In the autumn of next year, the long anticipated EU Foreign Direct Investment Screening Regulation (FDIR) will apply. While the FDIR does not establish a European equivalent of the Committee on Foreign Investment in the United States (CFIUS), it is nonetheless likely to have a significant impact on FDI within the EU – both in Member States that already have their own screening mechanisms and those which do not. Non-EU investors take note: the FDIR creates significant risks, and perhaps also a few opportunities.
1. THE CONTOURS OF THE EU FDI SCREENING FRAMEWORK
The FDIR has three main components: (i) it introduces a set of minimum requirements for Member State screening mechanisms, (ii) it introduces a form of peer-review amongst Member States and the European Commission (the Commission), and (iii) it plants the seeds of a centralised EU screening procedure for certain investments of “Union interest.” We look at each of these components in turn.
1.1 Minimum requirements for Member State FDI screening mechanisms
The FDIR does not introduce a full-blown European CFIUS mechanism whereby “Brussels” would have authority to review in-bound FDI on grounds of public security. Instead, mindful of realities on the ground – over half of EU Member States already have some form of FDI screening in place [i] – the FDIR aims to ensure that all mechanisms within the EU meet a set of minimum quality requirements. Article 3 of the FDIR stipulates that:
The FDIR empowers the Commission to bring infringement actions against Member States whose screening mechanisms do not meet these standards. In addition, since the regulation is directly applicable, investors may be able to challenge Member State screening mechanisms before national courts if they believe the mechanism does not comply with the FDIR or other principles of EU law, including the Charter of Fundamental Rights of the EU or the Treaty provisions on freedom of movement (more on this further below).
1.2 The peer-review mechanism
The FDIR sets up two very similar mechanisms for peer review amongst Member States and the Commission. Article 6 of the FDIR empowers Member States and in some instances the Commission to provide comments or an opinion on investments being reviewed by (another) Member State. Article 7 establishes a potentially more far-reaching and highly political mechanism by allowing Member States and the Commission to comment or issue an opinion on investments in Member States which do not apply an FDI screening mechanism.
In both instances, the mechanism is triggered if an investment is “likely to affect security or public order” or if a Member State or the Commission have “relevant information in relation to that foreign direct investment.” A Member State can make comments on a proposed investment in another Member State if it considers that its own security or public order is likely to be affected. The Commission can issue an opinion if it considers that the security or public order in more than one Member State may be affected. What is to be understood by "relevant information in relation to that foreign investment" is not clear; the broad wording suggests that Member States and the Commission will enjoy a broad margin of discretion.
To enable other Member States and the Commission to comment or issue an opinion on an investment in a Member State, the FDIR requires Member States with a screening mechanism to inform the Commission and the other Member States about each investment “as soon as possible.” Article 9 provides that the Member State concerned must inform the other Member States and the Commission of:
While enforcing this provision may prove to be challenging in practice – how can Member States or the Commission become aware of investments that have not been communicated? – it is not difficult to imagine the chilling effect of these elaborate information requirements on certain investment projects. Further, it cannot be excluded that the Commission may bring infringement proceedings against recalcitrant Member States.
For investments in Member States without a screening mechanism, the FDIR allows Member States and the Commission to ask the Member State without a mechanism for the information listed above (Article 7(5)) if they consider that the investment is likely to affect their security or public order or, in the case of the Commission, the security or public order of several Member States. The Member State concerned will be obliged to supply the information, provided the request passes a proportionality test provided for in Article 7(5) second paragraph.
The FDIR sets different triggers for Member States and the Commission to issue comments or an opinion:
The triggers are the same regardless of whether or not the Member State concerned has a screening mechanism in place.
Member States with screening mechanisms have at least 35 days to comment on an investment once it has been notified. This 35 day period is added to a 15 calendar day period provided to allow Member States or the Commission to express their intention to make comments or issue an opinion. The 15 calendar day period itself starts on the day on which the receiving Member State has notified the investment to its peers and to the Commission. The Member State must do this "as soon as possible"; it is very well possible that it will not do so immediately, however. The closing of deals will likely be delayed until Member States or the Commission have made their comments or have issued their opinion.
The ultimate decision-making authority over investments remains with the Member States. A Member State which has received comments from other Member States or an opinion from the Commission must merely give it “due consideration.” The preamble to the FDIR (Recital 17) adds that Member States must do so “in line with [their] duty of sincere cooperation laid down in Article 4(3) TEU.” This reference may be understood as an invitation to the EU courts to develop case law on what constitutes “due consideration.”
1.3 EU screening of investments of “Union interest”
In Article 8, the FDIR provides for specific rules on the screening of investments of “Union interest.” This category includes “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.” An annex to the FDIR provides a list of such projects. The Commission can amend this list at a later point by means of a delegated act. The current list includes the following projects: Galileo & EGNOS, Copernicus, Horizon 2020, TEN-T, TEN-E, Trans-European Networks for Telecommunications, and, in the area of defence: the European Defence Industrial Development Programme and the Permanent Structured Cooperation (PESCO).
The procedural rules in Articles 6 and 7 apply mutatis mutandis also to investments of “Union interest”: depending on whether or not the Member State concerned has a screening mechanism in place, it will or will not have to share information on its own initiative or upon request. The Commission (but not the Member States) will be able to issue an opinion. The Member State concerned will have to give “utmost consideration” to the opinion (as opposed to “due consideration” under the ordinary regime). The FDIR adds that the Member State concerned will have to “provide an explanation to the Commission if its opinion is not followed.” Here again, one can expect that the EU courts, if given the opportunity, will provide guidance on when exactly the requirement of “utmost consideration” is met and how the distinction between “utmost” and “due” consideration is to be made.
2. ASSESSMENT: A HUMBLE FIRST STEP TOWARDS AN EU SCREENING MECHANISM, BUT ONE WITH FAR-REACHING PRACTICAL CONSEQUENCES
The result of a political compromise, the FDIR does not introduce a European CFIUS. The ultimate decision-making power over FDI projects remains with the Member States -- even for projects with a “Union interest”. Likewise, the Regulation neither imposes an obligation on Member States to introduce a screening mechanism nor does it impose criteria by which Member States are to assess investments. Article 3(1) authorises Member States to maintain or introduce mechanisms to screen investments on the grounds of “security or public order”; Article 4 introduces a series of factors that may be taken into consideration by Member States or the Commission in their screening analysis. These factors are, however, suggestions. That said, investors are well advised not to underestimate the practical impact of the FDIR for the following reasons:
2.1 The regulation applies to all sectors and to investments from all non-EU countries
The Regulation applies to all sectors of industry, and not merely to sectors that the Commission considers to be strategic such as energy, space or transport. In addition, the FDIR applies to investments from all non-EU countries.
That said, Article 4 of the FDIR provides for a set of factors that Member States or the Commission may take into account in determining whether a foreign direct investment is likely to affect security or public order. These factors include the potential effects of the investment on critical infrastructure or critical technologies and dual-use items, the supply of critical inputs, access to sensitive information and the freedom and pluralism of the media. The factors – while but suggestions – are indicative of the type of sectors within which Member States and the Commission are likely to screen investments.
2.2 The regulation applies to controlling and non-controlling investments alike, but not to portfolio investments
In the U.S., pre-FIRRMA, that is the Foreign Investment Risk Review Modernization Act of 2018 which reformed the scope of transactions under review by CFIUS, screening had applied only to proposed or pending transactions with any foreign person which could result in “control” of a U.S. business by a foreign person. “Control” is defined broadly as the power – whether or not exercised – to directly or indirectly determine, direct, or decide important matters affecting the U.S. business. A similar notion of “control” exists under the EU Merger Control Regulation, where “control” is understood as the ability to exercise a “decisive influence” over an undertaking [ii].
The FDIR is not limited to the review of controlling investments. Instead – in keeping with the 2018 FIRRMA reform of CFIUS and with EU definitions of "direct investment" articulated in the context of the freedom of movement of capital – it also covers non-controlling investments. For an investment to fall within the FDIR's scope, the investor must aim 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” (Article 2(1)).
The preamble to the Regulation emphasises the Union legislator’s intent to cast the net wide by affirming the EU’s commitment to cover a “broad” range of investments, without however going as far as to cover portfolio investments, which EU law defines as "acquisitions of securities on the capital market solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking [iii]." This broad definition of foreign direct investment has an important implication: the scope of the information sharing requirements is very large and Member States will often have the opportunity to peer review each other's investments. The amount and types of investments that will become subject to scrutiny will presumably depend at least in part on resource considerations.
2.3 Uncertain whether Member State courts will be able to review Member State screening decisions
As mentioned earlier, the FDIR requires Member States to allow foreign investors to seek "recourse" against screening decisions. It is not clear at this point whether "recourse" includes the possibility of judicial recourse before the Member State courts, or whether it is sufficient for Member States to provide for a form of internal administrative review. The question is of practical significance, as investors will clearly prefer the opportunity to have Member State screening decisions reviewed by a court of law that is independent from the executive and which can refer questions to the EU courts in Luxembourg.
The legislative history of the provision suggests that judicial recourse was not envisaged by the EU legislator: whereas the Commission proposal provided for an opportunity to obtain "judicial redress" against screening decisions of the national authorities, the final text merely speaks of "recourse" against such decisions. It remains to be seen whether EU courts, if given the opportunity, would interpret this term as precluding foreign investors from seeking judicial redress. EU constitutional principles (particularly the rule of law) would seem to call for an interpretation that allows for a court challenge of national screening decisions. If this interpretation is followed, the FDIR would provide foreign investors with a powerful tool to challenge such decisions. At this juncture, however, investors are well advised not to take for granted the possibility of challenging Member State screening decisions before the national courts.
2.4 FDI in Member States without screening mechanisms may also become subject to scrutiny
While the FDIR does not require Member States to adopt screening mechanisms, and in any case leaves the final decision over individual investments to the Member State concerned, it does grant other Member States and the Commission potentially powerful tools to scrutinise investments -- both planned and completed -- in other Member States, including in those Member States that currently do not have screening mechanisms in place. As mentioned earlier, this process of information sharing and peer-review may have a chilling effect on certain investments. As Member States are required in some instances to share information with other Member States and the Commission, certain Member States may become less attractive FDI destinations. Even though the investment is not suspended during the peer review process, the possibility of receiving critical comments from other Member States or the Commission up to 15 months after completion of the project may dissuade potential investors from carrying investment projects forward.
2.5 FDI screening is without prejudice to merger control
FDI screening and merger control remain separate investigations and many investments will be subject to both types of review. Investors may therefore have to make filings with different authorities at EU and/or Member State level.
FDI screening and merger control have distinct finalities: while the former is to some extent political, the latter typically only addresses competition concerns. Nonetheless, while separate, the FDI screening and merger control assessment are likely to influence one another. The FDI regulation expressly provides that it is to be applied "in a consistent manner" with the merger control rules [iv]. In particular, a recital of the FDIR provides that the grounds for screening and the notion of "legitimate interests" within the meaning of Article 21(4) of the EU Merger Control Regulation should be interpreted in a "coherent manner." "Public security" is mentioned in the Merger Control Regulation as one of the legitimate interests on the basis of which Member States may block mergers. It remains to be seen whether the obligation to ensure consistency with the FDIR will make the Commission and national authorities more willing to block mergers on the basis of a need to protect public security.
When undertaking an investment, non-EU investors will have to pay close attention to whether a notification is required and, if it is, where to report the proposed investment, and must be mindful of the potential implications on the time required to close a deal. Whereas a Phase I merger control assessment by the Commission takes up to 25 days from notification, and whereas most individual Member States generally take 25 to 30 days to assess Phase I mergers (although Belgium, France, Slovenia and the UK have longer periods of up to 60 days), Member States with FDI screening mechanisms have 50 days (including 15 calendar days to express their intention) to comment on a notified investment. The application of these albeit distinct but parallel merger control and FDI processes therefore require careful consideration in relation to which process should be started, and when, to enable the timely closing of a transaction.
While the FDIR will apply on 11 October 2020, it is unlikely to be the final stop in the EU's journey towards a more integrated approach to the screening of FDI. During his hearing before the European Parliament, incoming trade commissioner Phil Hogan already confirmed as much, stating that "[b]eefing up the screening mechanism I think is essential if we want to protect our critical technologies and our critical infrastructure. We just cannot take a chance on these issues." [v] He added that he "would like to see a coordinated and harmonized approach" for all EU countries. It remains to be seen whether this is a politically realistic prospect.
[i] See the list compiled by the European Commission, available at https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157946.pdf accessed 14 October 2019.
[ii] Article 3(2) of Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), OJ L 24, 29.1.2004, p. 1–22.
[iii] See e.g. Judgment in Commission v Portugal, C-212/09, EU:C:2011:717, para. 47, distinguishing portfolio investments from 'direct' investments
[iv] Recital 36 of the FDIR.
[v] As reported by Politico: https://www.politico.eu/pro/hogan-beefing-up-investment-screening-is-essential/ (accessed 2 October 2019).