On September 13, 2017, the European Commission (the “Commission”) announced a proposal to set up a new EU-wide framework for screening foreign direct investment (“FDI”) into the European Union. The proposal, set out in a draft Regulation, provides for: (i) new foreign investment review powers for the Commission; (ii) a harmonized approach in screening FDI; (iii) specific criteria to be considered when reviewing investments; and, (iv) a cooperation mechanism between Member States and the Commission.
New review powers for the Commission. If the Commission considers that an FDI could affect a “project or program of Union interest” on the grounds of “security or public order”, it may review and issue a non-binding opinion to the EU Member State where the FDI is planned or completed. Although the Commission does not have the power to block the investment, the EU Member State must ”take utmost consideration” of the Commission’s opinion and “provide an explanation to the Commission in case its opinion is not followed”.
Projects or programs of Union interest are those that may either involve substantial EU funding, or are established by EU law regarding “critical infrastructure, critical technologies, or critical inputs”. An indicative list annexed to the draft regulation lists the following projects: European satellite programs (Galileo and EGNOS); Horizon 2020 research and innovation projects relating to “key enabling technologies” such as artificial intelligence, robotics, semiconductors, and cybersecurity; Trans-European Networks for Transport; Trans-European Networks for Energy; and Trans-European Networks for Telecommunications. The Commission seems to be planning to dedicate significant resources to this process, as it estimates that implementation of this Regulation will require around 22 additional FTEs within its services.
Specific criteria and targeted sectors. The draft Regulation prescribes several factors that may be considered in the review by the Commission or member States. Emphasis is placed on: (i) critical infrastructure in sectors including energy, transport, communications, data storage, space, and financial infrastructure; and, (ii) critical technologies including artificial intelligence robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space, and nuclear technology. The proposal also focuses on the security of supply of critical inputs and access to sensitive information. Further, in determining whether the investment may affect security or public order, control of the foreign investor by a third-country government (such as a state-owned enterprise) will be an important factor.
Convergence with national screening mechanisms. The draft Regulation permits EU countries that have their own national regimes to continue screening investments. The Commission has stated that the EU-level investment screening framework will “build on the national review mechanisms already in place in 12 Member States” (Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the United Kingdom). The draft Regulation however imposes a number of requirements on these screening mechanisms, including transparency, non-discrimination, clear timeframes and judicial review.
EU countries without screening mechanisms will be required to provide the Commission with an annual report on FDI in their jurisdictions.
Cooperation mechanism. The proposal provides for a mechanism to enhance EU-wide cooperation. EU countries are required to: (i) inform each other as well as the Commission of any FDI undergoing screening in their jurisdictions; and, (ii) allow Member States affected by a particular FDI or the Commission to comment on ongoing individual cases. Foreign investors can expect to see a high degree of information sharing on their investments, funding, and business structures (among others) between EU countries and the Commission as the draft Regulation specifically provides for this (although the draft Regulation also provides for protection of confidential information).
Impact on EU Merger Regulation. The proposal acknowledges the role of the EU Merger Regulation, which Article 21 (4) allows EU countries to take appropriate measures protecting their “legitimate interests”, notably the protection of public security, plurality of the media, and prudential rules. As part of the information transmitted to the Commission and other Member States, the screening Member State shall “endeavour” to indicate whether the investment is likely to fall within the scope of the EU Merger Regulation. In the event of an overlap of scope between both Regulations, the draft Regulation requires this to be “applied in a coherent manner”.
The draft Regulation has been proposed against the backdrop of mounting concerns in the EU related to investment by third country investors. In that vein, the Commission has noted the “rapidly changing economy, growing concerns of citizens and Member States” and has unusually presented the proposal without an accompanying impact assessment.
The Commission intends to complete this initiative by the end of 2018. Procedurally, the draft Regulation must now go through the ordinary legislative procedure and be approved by the European Parliament and the Council.