European Commission reports on operation of EU FDI screening mechanism

The Regulation established a cooperation framework for screening foreign investments into the EU for their impact on security and public order, based on the regimes in individual Member States. A Member State receiving a filing under its FDI control regime must immediately inform all other Member States and the EC of that filing and provide information as required by the other Member States and the EC. And while the appropriate response to a particular FDI rests exclusively with the specific Member States in which the investment is planned or completed, they must give due consideration to any comments received from other Member States and any EC opinion (and in limited cases take ‘utmost account’ of the EC’s opinion).

In practice, the screening mechanism is efficient but more EU cases require mitigating measures

The EC says “the EU remains open to foreign investments, but this openness is not unconditional. It must be balanced.” The statistics and trends recorded in the 2021 report concur.

Intervention:

• There were over 1,500 requests for authorisation and ex-officio cases, nearly 30% of which were formally screened.
• 73% of formally screened cases were authorised unconditionally.
• 23% of cases involved the negotiation of actions, assurances and commitments from investors prior to approval – this is a significant uptick on the first report which recorded 12%.
• Frustration of transactions remains rare: just 1% of decided cases were blocked.
• The EC gave an opinion in less than 3% of transactions.

Foreign investors:

• The top five countries for the ultimate investor notified were (in order) the U.S., the UK, China, the Cayman Islands and Canada.
• Russian FDI accounted for less than 1.5% of the cases and Belarus for 0.2%. Those figures can be expected to be even lower within the next few years as a consequence of the sanctions imposed against these two countries. The EC uses its report to remind EU Member States to be even more vigilant in their review of Russian and Belarussian investments, as already emphasised in the EC’s April 2022 guidance on assessing and preventing threats to EU security and public order from Russian and Belarusian investments.

Industries of concern:

• Unsurprisingly, most cases requiring a detailed assessment concerned the diverse ‘manufacturing’ sector (covering defence, aerospace, energy, health and semiconductor equipment), with Information and Communications Technologies next.

Timing:

• Of the 414 cases notified in 2021, the vast majority (86%) were closed in Phase 1, with only 11% of the notified cases closed in Phase 2, and less than 3% of cases resulting in an opinion from the EC.
• The duration of cases requiring a detailed Phase 2 assessment varied significantly, in part dependent on the provision of information by investors.

FDI regimes are spreading, but not in alignment

The EU FDI Regulation encourages – but does not require – Member States to adopt FDI regimes complying with certain minimum standards. And the EC has continued to encourage Member States, both at political and technical level, to adopt, adapt and implement national screening mechanisms to ensure the collective security of the EU and its Member States. The global pandemic and disruptions in global supply chains have focused political attention.

As a result, 18 Member States now have an FDI regime in place, many of which have been recently updated and expanded. Additional EU Member States including Belgium, Croatia, Estonia, Greece, Ireland, Luxembourg and Sweden are actively considering the implementation of FDI regimes. Some of these new regimes may even provide for a “retroactive effect”, reserving to the relevant government the right to scrutinize transactions that were signed or closed before the new rules entered into force. This was the approach taken in The Netherlands recently (and, outside the EU, the UK).

Other EU Member States are constantly reviewing their existing regimes, in some cases in order to make the clearance procedures less burdensome (such as Italy’s introduction of a new pre-notification regime).

In practice, we also note that some Member States may avoid taking decisions where FDI clearance procedures overrun (for different reasons) the longstop dates agreed between the parties; this outcome may have a similar effect to a veto of the transaction.

Perhaps inevitably, this proliferation of FDI regimes has led to significant variation in rules across the EU. The concept of foreign investors varies and some EU Member States reserve the right to screen intra-EU investments. Likewise, the regimes differentiate between relevant triggers such as thresholds, shares, voting rights or relevant assets. The sectoral coverage is also very different from one Member State to another. The regimes may require mandatory filings and provide for stand-still obligations. Infringements of filing and clearance obligations may trigger fines or criminal sentences, and transactions may risk nullity. Moreover, we note in practice that the duration of procedures varies between EU Member States and that some EU Member States impose remedies on investors much more frequently than others.

It is reassuring, therefore, that the EC “remains dedicated to support the alignment of national screening mechanisms”.

An evolving EC approach

As part of the legislative evaluation of the EU FDI Regulation, a study on the EU FDI cooperation mechanism will feed into an EC review on the potential need for a revision of the FDI Regulation in 2023. The study considers, amongst other things, the effectiveness and efficiency of outcomes and the administrative burden on investors. In a best case scenario, this may help to identify best-practices, eg in terms of the commitments that EU Member States demand from investors and will (hopefully) help to make the outcome of FDI procedures more predictable and manageable.

In general, as the EU FDI screening regime matures, we expect the EC to look to play a more pro-active role both in the EU and internationally, building on its current cooperation with the U.S. through the Trade and Technology Council. We also expect the EC to adapt its approach and guidance to Member States as political and economic conditions evolve. In addition, it will be interesting to see to what extent the EC and the EU Member States adopt approaches taken in non-EU FDI regimes (such as the U.S. and the UK) to expand the scope of their ability to scrutinise transactions.

Finally, the EU has adopted a legislative package that will introduce a new independent review process: the EC will be empowered to review the impact of “foreign subsidies” including on M&A transactions. As some EU Member States already consider the sources of any investor’s funding (particularly state-owned investors’ funding), this is likely to create more complexity and overlap between the competencies of the EC and Member States.