foreign investments and to intervene if they think that their interests may be affected.

If one looks at the description of the screening grounds (“security” or “public order”), it immediately becomes clear that this proposal essentially can cover any investment.

Article 4 Factors that may be taken into consideration in the screening of the proposal states:

In screening a foreign direct investment on the grounds of security or public order, Member States and the Commission may consider the potential effects on, inter alia:

  • critical infrastructure, including energy, transport, communications, data storage, space or financial infrastructure, as well as sensitive facilities;
  • critical technologies, including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology;
  • the security of supply of critical inputs; or
  • access to sensitive information or the ability to control sensitive information.

In determining whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is controlled by the government of a third country, including through significant funding.

Moreover, in order to be effective, this Regulation essentially will require all Member States – in particular those which have not yet a screening mechanism in place – to create one, otherwise these Member States and the Commission will not be able to share the required information about planned new foreign investments and the review them.

As a result, if this proposal is approved, the screening of foreign investments will become a standard procedure in all Member States.

The question arises to what extent this proposal may be damaging for the economies of the Member States. In this context, it is telling that this proposal is not accompanied by an impact assessment study. This proposal contains the following justification for the lack of the impact assessment:

“In view of the rapidly changing economic reality, growing concerns of citizens and Member States, the proposal is exceptionally presented without an accompanying impact assessment. The proposal targets specifically the main issues identified at this stage in a proportionate manner. Other elements will be further assessed in the study announced in the Communication accompanying this Regulation. In the meantime the Commission proposal for Regulation is accompanied by a Staff working document providing a factual description of foreign takeovers in the EU on the basis of the available data, as well as a brief analysis of the issue at stake.”

This “justification” reveals that the need to satisfy populism quickly is considered more important than performing a proper impact assessment.

Apart from this, there are significant reasons to reject this proposal.

Firstly, the question arises whether such a screening mechanism would be compatible with the 1,500 extra-EU BITs which the EU Member States currently have in place with third states. The proposal does not discuss the potential incompatibility with BITs and neither does it discuss the potential claims based on the BITs by foreign investors against such screening decisions. This is very surprising since one of the main aims of BITs is to promote foreign investments and to protect them against unfair or discriminatory treatment. Prima facie, it seems that such a screening mechanism could lead to breaches of these BITs and thus to subsequent claims.

Secondly, there are many countries within the EU, in particular in Central, Eastern and Southern Europe which actually are in dire need of foreign investments – including also Chinese investments. Creating more obstacles against such investments is not going to help these countries economically.

Thirdly, one may wonder whether it is in the interest of the EU to send out such a protectionist signal to the world – in particular in light of the current US Administration’s protectionist attitude. Indeed, the experience with the American CFIUS mechanism shows that the screening of foreign investments is mainly used for domestic political gains rather than for economic benefits.

Finally, one wonders who will be financially responsible if foreign investments fail to materialize due to the market distorting interventions by other Member States and/or the Commission.

So, for all these reasons, the EU Member States should resist riding on the populist protectionism wave that may be helpful to satisfy short-term political gains, but which will be damaging for the EU as an attractive FDI dentition. The EU Member States are in dire need for more foreign investments, for example in renewable energy but also for large infrastructure projects such as connecting to the One Belt one Road (OBOR) project, which is currently pushed by China.