Background

On February 14, 2019, the European Parliament (EP) plenary session agreed to adopt an EU mechanism for screening foreign direct investments (FDI) in order to protect strategic sectors.

Traditionally, the protection of security interests and public order has been reserved for member states, and 14 of the now 28 member states have legislation providing for some form of screening foreign investment. The strictest rules are in Germany and France. The EU Treaties did not give such explicit powers to the European Union (EU). However, the 2009 Treaty on the Functioning of the EU explicitly provided for the possibility to extend implicit powers to the EU, in cases where such powers are necessary to implement new EU legislation approved by the EU member states. The same Treaty also provided the EU with new powers in the area of foreign direct investment, which the European Commission (Commission) is keen to exercise on its behalf.

Key features of the proposed EU regulation on the screening of FDI

On September 13, 2017, the Commission published a proposal for a new EU regulation that would give it wide-ranging powers to screen foreign acquisitions that may affect security or the public order in the EU. In announcing the proposal, Jean-Claude Juncker, President of the Commission, stated “…we are not naïve free traders. Europe must always defend its strategic interests. This is why today we are proposing a new EU framework for investment screening. If a foreign, state-owned company wants to purchase a European harbour, part of our energy infrastructure or a defence technology firm, this should only happen in transparency, with scrutiny and debate. It is a political responsibility to know what is going on in our own backyard so that we can protect our collective security if needed.”

Negotiations between the Commission, the EP and the Council of the EU were concluded on November 20 2018, and a provisional agreement on a text for the proposed regulation was released. Although the compromise text mainly follows the European Commission’s proposal of September 2017, some noteworthy amendments were made. These amendments include a clearer definition of the roles of the different actors involved, additional screening factors and an enhanced cooperation mechanism. With respect to the latter, the provisional agreement provides for a “cooperation mechanism” between the Commission and the member states in national review procedures. In such cases, the Commission will be informed promptly and empowered to issue an opinion to the member state to which the latter must give “due consideration”. In other words, although the final decisions rests with the member state, the member state will have to “take utmost account” of the Commission’s recommendations. If it decides not to follow a recommendation, then it will have to justify its decision not to comply with the issued recommendation.

In determining whether a foreign direct investment is likely to affect security or public order, the text endorsed by the EP provides that EU member states and the Commission may consider its potential effects on, inter alia:

(a) Critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure
(b) Critical technologies and dual use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies
(c) Supply of critical inputs, including energy or raw materials, as well as food security
(d) Access to sensitive information, including personal data, or the ability to control such information
(e) Freedom and pluralism of the media.

In addition, the text provides that EU member states and the Commission may also take into account:

(a) Whether the foreign investor is directly or indirectly controlled by the government of a third country, including through ownership structure or significant funding
(b) Whether the foreign investor has already been involved in activities affecting security or public order in an EU member state
(c) Whether there is a serious risk that the foreign investor engages in illegal or criminal activities.

As before, the proposed regulation also encourages, but does not require, EU member states to adopt national measures to screen foreign investments involving sensitive sectors. The decision whether to set up such screening mechanism thus remains the sole responsibility of each member state. 

It is worthy to note that the Commission (or member state) review would be conducted in parallel to review under the EU Merger Regulation (the EUMR) and coherence would be required where the same concerns occur under both the EUMR and the investment screening.

Next steps

The Council is expected to endorse the agreement formally on March 5, 2019. The regulation will enter into force once the Council has given its approval. After that, member states and the Commission will have 18 months to put in place the necessary arrangements for the new mechanism to operate.