EU foreign direct investment screening mechanism now in force

The EU framework for screening of foreign direct investment (FDI) is now fully operational as of 11 October 2020.

As set out in our previous publication, EU Regulation 2019/452, of 19 March 2019, provides a set of principles by which Member States must abide when maintaining, amending or adopting mechanisms to screen FDI in their territory on the grounds of security or public order. The Regulation also establishes an EU-wide FDI screening cooperation framework in which the European Commission and the Member States can coordinate their actions on foreign investments.

The harmonisation of FDI principles

The Regulation establishes a framework for the screening by Member States of FDI into the EU on the grounds of security or public order. It sets out a number of parameters for Member States to observe when maintaining, amending or adopting mechanisms to screen FDI. These parameters require Member States to provide transparency on timeframes, triggers for screening and procedural rules, and, requires them to adopt the principle of non-discrimination between third countries.

Other obligations within the Regulation require Member State FDI screening to preserve confidentiality, provide foreign investors with recourse against decisions, and, put in place anti-circumvention measures (preventing, for example, artificial arrangements through the use of local subsidiaries).

The Regulation contains a non-exhaustive list of factors that a Member State may take into account when determining whether FDI is likely to affect security or public order. These include effects on critical infrastructure, critical technologies, critical inputs (including energy, raw materials and food), access to sensitive information, and the freedom and pluralism of the media. In addition, Member States can take account of whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country (including through ownership structure or significant funding).

Significantly, any Member State FDI screening mechanism must also allow for cooperation between Member States including the taking into account of comments of other Member States and the opinions of the Commission.

How does the cooperation mechanism work?

While each Member State retains sole responsibility for its national security and the right to protect its essential security interests, the Regulation aims to ensure a Union-wide coordination and cooperation between Member States and the European Commission.

First, Member States shall notify the Commission and the other Member States of any FDI in their territory that is undergoing screening. Within 15 calendar days following the receipt of that notice, other Member States must notify the Member State undertaking the screening of their intention to provide comments. The comments must be provided within 35 calendar days following receipt of the initial notice.

In addition, the Commission may issue an opinion addressed to the Member State undertaking the screening - it has an extra 5 calendar days beyond the 35 in which to do so. Where the Commission considers that FDI is likely to affect projects or programmes of Union interest on grounds of security or public order, the Member States undertaking the screening shall take "utmost account" of the Commission's opinion and provide an explanation to the Commission if its opinion is not followed.

Accordingly, the Regulation obliges all Member states to cooperate and share information requested. The Member State undertaking the screening shall give "due consideration" to the comments of the other Member States albeit retaining the final screening decision.

Notably, completed FDIs which have not been screened may be commented upon for up to 15 months following completion. This rule not only applies from the entry into force of the Regulation, but it is also retrospective in its application - this means FDI completed in the last 15 months (and before 11 October 2020) can be subject to intervention from other Member States through the cooperation mechanism.

What does this mean for businesses?

We have seen the COVID-19 pandemic bolster the already politically-driven trend for increasing protectionism - not only globally - but also within the EU. This year has therefore seen a number of EU Member State FDI regimes being introduced or tightened up - likely also in anticipation of the harmonisation exercise undertaken by this Regulation.

Throughout 2020 our practice has seen a significant increase in transactions coming within the broadening jurisdiction of fast-moving regimes around Europe, notably in the UK, France, Germany, Italy, Netherlands and Spain. This development of FDI regimes does not show any signs of slowing down and the parameters and principles set out in this Regulation will play a significant role in shaping what new legislation looks like and how it is implemented.

There a number of key points that those considering transactions should bear in mind as a result of this Regulation:

• Undertake an early FDI analysis: Standard practice should be to undertake a multi-jurisdictional FDI analysis early on in the process, and alongside other regulatory assessments, in order to identify any FDI screening risk. Remember that a full FDI analysis will not only require details of the foreign investor but also sufficient detail of the target's activities.

• Uncompleted investments: Ongoing investments undergoing screening in a Member State may be subject to additional EU-wide scrutiny. Consider not only whether the Member State in which it is being screened but also whether further challenge could be met by virtue of the cooperation mechanism. Moreover, remember that the factors listed as relevant in the EU Regulation are not exhaustive and may not reflect all those factors that are considered at a national level.

• Completed investments: Completed transactions that have not been FDI screened remain subject to comment or opinion for 15 months. This applies retrospectively meaning FDI's completed before 11 October 2020 can be subject to comment through the cooperation mechanism. Unfortunately, the only criterion for a Member State to meet in order to make a request for further information from the Member State undertaking the FDI screening is that it is "duly justified, limited to information necessary to provide comments", "proportionate to the purpose of the request and not unduly burdensome for the Member State undertaking the screening".

• Timings impacted by the standstill obligation: The Member State undertaking the FDI screening cannot make a decision before giving "due consideration" to comment / opinion received or, at a minimum, before the time for giving notice of intention to comment / opine has passed (subject to exceptional circumstances where "immediate action" is required). As a result of this suspensory effect, those undertaking FDI in Member States where the process is typically short, now face a minimum suspension of 15 days and potentially up to 40 days should the Commission seek to opine (in each case plus additional time for giving "due consideration").