On September 13, 2017, the Commission published a proposal for a regulation establishing a framework for screening of foreign direct investments into the European Union (hereinafter the “Regulation Proposal”).

The observation at the origin of this Proposal is that the European Union is one of the most open regimes in the world. However, this openness cannot function without some control over European strategic interests.

Although the Commission accepts that Member States can protect their national interests, the principle remains that this control must be exercised while respecting freedom of movement, in particular when it comes to investments made by other Member States. The Proposal is made whereas several Member States have already put in place an internal foreign investment screening mechanism as is the case in France. Nevertheless, there is no mechanism at European level.

The Proposal has two main objectives which are, firstly, to establish a harmonized analysis framework for the Member States which want to maintain, modify or adopt a mechanism for screening foreign direct investments in strategic national assets and to a lesser extent, to define a European screening mechanism after opinion from the Commission on foreign direct investments in projects or programs of Union interest.

If this initiative can, at first sight, be a source of concern for foreign investors, the European Union institutions are nevertheless trying to be reassuring: this proposal is not in any way intended to deter foreign investments. The Commission published a communication in this respect with the evocative title: “Welcoming foreign direct investments while protecting essential interests”.

Unless the Regulation Proposal is substantially modified by the European Parliament and the Council during its adoption, its contribution seems limited and it does not replace the national screening mechanisms already in place in the Member States.

1.The emergence of an intent to regulate the screening of foreign direct investments at European level

Whereas foreign investments fall under the common trade policy and the exclusive jurisdiction of the European Union, they are only currently screened by a few Member States at national level: France, Germany, Italy, Spain, Portugal, United Kingdom, Austria, Denmark, Finland, Poland, Lithuania and Latvia.

The screening mechanisms put in place in these States are rather diverse: they may only target investments from countries outside the Union or all foreign investments, fall under an ex post screening regime or a prior authorization regime, be limited to strategic sectors or not, be carried out on the basis of qualitative (for example, takeover) or quantitative (percentage of shares or voting rights) criteria, be limited to the sole defense sector or take into account public safety and public order in more global manner.

In France, the screening mechanism put in place is a quite sophisticated prior authorization regime which makes a distinction between countries in and outside the Union (the screening being lighter when investments come from a Member State of the European Union), carried out on the basis of qualitative and quantitative criteria and based on a broad understanding of public order taking notably into account imperatives such as integrity, safety and business continuity in transport networks, electronic communications and the protection of public health with respect to investments from States outside the Union.

The concerns generated by the multiplication of certain foreign investments in strategic assets in Europe (notably from Brazil and China) now raise the question of setting up a clear and harmonized European framework. Nevertheless, the Union institutions continually state that foreign investments are welcome in Europe, as they are factors of economic growth, innovation and job creation.

Without substituting itself for the Members States which are admittedly the best placed to appreciate their individual situation and national specificities, the Regulation Proposal is intended to provide more legal certainty for foreign investors, more transparency in the national screening mechanisms and guarantee to these investors the absence of discriminatory treatment.

It is clearly indicated that the screening of foreign direct investments is not in any way intended to replace or interfere with merger control whether at European or national level, as the purpose of these two mechanisms is completely different. It superimposes itself on a great number of other regulations in strategic sectors.

2. Harmonization and clarification of the legal framework of national mechanisms for screening foreign direct investments

At Member State level, the Regulation Proposal should not be a major change in the sense that it does not require them to put in place a screening mechanism if they do not have one already, limit the existing mechanisms or adapt them. In France, the content of the prior authorization regime of certain foreign investments as extended by decree No. 2014-479 of May 14, 2014 should therefore remain unchanged.

Article 4 of the Proposal proposes a number of factors to be taken into account by the Member States in the scope of the screening but these factors are only indicative and can be completed by the Member States depending on their specificities. These factors correspond to the potential effects of the investment on infrastructure (energy, transport, communications, data storage, space or financial infrastructure) and critical technologies (artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cyber security, space or nuclear technology), the security of supply of critical inputs and access to sensitive information or the ability to control sensitive information. For the record, the French regime is based on a broad understanding of the imperatives to be protected with respect to investments from States outside the Union (see point 1 above). The Member States are also invited to take into account whether the foreign investor is controlled by the government of a third country.

In the end, the Proposal’s main step forward seems to be the definition of minimum procedural requirements ensuring a certain number of guarantees in the application of the screening and in particular:

• the guarantee of transparent mechanisms (conditions, reason for screening, detailed procedural rules applicable),
• respect by the Member State of the deadlines fixed in advance to give a decision,
• the confidentiality of the information relating to the foreign direct investments,
• and the existence of an effective remedy against the Member States’ screening decisions.

3. The screening mechanism applied to projects or programs of Union interest

One of the real innovations of this Proposal seems to be the possibility for the Commission to carry out a form of screening of the foreign direct investments affecting projects or programs of Union interest.

Projects and programs of Union interest are those which involve a significant share (without this share being defined) of Union funding and which are covered by Union legislation. An indicative list is provided in annex 1 of the Regulation Proposal and mentions projects such as Galileo, EGNOS and Copernicus in satellites, Horizon 2020 in research and innovation and trans-European transport, energy and telecommunications networks.

In this case, the European Commission is to give an opinion on the investment within a maximum period of 25 working days from receiving the information which it will have requested, as the case may be, from the Member State concerned.

In practice, the extent of the Commission’s new power remains very limited for the following reasons:

• The number of projects or programs of Union interest is likely to be relatively limited;
• The Commission’s power only consists in giving a non-binding opinion to the Member State in which the investment is contemplated, it being up to this Member State to provide an explanation if it does not follow this opinion;
• This power seems completely ineffective if the Member State concerned has not set up a direct investment screening mechanism since the Proposal does not define an autonomous European screening mechanism.

4. The development of cooperation and exchanges between Member States and with the Commission regarding foreign direct investments

In its Regulation Proposal, the Commission requires the Member States to notify it of the existence of any screening mechanism and any modification made thereto by a Member State. In addition, all the Member States have to communicate to the European Commission an annual report on foreign direct investments and, as the case may be, the application of the screening mechanisms.

Finally, Article 8 of the Regulation Proposal establishes a timely information procedure of the other Member States and the Commission in case of screening of an investment by a State and provides for the possibility for these States to present comments if they consider that the strategic interests of one or more Member States are impacted. Once again, the Member State concerned is invited to take these comments into account without however being bound by them.

These cooperation measures between Member States should in the future ensure greater transparency and a better detection of foreign investments in the strategic assets of Member States as well as a better detection of the transactions submitted to European merger control.

In short:

• The Regulation Proposal does not require the Member States to set up a mechanism for screening foreign direct investments if they do not have one already;
• It also does not limit or modify the substance of the existing mechanisms for screening foreign direct investments for the others;
• The content of the French prior authorization regime of foreign direct investments will therefore remain unchanged;
• The Regulation Proposal harmonizes and proposes a minimum procedural framework for the national mechanisms for screening foreign direct investments to offer more guarantees to foreign investors;
• No screening mechanism per se of foreign direct investments is established at European level in case of investments in projects or programs of Union interest. It is simply provided that the Commission will give an opinion which will not be binding for the Member State in which the investment takes place;
• Finally, cooperation, information and transparency obligations are established for Member States on the foreign direct investments made there and the application of the mechanisms for screening these investments.