Proposal for a new EU investment screening framework

On September 13, the European Commission (Commission) proposed a regulation creating a new framework for screening foreign direct investments into the European Union (EU).  The proposal would address the potential for divergence among existing Member State screening mechanisms and create a new oversight role for the Commission itself.  The framework could affect acquisitions in a broad range of industries, including communications, data storage, energy and transport infrastructure, artificial intelligence and robotics.

Several Member States already have national mechanisms in place enabling them to intervene in transactions that they believe endanger their national interest, but there is currently no EU regime for reviewing foreign investment into the EU other than the EU Merger Regulation (EUMR), which restricts Member States’ ability to review transactions subject to the EUMR on any ground other than public security, media plurality and prudential rules. The proposal would not require Member States to adopt or maintain screening mechanisms, but would create minimum requirements for such mechanisms, including judicial review of decisions, non-discrimination, and transparency, as well as setting out a list of factors to be considered when screening investments (e.g., effect on critical infrastructure, technologies, inputs essential for the security or the maintenance of public order, and access to sensitive information).  In considering whether a foreign investment is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is “controlled by the government of a third country, including through significant funding.” This suggests greater scrutiny under the framework of foreign direct investments by state-owned enterprises and sovereign wealth funds.

Under the proposal, Member States would be required to notify the Commission of existing screening mechanisms and provide annual reports on their application. Member States that do not maintain a screening mechanism would be required to collect information and report on foreign direct investments taking place in their territory and create a contact point that could be contacted on issues relating to the implementation of the proposed regulation.  The regulation would also create a system for national governments to raise concerns with each other about problematic investments.  A Member State conducting a screening would be required to inform other Member States within five working days, and other Member States would then have 25 working days to provide comments.

If an investment concerns projects or programmes of Union interest, such as projects involving EU funds, the Commission would be able to carry out its own assessment of the investment’s impact on security and public order. In such cases, the Commission’s opinion would be addressed to the Member State in which the investment is planned or completed.  The addressed Member State would be required to “take utmost account of the Commission’s opinion” and provide an explanation if the opinion is not followed.  The proposal contains an indicative list of such projects, including networks for transport, energy, telecommunications, and the European GNSS programme.

In addition, the Commission would oversee information exchanges between Member States and be able to issue a non-binding opinion on investments under review, taking account of comments made by Member States, within an additional period of 25 working days. Interestingly, the regulation includes an overarching anti-circumvention provision allowing Member States broad discretion to maintain, amend or adopt measures necessary to prevent circumvention of the review procedure or review decisions. This provision will allay the concerns of several Member States that creative group or ownership structures could conceal FDI and circumvent the rules.  

The Commission’s proposal will now be considered by the European Parliament and the Council of the European Union (Council). In Council, the Commission can expect support from the French, German and Italian governments, who have voiced concerns about state-owned third country investors investing in strategically-important sectors across the EU.  These Member State governments and the Commission have also complained that the EU’s “openness” to foreign direct investment is not reciprocated by key trading partners.  In the Parliament, the proposed regulation will be scrutinised by the European Parliament’s International Trade committee, eight of whose members were amongst 10 senior European People’s Party legislators that called on the Commission to bring forward legislation on the screening of foreign investments in strategic sectors in March of this year.  The prospects for adoption of the proposed regulation thus seem good.