EU Commission publishes proposal for the FDI Screening Regulation - Member States are now obliged to establish a harmonised screening mechanism

On 24 January 2024, the European Commission (Commission) published for the Regulation on Foreign Direct Investment Screening Regulation 2019/452 (FDI Screening Regulation) a proposal (Proposal Regulation). The background is the Commission's third annual report, according to which the importance of foreign direct investment screening continues to increase due to geopolitical challenges and it must be ensured that the (security) interests of the European Union (EU) are preserved. In the Commission's view, the crucial factor here is the widespread introduction of harmonised screening mechanisms in all Member States.
 

Background

The current FDI Screening Regulation entered into force on 11 October 2020 and created a cooperative framework for the screening of foreign direct investments by the respective authorities of the EU Member States regarding their impact on security and public order.

The Commission's third annual report revealed that 21 countries have already introduced a screening mechanism and that the six most important countries of origin for direct investments are the USA, UK, China, Japan, the Cayman Islands and Canada. Furthermore, less than 3 % of the more than 420 cases reviewed by the Commission in 2022 resulted in issuing an opinion. While the Commission says the number of cases has increased significantly each year, experience from a public consultation has shown "that the current system could be improved". For example, the Commission mentioned insufficient cooperation between screening authorities and significant differences between screening mechanisms across the EU, particularly in terms of timing, coverage and the notification procedures themselves.
 

Obligation to establish a screening mechanism

The current FDI Screening Regulation does not require Member States to introduce or implement a screening mechanism. It is currently the right of the Member States to decide whether or not to screen a foreign direct investment within the requirements of the FDI Screening Regulation in accordance with Art. 1 (3) FDI Screening Regulation. The now published proposal of the Regulation significantly changes the existing FDI Screening Regulation and the "screening landscape" regarding foreign direct investments within the EU. It now requires member states to set up a screening mechanism that fulfils the requirements of the Proposal Regulation (see Art. 3 (1) Proposal Regulation). The member states are given 15 months from the entry into force of the Proposal Regulation to implement this obligation (see Art. 3 (3) Proposal Regulation). This requirement is intended to close a gap in the protection of security and public order in the internal market, as 22.7 % of foreign acquisitions and 20 % of greenfield investments take place in Member States that have no or only an inadequate screening mechanism. In addition, the political context has changed in recent years, meaning that risks now need to be recognised more effectively.
 

Obligation to comply with minimum screening requirements

In addition to the obligation to establish a screening mechanism, Art. 4 of the Proposal Regulation also demands minimum screening requirements. In terms of procedure, a two-stage system is intended. In a first stage, the screening authority should determine whether it has jurisdiction for examining the foreign direct investment and - assuming this is the case - carry out an initial review (Stage I). If necessary, the authority should be able to carry out an in-depth investigation of the foreign direct investment in a second step (Stage II). The notification and review of the foreign direct investment should now be prior to the completion of a transaction. Furthermore, the parties involved should have the right to make their views known before the screening authority takes any measures, and the authority should also take precautions to ensure the confidentiality of sensitive information throughout the entire process. Finally, there must be the possibility of taking legal action against decisions.
 

Obligation to screen foreign direct investments in certain sensitive sectors

The proposal also states in Art. 4 (4) of the Proposal Regulation that certain sensitive sectors in which foreign direct investments must be examined by the national screening authorities. The approach is quite detailed and covers all activities of a target company that are within the scope of projects of Union interests (Annex I of the Proposal Regulation) or are listed in Annex II of the Proposal Regulation (e.g. semiconductor technologies, AI language processing, cloud computing, quantum computers, biotechnologies, the "Internet of Things" or "virtual reality" as well as goods from the Dual-Use Regulation or the list for the export of military technology and military goods). The implementation of bare minimum requirements for the sectors enables the member states to also examine investments in other sectors. This approach was taken in view of the different industrial sectors of the member states and the resulting different security risks (see recital 9 of the Proposal Regulation).
 

Extension of the scope of application to certain investments within the EU

The proposed regulation additionally extends the scope of the FDI Screening Regulation to include investments made by a European company that is controlled by a non-EU investor. This extension is intended to ensure that the processing of these transactions is also subject to the screening, since the power to decide on the investment lies with the non-EU investor. The background to the extension is likely to be the judgement of the European Court of Justice in the "Xella" case, which declared the FDI Screening Regulation inapplicable in such a constellation, as the acquisition was made by a company based in the EU and no indirect acquisitions from third countries were covered by the regulation (ECJ, Judgement of 13 July 2023, Xella Hungary, C-106/22).

The area of greenfield investments is now also considered by the Proposal Regulation. Member States should not be obliged to examine these. However, the Commission recommends that Member States at least include them in the scope of application if greenfield investments are made in sectors, that are important for the security and public order of the Member State.
 

Harmonisation of the determined standard

In order to ensure the creation of a harmonised determined standard, Art. 13 of the Proposal Regulation lists various criteria for the evaluation of a potential threat to security and public order. The examination must consider, in particular, negative effects on (i) the security, integrity and functioning of critical infrastructure, (ii) the actual availability of critical technologies (including relevant enabling technologies), (iii) the possibility of a constant supply of critical input for security or public order, (iv) the protection of sensitive data or (v) freedom or pluralism of the media. When assessing a potential threat to security or public order, the circumstances or context of the foreign direct investment should also be taken into account. This includes, for example, whether a foreign investor is directly/indirectly controlled by the government of a third country or is involved in the pursuit of political objectives of third countries to promote their military capabilities.
 

Extension of notification obligations, right to comment and own-initiative procedure

The Proposal Regulation also extends the notification obligations of Member States to other Member States and the Commission with Art. 5 of the Proposal Regulation. Stage I procedures only have to be notified under certain conditions. This is either the case, if the target company is involved in a project or programme of Union interest (Annex I Proposal Regulation) or is active in an area in which a licensing requirement exists (Annex II Proposal Regulation) and the investor is either (i) controlled by a government of a third country, (ii) subject to restrictive measures or (iii) was involved in a foreign investment that was previously examined by a Member State and not authorised or only authorised with conditions. Stage II procedures must always be notified.

In addition, Article 7 of the Proposal Regulation still allows Member States to submit comments to another Member State in which a foreign investment is to be made. For this purpose, the Member State must express the opinion that a foreign direct investment could affect the security or public order of its (own) country, or it must have information that is relevant for the screening of this foreign investment. The Member State also forwards the comments to the Commission, which in turn still has the right to issue opinions. Art. 8 of the Proposal Regulation now defines the deadlines and procedures for this in more detail and gives the Commission five more days to notify that it reserves the right to issue an opinion compared to the current FDI Screening Regulation. Experience has shown that the Commission needs a few additional days in order to gain a sufficient overview, particularly in the case of necessary queries.

Art. 9 of the Proposal Regulation also allows a member state to initiate its own procedure on its own (so-called own initiative procedure). For this, it must consider that a foreign investment in the territory of another member state that has not been notified under the cooperation mechanism is likely to affect its own security or public order. The member state then has 15 months after the foreign investment has been completed to do so.
 

Commentary and perspectives

The Proposal Regulation provides for significant changes in the screening of foreign direct investments. The current FDI Screening Regulation was characterised by proposals from the Commission and placed few obligations on the Member States. The minimum criteria that have now been defined restrict the Member States scope of action and, in particular, oblige them to introduce an effective screening mechanism including (harmonised) minimum requirements. A comprehensive system of harmonised screening of foreign direct investments should be welcomed from a corporate perspective, as the complexity of regulatory requirements within the EU (merger and investment control as well as the Foreign Subsidies Regulation) is increasing and ultimately has a significant impact on transaction planning (in terms of timing, but especially regarding transaction security). The minimum requirements now envisaged regarding deadlines and procedures are therefore to be welcomed in principle.

The proposal must now proceed through the ordinary legislative procedure and be reviewed by the European Parliament and the Council of the EU. In the light of the elections to the European Parliament in June this year, however, it is likely that the legislative process will be delayed. As the new regulations must be implemented 15 months after their entry into force, the new provisions would therefore not become fully effective until 2026 or 2027.
 

Link to the proposal of the FDI Screening Regulation

Link to the Commission's third annual report