The Council of the European Union just made investing in the EU more complicated: on February 20, 2019, the Council ratified a new framework for vetting foreign direct investment (FDI) from outside the EU. The new rule is likely to lengthen review and approval cycles and lead to increased scrutiny of foreign investments by the EU and multiple Member States.
Like the rules imposed on investments into the US by the Committee on Foreign Investment in the United States, the new EU regulation establishes additional procedures for evaluating investments to ensure that they comply with EU [and member state] security rules. Non-EU investors should be prepared for longer review and approval cycles as well as increased scrutiny from the EU and multiple Member States.
Enhanced Protection for Entities Engaged in "Security and Public Order"
The key provision of the new regulation is a framework for Member States to guide screening of proposed FDI transactions where a non-EU party will have ownership or control over entities engaged in "security and public order," broadly defined as:
- Critical technology and dual-use, including cybersecurity, artificial intelligence, robotics, semiconductors, and biotechnology;
- Critical infrastructure, whether physical or virtual;
- Critical inputs (i.e., energy and food security);
- Access to personal data or the ability to access such data; and
- Media pluralism and freedom.
Much like CFIUS, the regulation also recommends that Member States look closely at transactions where:
- The foreign investor is government-controlled;
- The foreign investor has been previously involved in activities affecting the security or public order of the Member State; and
- There is the risk of the foreign investor engaging in illegal activities.
New Information Sharing Guidelines
In addition, the new regulation establishes FDI information-sharing recommendations among Member States and the EU. Member States are encouraged to inform both the EU and other Member States when reviewing transactions; and the framework establishes the authority of the EU and Member States to comment and request additional information on extra-territorial transactions.
Looking Ahead
Prior to the ratification of this regulation, only 13 of 28 EU Member States had rules for vetting FDI, with varying criteria for review. While the new rule does not replace sovereign laws, it may prompt states to establish new national security procedures or fortify current rules governing foreign investment.
It is important to note, however, that the regulation does not require EU countries to incorporate these rules into their own FDI review regimes – Member States retain the sovereignty to interpret the standards as they see fit (or not at all) under local rules and regulations.
Nevertheless, because Member States where the FDI is planned or completed must perform the review as laid out in the framework, the heightened awareness and concern over a marked increase in FDI with potential long-term security and strategic implications is likely to continue across most of the EU membership.
The regulation is expected to be fully implemented in 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.