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31.01.2019

The EU Framework for the Screening of Foreign Direct Investment

On 20 November 2018, the European Parliament and the Council have reached a political agreement1 on the proposal of the Commission2 for the first comprehensive European Union (EU) framework for the screening of Foreign Direct Investment (FDI). It can now be expected to enter into force soon.

The framework is a response to growing concerns of several EU Member States (MS) about foreign investors, notably state-owned enterprises, taking over EU companies with key assets for strategic reasons and about EU investors’ often not enjoying the same rights to invest in the country from which the foreign investment originates.

The term “FDI screening mechanism” (FDISM) essentially refers to a law allowing a public authority to assess, authorise, prohibit or unwind FDI in companies, assets or sectors considered of strategic importance, on grounds of security or public order. Several MS already have FDISM in place, albeit significantly differing in design and scope.

Based on the Commission proposal, the framework:

  • Enables (but does not require) MS to maintain or adopt FDISM (other than those already allowed or required under existing EU legislation, for example, in the energy sector) and provides legal certainty for those MS, in view of the EU’s exclusive competence for the regulation of FDI (which otherwise excludes any MS legislation);
  • Defines certain basic requirements that FDISM of MS must fulfil (in terms of, for example, transparency, legal certainty, non-discrimination, protection of confidential information, access to judicial review) without, however, harmonising their design and scope;
  • Provides for an indicative list of factors which may be taken into account in the screening of FDI, including effects on critical assets (critical infrastructure, technologies, inputs/raw materials, information) and influence exercised on the foreign investor by the government of a third country, including through funding; and
  • Establishes a mechanism for close and systematic information and cooperation between MS and the Commission in relation to FDISM and FDI undergoing screening, also with a view to increase transparency in this regard.

The framework does not (yet) establish a FDISM at EU level. While the Commission is competent to assess relevant FDI, it can only issue advisory opinions to the MS concerned. Although its opinions must be taken into account, in particular where the FDI is likely to affect projects or programmes of Union interest (e.g., Galileo, Copernicus, Horizon 2020/Key Enabling Technologies, Trans-European Networks), the MS has the final say.

Even though, for now, the framework is only an enabling regulation which largely recognises the autonomy of MS to protect (or not) their critical assets against FDI in line with their national strategic interests, it can nonetheless be expected to lead to an increase in regulatory hurdles for FDI in strategically important sectors of the EU. It is therefore undoubtedly an important and relevant piece of legislation, especially for foreign investors and for owners of potentially critical assets in the EU.

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1 Press releases of the Commission and the Council available here and here.
2 Available here.

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