On 21 March 2019, a new EU regulation, establishing a framework for screening foreign direct investments (FDI) into the EU in order to protect strategic sectors (Regulation), was published in the European Official gazette. This Regulation entered into force on 10 April 2019 and applies from 11 October 2020 (except for some of its provisions which already apply to transactions occurring after 10 April 2019).

The key feature of this new EU framework is neither to harmonize the formal FDI screening mechanisms currently in place in certain Member States1, nor to replace them with an FDI screening mechanism entirely operated at EU level. Instead, it sets minimum requirements for national screening mechanisms and aims at enhancing cooperation and information-sharing between the Commission and Member States on specific FDI likely to affect security and public order in Member States or in the whole EU.

1.     Key requirements for FDI screening at a national level

Member States are not obliged to create an FDI mechanism. The Regulation only sets minimum common requirements for Members States maintaining or adopting a screening mechanism, which includes in particular transparency of rules and procedure, non-discrimination among foreign investors, establishment of judicial redress against screening decisions and confidentiality of information exchanged.

2.     Creation of a cooperation mechanism between Members States and EU Commission

The Regulation creates a cooperation mechanism where Member States shall cooperate and assist each other and the Commission on incoming FDI that may affect security or public order (irrespective of whether such FDI is subject to screening in the Member State in which it takes place.

The Member State where the FDI is planned or has been completed (Concerned Member State) may be required to provide in particular information regarding:

i      The investor and target entity's ownership structure;

ii      The approximate value of the FDI;

iii      The products, services and business operations of the foreign investor and of the target company;

iv      Members States in which the foreign investor and the target company conduct their business;

v     The funding of the investment and its sources; and

vi     The date of the FDI.

Other Member States may provide comments to the Concerned Member State where they consider that the FDI is likely to affect their security or public order or where they have relevant information. The Regulation also allows the European Commission to issue a non-binding opinion on the FDI where it considers that such FDI (i) may affect security or public order in one or more Member States; (ii) where it has relevant information; or (iii) where such FDI may undermine a project or the program of interest to the whole EU.

In that respect, the Regulation provides two non-exhaustive lists of relevant factors that may be taken into consideration by Member States and the European Commission to determine whether an FDI is likely to affect security or public order in the EU (Screening Factors).

The Screening Factors may include the potential effects on, inter alia, (i) critical infrastructure (including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure and sensitive facilities); (ii) critical technologies and dual use items; (iii) supply of critical inputs (including energy or raw materials); (iv) sensitive information (including personal data, or the ability to control such information); or (v) freedom and pluralism of media.

The context and the circumstances of the FDI may also may be taken into consideration, in particular (i) whether a foreign investor is directly or indirectly controlled by the government of a third country, including through ownership structure or significant funding; (ii) whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or (iii) whether there is a serious risk that the foreign investor engages in illegal or criminal activities.

It is worth noting that, in all scenarios, the final decision in relation to any FDI remains the sole responsibility of the Concerned Member State.

3.     Annual reporting and obligation to notify existing screening mechanisms

The Regulation creates an obligation for each Member State to provide an annual report covering FDI which took place in their territory on the basis of information available to them as well as information on the requests received from other Member States pursuant to the cooperation mechanism between Member States and the European Commission created by the Regulation.

In addition, for Members States that have FDI screening mechanisms, the Regulation provides that they have to (i) notify their existing screening mechanisms to the European Commission and (ii) provide information in their annual report on their application.

For further information, please liaise with the contacts listed below.

1According to the European Commission, currently 14 Member States (Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Hungary, Italy, the Netherlands, Poland, Portugal, Spain and the United Kingdom) have national screening mechanisms in place which vary in design and scope. Several are in the course of reforming them or adopting a new one. See European Commission, Welcoming Foreign Direct Investment while Protecting Essential Interests, COM (2017) 494, 13 September 2017, p. 7.

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