EU framework for screening foreign direct investments
Foreign direct investment into the European Union (EU) made by third country companies or individuals has become increasingly common, taking the form of mergers, acquisitions, joint ventures or new businesses. It has in recent months come to the European Commission’s attention that some EU Member States are concerned about certain foreign investments, which may have a significant economic impact because of their larger than average size and their focus on high-technology sectors. As a response to a growing demand from the Member States for guidance on how foreign direct investment should be handled, the European Commission has proposed a new draft regulation for screening such investments.
Some Member States have already started their own screening processes, for example Austria, Denmark, France and Germany, while others have not. All Member States have however recognised that there are security concerns that need to be addressed. The proposed regulation is aimed at certain investments, in particular from state-owned enterprises investing in strategic areas. Even though these investments are generally allowed in the EU, there are often no reciprocal rights to invest in the third country from which the investment originates.
Foreign investments may have an impact on security and public interests, but are at the same time important sources of economic growth, jobs and innovation. Although the benefits brought to the EU by such investments are not to be disregarded, the European Commission has found it appropriate to establish a screening process framework for the purpose of increasing legal certainty and predictability, both in relation to investors as well as the Member States.
The proposed regulation does not include any requirement for Member States to adopt screening mechanisms; it merely enables them to maintain their already existing mechanism of screening or to adopt such mechanisms to review foreign investments on the grounds of security or public order. In addition, the proposal authorises the Commission to offer an opinion on the impact of investments that are likely to affect projects or programmes of EU interest. The regulation also sets out obligations for the Member States to share information on foreign investments through a network of contact points, both in relation to each other and the Commission. This is intended to increase coordination opportunities regarding the risk assessment.
In the screening process, factors such as critical infrastructure (including energy, transport, space or financial infrastructure), critical technologies (including A.I, robotics, space or nuclear technology), the security of supply of critical inputs or access to or control of sensitive information, may be considered. If the investor is controlled by the government of a country outside the EU, this may also be taken into account. The proposed framework is accordingly fairly broad and appears not to be limited to acquisitions of control.
There are certain rules for the screening process set out in the proposal. First, the mechanisms for screening should be transparent, non-discriminative and predictable. Circumstances which have triggered the screening, the grounds for screening and the procedural rules should be set out. Second, the Member State should establish a timeframe for the decision to be made. Third, confidential information about the investor which might be commercially sensitive should be protected. In addition, the proposal sets out that investors should have the possibility to seek judicial review against the decisions made.
The contents of the draft proposal must now be negotiated and amended before it can be approved by the European Parliament and the Member States. This process can be expected to take between one and one and a half years, and the new rules can be expected to enter into force in late 2018 or early 2019.
The proposal is meant to complement and not affect other Union policies and initiatives. According to the Commission the proposal will not affect the free movement of capital and freedom of establishment.
The regulation does not distinguish between countries, as it is non-discriminatory, however it will have an effect on many investments made by state-owned enterprises. These are often Chinese investors acquiring European assets, but also investors from the United States, Canada, Brazil and other top foreign investors into the EU may now need to consider whether Europe should be their choice of investment destination and also which type of assets they wish to invest in.