On 14 February 2019, the Plenary of the European Parliament (Parliament) approved, with an overwhelming majority, the rules establishing a framework for the screening of foreign direct investment (FDI). The rules were approved by a large majority of 500 to 49 votes and 56 abstentions. This brings the EU one step closer to the adoption of the rules into law, with the Council's vote expected in March 2019.

During the debate in the Parliament's Plenary, EU Trade Commissioner Cecilia Malmström stated that "[i]t is a very important new tool that would help us to strengthen our collective capacity to respond to challenges that have arisen because of globalization, in particular when foreign investments threaten our strategic interest."

Background

Currently there is no EU-wide mechanism for screening FDI on security grounds. Such mechanisms are in place in 12 Member States, which vary significantly. Member States are not required to coordinate their policies or approaches, even in situations where FDI might have cross-border security implications within Europe. Some of these national mechanisms have recently undergone significant changes through the introduction of more stringent reviews of transactions that raise national security concerns (see our previous posts on the German reforms here and on the UK reforms here).

The European Commission proposed a regulation establishing a framework for the screening of FDI into the EU in September 2017 which were finalised in November 2018. These rules aim at establishing a more coherent approach among Member States with respect to blocking FDI in EU companies made into sectors that are considered sensitive and strategic and are often linked to national security.

The adoption of the new rules will mean that many European member states will have to start systematically collecting information on FDI for the first time in order fulfil their information duties. The rules are of a general nature. However, they can be seen as a response to the rising importance of state-owned enterprises to strategically acquire companies deemed key to further development – such as China's "Made in China 2025" policy.

Main features of the EU rules

The rules do not aim to establish an EU-wide screening mechanism, nor do they impose the obligation on Member States to establish a FDI screening mechanism in their jurisdiction. Rather, the rules purport to enhance cooperation among Member States and establish more coherent criteria that Member States' screening mechanisms must apply (ie, transparency, non-discrimination and the possibility of foreign investors for judicial redress). The main elements of the new rules are:

  • The rules reaffirm that national security interests are the responsibility of Member States and that the EU framework will not affect a Member State's ability to maintain any national review mechanisms already in place, or require a Member State, where it does not currently have a national FDI regime, to adopt one;
  • Member States will have the final say as to whether a specific investment should be permitted or not in their territory;
  • The creation of a "cooperation mechanism" whereby Member States are required to exchange information (amongst themselves and with the Commission), concerning FDI taking place in their jurisdiction (both for FDIs undergoing screening and for acquisitions in Member States with no screening mechanism in place). If other Member States or the Commission consider that such FDI is likely to affect security and public order in one or more Member States, they may provide comments and request more information about this FDI. This is a framework through which the Commission and Member States can carry out a more coordinated review of FDI;
  • The Commission will be able to issue non-binding opinions:

    • In the context of the cooperation mechanism: where a number of Member States consider that an investment would likely affect security or public order in one or more Member States, they may request the Commission to issue such an opinion (and to which the Member State(s) in question must then "give due consideration"); and
    • Projects and programmes of Union interest: where a proposed investment is likely to affect a project or programme of interest to the whole EU, the Commission may issue an opinion, of which the Member State concerned must "take utmost account" and provide an explanation in case it deviates from such opinion. The new rules list the EU projects and programmes concerned, which include Horizon 2020 or Galileo;
  • The rules set out an indicative list of factors and criteria that Member States may consider when assessing whether an FDI would raise concerns for their national security. An enhanced list of sectors now includes critical infrastructure (such as energy, transport, water, telecommunications), critical technologies (such as dual-use technologies), supply of critical inputs (including raw materials and food security), access to sensitive information and the freedom of media. Criteria to be assessed include foreign governmental ownership or control, prior involvement in activities affecting security and engagement in illegal or criminal activities.
  • International cooperation on screening policies is encouraged, including through sharing experience and best practices as well as information regarding investment trends;
  • The need to "operate under short business-friendly deadlines and strong confidentiality requirements" is recognised.
  • The new rules are expected to have a significant impact on FDI transactions into the EU, in particular in sectors that are deemed strategic or sensitive. Increased scrutiny will entail more thorough analysis of potential cross-border transactions, while timeframes for review are expected to be longer (see our previous post here).

Next steps

Following the Parliament's endorsement, the Council is expected to approve them in March 2019. The rules are expected to enter into force in the coming months and will become fully applicable in 18 months from their entry into force (likely in November 2020).

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