The European Commission's Proposal for a New Foreign Investment Screening Regulation: Streamlining National FDI Regimes in Europe or Adding Complexity for Foreign Investors?
In line with its initiatives promoting a European strategy for economic security1, the European Commission (the “Commission”) presented on 24 January 2024 a proposal for a Regulation on the screening of foreign investments in the European Union (“EU”) (“Proposal”)2. The Proposal aims to strengthen the existing EU legal framework for the screening of foreign direct investments (“FDI Framework Regulation”).3
FDI screening for M&A and investments, is now a routine part of the pre-transaction assessment alongside merger control. There has been a rapid expansion of the number of FDI regimes in the EU over the last few years; currently 22 of the 27 EU Members States have implemented FDI regulation, with Ireland set to implement its recently adopted FDI screening legislation this year. There has also been an expansion in some countries of the scope of review, and transactions involving acquisition by non-EU companies of targets with an EU presence frequently trigger one or more FDI filings. Certain sectors are more likely to be subject to scrutiny, such as defence, healthcare, energy, communications, advanced technologies and critical infrastructure. However, the scope of many national regimes reaches well beyond companies directly active in these sectors.
The Proposal addresses what the Commission has identified as shortcomings of the existing FDI Framework Regulation, by expanding its scope of application, imposing on all EU Member States the obligation to adopt national rules for the screening of foreign investments and by also setting out minimum standards for national screening mechanisms. The Proposal also aims to enhance and streamline the existing cooperation mechanism between EU Member States and the Commission.
The Commission’s initiative aspires to bring more transparency and coherence to the patchwork of national procedural and substantive rules for FDI screening across the EU. However, the new rules risk raising additional hurdles and complexities for foreign companies investing in the EU.
Overview of key changes brought by the Proposal
- Extension of the scope of application
The current FDI Framework Regulation only covers foreign direct investments made in EU companies by non-EU investors. The Proposal intends to also capture investments made in EU companies by the EU established subsidiaries of foreign investors, in order to address incidents of circumvention of the current legal framework.
- Mandatory adoption of foreign investment screening mechanisms by all Member States
The Proposal provides for an obligation for all Member States to introduce an FDI regime at national level. There are currently four Member States (Greece, Bulgaria Croatia and Cyprus) with no FDI regime in place.
- Minimum standards for national foreign investment screening mechanisms
To address the divergence among the existing screening mechanisms in the EU Member States, the Proposal includes, under Annexes I and II, lists of the projects of Union interest and the various economic activities and technological sectors that are required to be captured by all national screening mechanisms4. Moreover, the Proposal sets out the minimum procedural requirements with which national screening mechanisms should comply, including the power for the screening authority to screen investments that were not notified for at least 15 months after completion, as well as giving foreign investors the right to seek judicial recourse against national screening decisions.
- Common criteria for the assessment of foreign investments
The Proposal also provides a revised list of criteria that Member States shall consider when assessing the effects of investments on national security and public order. These criteria include the impact on security and functioning of critical infrastructure, availability of critical technologies, continuity in the supply of critical inputs, protection of sensitive data and freedom of the media.
- Alignment of deadlines and procedures for multi-jurisdictional FDI reviews among Member States
Among the main measures covered by the Proposal, applicants in multiple Member States are required to submit their respective notifications on the same day, and Member-States are required to collect the same type of information for notifications and to align on the use of the cooperation mechanism between EU Member States and the Commission in the case of multi-jurisdictional transactions. The Proposal also aims to streamline and revise the deadlines for the participation of the Member States and the Commission in the various stages of the cooperation mechanism.
- Establishment of “own initiative procedure”
Member States that consider that a foreign investment in another Member State that has not been notified to the cooperation mechanism is likely to negatively affect their security or public order, have the right to open an “own initiative procedure” in relation to such investment.
- More active role for the Commission and the Member States
The Member State where the investment takes place will be able to call for a meeting to discuss its planned decision with other Member States and the Commission and to share information with other Member States and the Commission about such decision. In reaching its final decision, the Member State should give utmost consideration to the comments and opinions it has received, and if its decision deviates from those comments and opinions, it should provide sufficient explanations.
Next steps and impact on foreign investors
The Proposal introduces significant changes to the existing EU legal framework both in terms of scope of application and procedural aspects. Once reviewed and adopted by the Council of the European Union and the European Parliament, the Proposal (which will take the form of a Regulation), is expected to start applying 15 months after its adoption in order to give the Member States sufficient time to review and amend their national FDI regimes in line with the new EU rules. Taking into account the upcoming European elections, the Regulation is not expected to be adopted (let alone enter into force) before 2026.
The Commission’s Proposal seeking to expand the existing FDI legal framework does not come as a surprise given the current geopolitical situation and seems to follow the trend already established by a number of countries, including, the U.S., the UK and Australia that have recently adopted or expanded the scope of application of their FDI regimes.
As far as foreign investors are concerned, the Proposal may bring about a certain degree of cross-EU harmonisation and thus more certainty on what they should be expecting at EU level in terms of the scope of application, the substantive review and procedural rules with regard to the screening of their investments.
However, the Proposal undoubtedly also adds additional layers of complexity to the challenges that investors are currently facing when assessing the regulatory requirements stemming from their investments. More specifically:
- Foreign investors should be mindful of the extended scope of application of the Proposal that will also capture investments carried out by foreign investors through their EU-established subsidiaries, and, more importantly, of how this requirement will be transposed into the national FDI rules of each Member State.
- At the same time, whereas the revision of the deadlines for the participation of the Commission and the Member States in the cooperation mechanism are meant to align and shorten the process, it is doubtful whether this will actually happen. On the contrary, further delays in the timeline of the review of multi-jurisdictional transactions should be expected, especially given the increased reliance on the active participation of the Member States and the Commission which may result in the extension of the review timeline and in the requirement for Member States not to reach a decision until all relevant deadlines under the cooperation mechanism have expired.
- The introduction of the “own initiative procedure” will also lead to additional uncertainty for foreign investors given on the one hand, the lengthy deadline of 15 months post-closing to review such transactions and, on the other hand, the unclear role of the Commission in such proceedings that normally fall under the exclusive competence of the Member State in charge.
More generally, the issues mentioned above, may prove to be the tip of the iceberg of the many challenges that foreign investors are facing while trying to navigate the numerous regulatory regimes across the globe to determine the relevant regulatory requirements for their transactions. Indeed, such transactions are often subject to a combination of national FDI and antitrust merger control filings and, more recently, also to potential notification requirements under the EU Foreign Subsidies Regulation. In light of increasing layers of regulation, it is advisable for foreign investors to assess all filing requirements and potential exposure to investigations at the early stages of their transactions, in order to evaluate risk, and the impact on the transaction timeline and to factor this in to the relevant provisions of the transaction agreement.
2. Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the screening of foreign investments in the Union and repealing Regulation (EU) 2019/452 of the European Parliament and of the Council, available at https://ec.europa.eu/transparency/documents-register/detail?ref=COM(2024)23&lang=en.
3. Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L 79I, 21.3.2019, p. 1–14.
4. Such sectors include (but are not limited to) advanced semiconductor technologies, AI technologies, biotechnologies, advanced connectivity, navigation and digital technologies, space and energy/nuclear technologies, robotics, advanced materials, military/dual-use items and critical medicines.
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