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Intro: Welcome to Disputes in Perspective, a Reed Smith podcast. This podcast series will discuss disputes-related trends, hot topics, and developments occurring in the global legal landscape, and hopefully provide you with some helpful insights and practical tips. If you have any questions about any of the episodes, please feel free to contact our speakers. 

Niyati: Welcome to Reed Smith's Disputes in Perspectives podcast. I'm Niyati Ahuja, senior associate in the New York office of Reed Smith. I work in the international arbitration and global commercial disputes group. I do both commercial and investor arbitration, as well as litigation in New York courts and white-collar investigation matters as well. Today, we are very pleased to welcome Dr. Steffen Hindelang to this podcast. Steffen is a professor of international investment and trade law at Uppsala University in Sweden. He's also the executive director of the CELIS Institute, an independent, non-profit, non-partisan research enterprise dedicated to promoting better regulation of foreign investment in the context of security, public order, and competitiveness. Steffen has advised the EU, European governments, as well as companies on investment tribute regimes, international investment disputes, and international organizations on the reform of the current international investment law regime. As you can tell, he has a very, very interesting background. He has been repeatedly invited by the European Parliament's INTA committee to prepare studies on the development of the EU's common commercial policy. He frequently acts as expert advisor before international tribunals and national courts and has served as an exit arbitrator. I also understand, Steffen, that you are organizing a very interesting boot camp in India next month in August on investment arbitration. I'd love to know more about that before we delve into the more serious topics we're going to discuss today about foreign direct investment screening. So I'd love to know more about this boot camp. Would you just share a few lines about that? 

Steffen: Of course. First of all, thanks very much for having me. Delighted to be here and talk about two worlds which come together. And that's also the topic of the boot camp. We are jointly organizing with a leading Indian institution. The idea here is to explore crossroads of investment arbitration and economic security regulation. We are inviting students, public servants, attorneys which want to know more about this emerging topic and of course also issue how two worlds come together and possibly collide and how we can make that coalition as painless as possible. 

Niyati: Yeah that sounds wonderful and is it in in Gujarat is that correct? 

Steffen: Indeed that's in Gujarat It's going to be hot in a double sense. Temperature is going to be quite intense. But also the topic, I think, if I may say so, it's going to be quite hot. And we are at the forefront here, exploring how investment screening measures and others will trigger or may trigger investment arbitrations. 

Niyati: Yeah, sounds very interesting. If you do want to, if anybody wants to know more about the boot camp, please do reach out to Dr. Steffen. Okay, now getting to the basics and the more serious topics, let's begin with the basics. What is foreign direct investment screening and why do you think it has become so central to policymaking in the EU and globally as well? 

Steffen: I think originally, or let's say for the last 30 or 40 years, we have seen a hyper-globalization. The world has come or had come together very close. In many ways, the United States and China were basically also coming closer. The United States' only remaining superpower at some point may have felt a bit challenged by China and its practices, which the United States perceived as not fair. And more and more in the United States, but also in other areas and other places around the world, this open-door policy was questioned. And one basically started to think anew about foreign investment, not just seeing the undoubtedly positive effects on welfare and development, but also seeing the potential risks to national security, as the United States would put it, or to public order and security, as the Europeans term it. So what is it about? Investment screening essentially is a review of a foreign capital employment or deployment for risks to national security. So is it acceptable that, for example, an Indian company runs the rail networks in the United Kingdom? That's the question the investment screening authority has to answer. Does this pose a threat to the national security? In many other areas, you find that as well. It's not just infrastructure, it's also technology. Is it a threat to national security that certain chip companies are suddenly owned by Chinese? Or that German robotics companies are taken over by Chinese? That are the basic questions behind investment screening. 

Niyati: That's very helpful for our listeners. My next question is actually related, and you mentioned invest infrastructure as well as technology sectors. So what kind of investments are typically subject to screening? Are there thresholds or sectoral focuses that listeners should be aware of? 

Steffen: I mean, investment screening, there is not just one regime. Each and every state runs its own. And even in the European Union, there's very little harmonization on that. But I think we're going to talk about the EU's regime later. Each state decides for itself what are the sectors which are perceived as particularly sensitive in terms of national security or public order and security. And it relates, as said earlier, to critical infrastructure, telecommunication networks, harbors, ports. Airlines, rail, and so forth. Also, technology from chips over emerging technologies, artificial intelligence is another example. You come to social services, you have, for example, hospitals as an area of interest. Pharmaceutical companies are at the focus. But you have even, in certain countries, school cafeterias, which are perceived as a critical asset, which is screened when taken over by a foreigner. So I think there are very few sectors actually around the globe, which are completely free of any investment screen. Because on the one hand, each nation has its own sensitivities. And on the other, one must clearly say there's a trend towards screening broader and broader, which causes, of course, additional red tape for international capital transactions. Thresholds, again, you can't have a cross-the-border answer on that. It's really depending on what kind of economic policy that respective country wants to run. You see a trend that thresholds getting lower and lower. So in the old days, it was 25% typically when 25% of a share capital was acquired, then it triggered a review. These days, in particular sensitive areas, you have 5% thresholds. But again, there are other jurisdictions like Switzerland, which is very, very skeptical about investment screening, and they have a relatively high threshold. So it depends really very much on the policy priorities. 

Niyati: Yeah, it seems like states are still exercising their sovereign powers over what kind of policy they want to develop relating to these foreign investments. My next question is related to, I think it's more specific in the way EU defines security and public order for the purposes of investment screening. Are these definitions, in your opinion, intentionally left to be broad? 

Steffen: I think the European Union is a very particular animal in that respect because the European Union is something... In between an international organization and a federal state and the relationships between the, EU as the international organization, so to say, and its member states is highly complex. And you can't really have across the board an answer to that relationship, but you really have to look at the particular subject matter here, investment screening. This is largely an EU competence. So basically, for our audience in the United States, it would be a federal competence. However, interestingly here, you would expect that then the European Union runs its own unified regime. No, they delegated back the power to run investment screenings on the state level. So for the U.S. on the state level, and a language you would talk about member states level. And each and every member state, except for one, runs its screening mechanisms. And here as well, there are member states which have a long tradition in having investment screening mechanisms. for example, France, but also Germany has had an established screening mechanism, though a very narrow one. And then there are, for example, Sweden states, which thought they can do completely without. And of course, having different approaches requires for very open-ended terms. And public order and security, this is an open-ended legal concept, which is then further defined either by secondary legislation, that is the EU screening regulation, which provides some guidance, though it does not really restrict the member states. And then you have the court, the Court of Justice of the European Union, which in its case law, of course, has defined public order and security. However, again, it's case sensitive. So public order and security in pharmaceutical regulations means something very differently than here in investment screen. 

Niyati: Yeah, no, that makes total sense. And I think it is also circumstantial, especially when it comes to courts issuing a ruling regarding what they would consider to fall under the definition of security and public order. My next question really is about what obligations. So we talked about how different states have different policies and it depends on how they want to exercise their sovereign powers. And then that would have an impact on this screening. My question now is about those member states that do not yet have national screening mechanisms. Are there any obligations that the EU regulation imposes on these member states? 

Steffen: Yes and no. There is no obligation today to introduce an investment screening mechanism, though a lot of peer pressure. And I think soon we're going to be there that each and every member state has its screening mechanism. So for example, Cyprus, which was very late in the process, has now a draft law or a bill. And if a member state has a screening mechanism, then there are certain basic requirements essentially relating to the due process. So you need to have a transparent process, you need to have the decision which is reviewable, and so forth. So very basic rule of law standards are repeated essentially because that also follows from other sources of law that you have to comply to those standards. The interesting part here of the EU mechanism is that member states are under the obligation to exchange information in an area which is perceived quite sensitive to sovereignty. So you have, as an effect of the EU screening regulation, an information exchange mechanism. And that's indeed novel. So member states are sitting together in Brussels and looking at the various transactions together with the commission. And in that way, it becomes more difficult for ill-intended investors to gain the system. So by entering the internal market through a member state without a screening regime or with only a very narrowly defined one. Because even a member state without any regime has to take part in this information exchange. 

Niyati: Right. That makes sense. My next question is about something very, very specific and how, in your opinion, has EU's experience with more than 1,200 notified transactions that shaped the 2024 legislative proposal to revise the screening regulation and had an impact? 

Steffen: I think that, of course, to some degree, shaped the proposal because what the EU member states notified to the European Union, basically what they fed in in this information exchange mechanism, varied greatly. So some member states were very restrictive. For example, they did not even send the information on the transactions which were cleared in a pre-screening to Brussels. So the commission and the other member states have the full picture. So you had an undersharing. And on the other hand, you had an oversharing. So other member states, they basically put any transaction which was notified to them. And in some member states, you have very broad notification obligations into the mechanism. So you have an oversharing where even toothbrush producers were suddenly finding themselves in information exchange mechanism and other member states and the commission had to think about it. So also this 1,200 notified transactions does not give the full picture. This is only what came in the European mechanism. Sweden alone, for example, had over 1,000 notifications a year. So you see the dimension and the red tape which is attached to this. Germany, which is roughly 8 to 10 times the size of the Swedish economy, had 400. Again, you see a different, more restrictive approach when it comes to investment screening. And then only a fraction of that actually moves into the European mechanism. So the Commission here tried to define more clearly in its legislative proposal. The European Commission is something like the government, which basically proposes legislation on the European context. And there are more clearly defined criteria what is notifiable and what is not notifiable in order to have the, basically more critical transactions on the screen and getting the toothbrush producers out of the system. 

Niyati: Yeah, it makes sense. Of course, the example that you gave about Sweden itself is there's only 1,200 notified transactions. I'm sure there were more than 1,200, potentially even 10,000 transactions that were not notified. So now moving on to more of our discussion about investment arbitration. In your opinion or in your experience, can these screening measures lead to disputes under bilateral investment treaties or the energy charter treaty? Could investors challenge such measures through investor state dispute settlement mechanism? 

Steffen: It's not only theoretical possibility. It is a reality today. Canada, actually, with its Invest Canada Act, which is an investment screening mechanism run for decades by the Canadians, got caught in investment arbitration, Global Telecom. And there, the Canadians were very successful in defending themselves against the claim because they apparently have run a very transparent, rule-based process, and this is how it should be. But the story which we can take from that very early case is that these mechanisms can be caught by the networks of bilateral and regional investment protection treaties. It depends, of course, very much on the BIT and also on the measure, because not each and every bilateral investment treaty protects market access. That's for one point, it's actually only the minority, but quite often you have. Investment screening also activated when the holdings in a certain investments are increasing over time. So you're having a renewed investment screening, and then you're already established within a jurisdiction, and then you have an investment within the meaning of a bilateral investment treaty, and then we already have the jurisdiction of a tribunal, and then the measures are reviewed by the tribunals. You can also look to other corners of the world. I have to mention Sweden again, so the second time already here. Huawei is a disguised investment screening case because in the middle of a public procurement, Sweden discovered threats to its national security and basically called everything off. And in a normal scenario, these kind of investments into certain sectors, telecommunications, also through contracts like public procurement, which is not strictly speaking an investment, are called by investment screening mechanisms. So you have cases ongoing. Since screening is relatively new in the sense of that now you have a lot of screening ongoing, the mechanism is not new. It's here for a long while. But since the case numbers are dramatically increasing, I don't have to have a crystal ball to say that we've got to see more cases in the long run here. 

Niyati: Right. And from a policy perspective, how should countries balance legitimate security concerns, which of course we've talked about, with the need to remain open and attractive to foreign investors? I think that's a challenge or maybe a negative impact that countries see. 

Steffen: I think both interests are not only legitimate, but also quite key. And I think personally, I would start that a well-run economy, which is highly competitive and also to the largest extent possible, open is actually the best insurance against outside threats because it allows you to spend full revenue, which you generate by taxes and others on your own defense. So I think any meaningful defense rests on a well-run economy. Hence, we need to have, at least to some degree, open economies. And even though the perspective on open markets has changed over the course of the last years, economic rationale has not changed. Open markets generate more wealth than if you're not trading. So that's for sure. And here, I think it's decisive, especially from a European perspective, to remain open to the largest degree, to have clearly defined. Investment screening mechanisms, which are from an investor's side, well understood in advance, so you can actually prepare, you understand which transactions are caught, which are not caught, what are the thresholds, what are the types of transactions, and also what kind of legal remedies are available if I'm unhappy about a decision and I feel unjustly treated by the administration. And here I think we we can do more to become quite transparent on those mechanisms and just also it's it's a way of of displaying openness if you are clear that you are prepared to defend your vital security interests on the other hand you want to also be held accountable If your mechanism is, yeah, well, not ideally run and you can be held accountable best by courts, if your criteria are clearly set out and you don't have those very soft, hardly predictable legal concepts as public order and security not further defined. And this is actually what the European Union does try to achieve with also the new screening regulation. The proposal is to not clearly define what is emerging technology, what is really critical infrastructure, and so forth. So giving more guidance to investors. This is key here. 

Niyati: Yeah. And looking ahead, you covered a lot of it, and our listeners cannot see, but I was nodding my head because I completely agree with you. So looking ahead, do you foresee new forms of disputes arising because of the intersection between FTI screening and investment arbitration? Or you think it's going to be more of the similar kinds of disputes with a new flavor, just like a new additional maybe layer of protection that investors might think to have been breached? 

Steffen: I think that investment arbitration is actually, in the area of investment screening probably in many jurisdictions the only remedy. Because the legal redress, for example, in the United States, is restricted to due process. So you can review of whether the result reached was reached in a lawful manner, so sufficient consideration of facts and so forth, and no bias in decision making, but of whether national security or open markets shall win in the end, that's unreviewable. So, our jurisdictions have no review whatsoever when it comes to national security. Then very few, like a German jurisdiction, they have a full reviewability, but then there's a large degree of deference to government decisions. So, here I think there is more space than what you typically find outside this national security context for investment arbitration. And that's maybe good news for investors, but maybe on the other hand, it may also be more and more seen as a problem for governments, which feel restricted in their exercise of sovereign powers in investment matters. And the question is, how are they going to react? Are they accepting that they are held accountable by investment tribunals, or are they rolling back investment arbitration? That's, I think, the interesting question. Look to Latin America, for example. That is maybe something which we may also see at the right side. 

Niyati: Yeah, and that's the big debate in the EU, right? What do we do with investment arbitration? I guess it's a big debate globally. What do we want to do with investment arbitration? And are the BITs in the current form sustainable going forward with all of the changes that are happening? And I think it's also partially due to all the experience that states have now had that investment arbitration in the past 20 years or more even. 

Steffen: When you look to Europe, I think the situation is slightly different. It's not about trying to avoid accountability. I think it's more about which forum is going to decide questions of government regulation and its legality. And here the European Union has decided for itself that they don't want to have investment tribunals decide these questions by state courts. So it's a slightly different question, though. But I agree you have a debate out there which is very much tailored around what to do with investment arbitration if it comes under pressure for varying reasons. 

Niyati: Yeah, no, I think we're both following the whole debate that's been going on for several years now. We'll see which direction we end up going in. For example, India is now entering into new FTAs and new EITs and protecting its rights a little bit more. So maybe that's the direction to go in, especially with India. A lot of investment is going outward. So it is important to protect foreign investors, which means Indian nationals and corporations, their rights when they invest outward. I am diverging from the topic of discussion. So stepping away from the heavier, I think we've had a good discussion about the basics as well. I hope our listeners have learned a bit about investment screening, especially from the EU perspective. and also from the Swedish perspective. Stepping away from the heavier policy and legal topics for a moment, could you share with our listeners who has been a mentor or a key source of inspiration in your career and why? It doesn't have to be a lawyer. 

Steffen: It doesn't have to be a lawyer. That's good news. I was fortunate enough to have wonderful teachers at my grammar school. And I also thought that my university education was guided by colleagues, now colleagues, which helped us develop a good sense of independence and also a sense of work ethics. And for that, I'm very grateful. I mean, there's this slogan, which has been with me from my school time, ex laboris fructus, which is obviously a Latin phrase. So out of work, there will be fruits, not imperfectly translated. And that's a bit what has been with me. Just, you know, keeping calm and carrying on. 

Niyati: Yeah, it's kind of like you reap what you sow. So I think it's similar in those two sayings. But thanks, Steffen. Thanks for taking the time to speak with us today. I personally learned a lot about what you're seeing and from your immense experience that comes out of your experience with the EU, European government, and just your general investment arbitration experience. On that note to our audience, thank you so much for listening. If you have any questions you want to talk about FDI screening investment arbitration or the boot camp that is happening in in India next month please don't hesitate to reach out to Steffen. If you obviously have any questions for me you can reach out to me as well. We thank you again for listening. 

Steffen: Thank you so much. 

Outro: Disputes in Perspective is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's litigation and dispute resolution practice, please email disputesinperspective@reedsmith.com. You can find our podcast on podcast streaming platforms, reedsmith.com and our social media accounts at Reed Smith LLP. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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