Investors will therefore increasingly face a dual-track system of merger control and foreign investment review. Planned acquisitions by competitors (or competing bidders) can also be brought to the attention of the Commission and of the Member States’ authorities anytime these investments present risks to the EU’s interests and security or other Member States’ security or public order.

The new EU FDI screening framework is only one of the Commission’s tools to ensure that foreign investments do not run counter to the level playing field in the EU. It complements the Commission’s existing powers to review foreign investments under EU merger control rules and/or sector-specific legislation, such as the Third Energy Package applicable to foreign investments in EU energy infrastructure. Furthermore, in June 2020, the Commission published a White Paper on Foreign Subsidies in the Single Market proposing additional tools to control, amongst others, acquisitions of EU companies that have been facilitated by foreign subsidies (the Commission aims at publishing draft legislative proposals in the first half of 2021). (See our previous alert for a detailed analysis of the White Paper and its impact on future M&A transactions.)

The EU’s new FDI screening framework will be the responsibility of the Chief Trade Enforcement Officer (CTEO), a member of the Commission’s DG Trade. The CTEO is in charge of the main offensive and defensive tools of the EU’s trade policy. (See our previous alert for detailed analysis on the CTEO.) The CTEO’s assessment of foreign investments under the new scheme is likely to be impacted significantly by the EU’s trade negotiations and its trade disputes with third countries, as well as the EU’s broader trade policy objectives, including the open strategic autonomy proposed by the Commission and recently endorsed by the Member States. (See the conclusion of the Council meeting of 2 October 2020, where the Member States call on the Commission to “identify strategic dependencies … and to propose measures to reduce these dependencies, including by diversifying production and supply chains, ensuring strategic stockpiling, as well as fostering production and investment in Europe”.)

More than ever, foreign investors are advised to monitor developments closely and engage in early planning of investments to anticipate feasibility risks and develop an effective strategy for succeeding in bidding processes and securing the necessary foreign investment, merger control and other regulatory approvals for their investments.

Background: key features of the EU’s FDI Screening Regulation

The key features of the FDI Screening Regulation² are:

• The FDI Screening Regulation creates a cooperation mechanism between the Commission and the Member States to exchange information and raise concerns related to specific investments in strategic industry sectors, infrastructures and key future technologies. The Commission and each Member State have established contact points to facilitate cooperation and communication, supported by a secure and encrypted system to exchange information on foreign investment transactions.
• Under the new EU screening framework, the Commission has the power to issue a non-binding opinion if (i) an investment poses a threat to the security or public order of more than one Member State, or (ii) an investment is likely to affect projects or programmes of Union interest. The EU strategic projects are listed in the Annex of the FDI Screening Regulation and currently include EU programmes for energy, transport and telecommunication networks (TEN-T, TEN-E, Trans-European Networks for Telecommunications); for the defence and security sector (EU Defence Industrial Development Programme, PESCO, Preparatory Action in Defence Research Programme); in the field of space, surveillance and tracking (Galileo, EGNOS, GovSatCom); for research and innovation (Horizon 2020); and for fusion energy (Joint Undertaking for International Thermonuclear Experimental Reactor (ITER)). While the Commission will have no direct powers to block transactions, it may nonetheless have the opportunity to ‘influence’ the outcome of foreign investment screening by issuing an opinion to a Member State, and the Member State concerned must take “utmost account” of the Commission opinion. This is likely to cause more and closer scrutiny of foreign investments and longer and more complex reviews going forward. (See also our previous alert for detailed analysis on the FDI Screening Regulation.)
• When they consider that the investment will affect their security or public order, Member States can also provide comments to the Member State reviewing an investment. The reviewing Member State must give due consideration to such comments.
• It is important to note that Member States and the Commission may even provide comments where the Member State in which the investment takes place does not have a screening mechanism or is not conducting a screening, and the Member State must take these into account and “consider […] available options, in full compliance with Union law and international obligations”.³
• The new EU rules lay out a non-exhaustive list of factors that could trigger a screening process on the grounds of security or public order, thus expanding the scope of investments to be reviewed. This list includes, inter alia:
  
  • Critical infrastructure (energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities).
  • Critical technologies and dual use items (artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies).
  • Critical inputs (energy, raw materials and food security).
  • Access to sensitive information (personal data).
  • Media freedom and pluralism.
• The FDI Screening Regulation further mandates certain basic requirements for Member States that choose to introduce a screening mechanism at the national level: (i) transparency and non-discrimination between third parties; (ii) established timeframes for screening; (iii) protection of confidential information; and (iv) possibility of judicial redress against the Member States’ decisions.

Continuous tightening of FDI screening across the EU

Since the FDI Screening Regulation entered into force on 10 April 2019, Member States have significantly tightened their national foreign investment screening regimes, by (i) widening the screening scope by adding new sectors subject to review; (ii) lowering the thresholds that trigger investment screening; (iii) expanding disclosure obligations; (iv) extending statutory timelines for authorities to review investments; and (v) introducing new civil, criminal or administrative penalties for not fulfilling or circumventing notification and screening obligations.

More recently in July 2020, for instance, the German government introduced for the first time a standstill obligation linked to a criminal sanction and administrative penalty. (See our previous alert for detailed analysis of the recent changes to the German screening mechanism.) Meanwhile, in Romania, the government has only recently proposed a new FDI regime, under which all transactions that meet an investment value in excess of €2 million must be notified and are subject to a standstill obligation, and which is expected to enter into force shortly. Foreign investment reviews have also been tightened (or changes announced) in other Member States, including Belgium, France, Italy, Slovenia and Spain, as well as the UK (see previous alert). Today, there are a total of 14 Member States (plus the UK) with FDI screening regimes in place.⁴ Any new regimes or amendments to existing regimes must be notified to the Commission within 30 days of the entry into force of the newly adopted rules, and the Commission regularly publishes the updated list of national screening mechanisms.

The increasingly tightened national regimes are also the result of the Commission’s continuous pressure on Member States to tighten their national FDI review.

In March 2020 and in response to the COVID-19 outbreak, the Commission issued new guidance on foreign investment screening in the context of the current COVID-19 crisis.⁵ Highlighting that critical EU industries are subject to an increased risk of foreign takeover in the COVID-19 crisis, the guidance outlines how Member States can use the new FDI Screening Regulation and other EU rules to address this risk of foreign takeover. In its guidance, the Commission calls upon Member States with existing FDI screening mechanisms to make full use of them and, where appropriate, to block investments or impose other mitigating measures.

The Commission further explicitly urged Member States that currently do not have a screening mechanism, or whose screening mechanisms do not cover all relevant transactions, “to set up a full-fledged screening mechanism and in the meantime to consider other available options, in full compliance with Union law and international obligations, to address cases where the acquisition or control of a particular business, infrastructure or technology would create a risk to security or public order, including health security, in the EU”. In this context, the Commission’s guidance further highlights the possibility under the FDI Screening Regulation for the Commission and Member States to provide comments and opinions within 15 months after the foreign investment has been completed, which could lead to the adoption of measures by the Member State where the investment has taken place, including necessary mitigating measures. In other words, a foreign investment completed, for instance, in March 2020 could be subject to ex post comments by Member States or opinions by the Commission as from 11 October 2020 (date of full application of the FDI Screening Regulation) and until June 2021 (15 months after completion of the investment).

Interestingly, the Commission’s guidance also encourages Member States to look carefully at acquisitions that fall outside the scope of the FDI Screening Regulation, namely certain minority shareholdings that confer certain rights under national law (e.g., 5 per cent), assess whether they could be relevant in terms of security or public order and, if so, impose restrictive measures. In addition, the Commission encourages Member States to acquire so-called golden shares, enabling them to block or set limits on certain types of investments in certain companies. Any such restrictive measures by a Member State would need to be in line with the EU rules on freedom of capital and be suitable, necessary and proportionate to attain legitimate public policy objectives (including public policy, public security and public health).

At the same time, the Commission is seeking to expand its powers under the FDI Screening Regulation. In July 2020, the Commission amended the list of projects or programmes of EU interest in the Annex to the FDI Screening Regulation on the basis of which it can issue opinions where it considers any such project or programme to be likely affected by the foreign investment. Besides EU programmes for energy, transport and telecommunication networks (TEN-T, TEN-E, Trans-European Networks for Telecommunications), Horizon 2020 and Galileo, the amended list⁶ now also includes three additional EU projects, namely Preparatory Action on Preparing the new EU Governmental Satellite Communications (GovSatCom) programme (space surveillance and tracking); Preparatory Action on Defence Research (defence); and European Joint Undertaking for International Thermonuclear Experimental Reactor (ITER) (fusion energy). This shows that the Commission is continuously monitoring the scope and application of the FDI Screening Regulation and, where possible, is prepared to expand its powers under the new FDI regime going forward.

Looking ahead

The new EU FDI screening regime is fully applicable and operational from 11 October 2020. Foreign investments in the EU will be subject to an increasingly complex ‘patchwork’ of foreign investment screening regimes with different jurisdictional regimes and notification requirements, as well as a reformed and more onerous EU framework. The new EU rules will allow the Commission to actively monitor foreign investments across the EU and intervene where foreign investments affect security or public order in more than one Member State or are likely to undermine projects or programmes of Union interest. It remains to be seen how the Commission will apply its new powers and prioritise its screening efforts in practice. In its March 2020 guidance, for instance, the Commission emphasised that foreign investments in EU undertakings that have received funding under projects of EU interest, such as Horizon 2020 and in particular in the health sector, will be subject to close scrutiny by the Commission. Arguably, not all of these acquisitions of EU companies that receive funding will necessarily affect or undermine the EU’s strategic project at stake, in particular in projects that involve parallel funding for a large number of other beneficiaries (besides the target company) or where the target-specific funding is insignificant in total value.

Despite the FDI Screening Regulation and as highlighted in a recent report by the European Court of Auditors,⁷ there is no uniform and consistent approach to foreign investments across the EU (Member States in which the investment is planned or completed retain the final responsibility to approve investments or impose measures; national mechanisms vary in scope; and several Member State do not (yet?) have a system in place) and there remain significant differences in economic interests (and needs) amongst EU countries. It will therefore need to be seen whether the application of the new EU screening regime will in practice result in a more systematic, coherent approach to foreign investment. For the time being, investors therefore remain exposed to a patchwork of national regimes, a more onerous EU framework and a more interventionist appetite by the Commission when investments potentially affect the security or public interest of more than one Member State or projects or programmes of EU interest.

The new EU FDI screening framework is only one of the Commission tools to ensure that foreign investments do not run counter to the level playing field in the EU. It complements the Commission’s existing powers to review foreign investments under EU merger control rules and/or sector-specific legislation, including the EU’s Third Energy Package applicable to foreign investments in energy infrastructure. Furthermore, in June 2020, the Commission published a White Paper on Foreign Subsidies in the Single Market proposing new additional tools to control, amongst others, acquisitions of EU companies that have been facilitated by foreign subsidies.⁸ It plans to put forward a specific legislative proposal on foreign subsidies in the first half of 2021 and, if adopted, the new regime would add red tape to foreign investments in the EU that are financed by foreign subsidies. (See our previous alert for detailed analysis of the White Paper.) Finally, the EU’s new FDI screening framework will be the responsibility of the CTEO, in charge of the main offensive and defensive tools of the EU’s trade policy. The CTEO’s assessment of foreign investments under the new scheme is likely to be impacted significantly by the EU’s trade negotiations and its trade disputes with third countries, as well as the EU’s broader trade policy objectives, including the open strategic autonomy recently endorsed by the Member States.

More than ever, foreign investors are advised to monitor developments closely and engage in early planning of investments to anticipate feasibility risks and develop an effective strategy for succeeding in bidding processes and securing the necessary foreign investment, merger control and other regulatory approvals for their investments.

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1. See also European Commission, EU foreign investment screening mechanism becomes fully operational, press release dated 9 October 2020.
2. Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (OJ L 79I, 21.3.2019, pp. 1–14).
3. See European Commission, Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), C(2020) 1981 final, 25 March 2020.
4. As of 7 October 2020, the following 14 EU Member States had national investment screening mechanisms (besides the UK): Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, the Netherlands, Poland, Portugal, Romania and Spain. See overview available at https://trade.ec.europa.eu/
5. European Commission, Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), C(2020) 1981 final, 25 March 2020.
6. Commission Delegated Regulation (EU) 2020/1298 of 13 July 2020 amending the Annex to Regulation (EU) 2019/452 of the European Parliament and of the Council establishing a framework for the screening of foreign direct investments into the Union (OJ L 304, 18.9.2020, p. 1–3).
7. European Court of Auditors, The EU’s response to China’s state-driven investment strategy, Review No 03 (September 2020).
8. European Commission, “White Paper on levelling the playing fields as regards foreign subsidies”, COM(2020) 253 final.