The origins of the Proposed Regulation
The Proposed Regulation is the response to a request made in February 2017 by France, Germany and Italy for a common approach towards foreign investment control. These governments sought the implementation of a ‘principle of reciprocity’, meaning a possibility for EU Member States to prohibit investments originating from a non-EU country that discriminate against European investors.
The context to that request was a series of takeovers of European companies that involved foreign investors with strong ties to their home governments and a perceived strategic focus by such investors to target European countries involved in the development of technologies and infrastructure critical to society, national security and the economy. The most notable of these was the acquisition of Kuka, a German robotics technology company, by Midea Group of China.
The state of FDI review in Europe
At present, there is no EU-level FDI screening legislation or role for the European Commission – it is a de-centralised process exclusively run by the EU Member States. Nearly half of the EU Member States, including France and Germany, have adopted a legislative framework for FDI screening.
These national legislative mechanisms differ in scope and procedure. For example, some require mandatory notification to the relevant authority, some are voluntary in nature; some are sector-specific, others apply across the whole economy; some apply to investments from any other country, some apply only to those from countries outside the EU.
An overview of the Proposed Regulation
The Proposed Regulation:
- creates a framework for EU Member States that have, or plan to implement, an FDI screening mechanism on the grounds of national security or public order;
- makes provision for minimum standards for FDI screening, such as the possibility of judicial redress of decisions, non-discrimination between third countries and transparency, including clear timeframes for the adoption of screening decisions;
- establishes a cooperation mechanism between the EU Member States and the Commission to inform each other of planned or completed FDI that may threaten security or public order, and to exchange information in this regard; and
- empowers the Commission itself to screen transactions on grounds of security and public order, in cases where FDI may affect projects or programmes of “Union interest” which involve a substantial amount for EU funding or which are subject to EU legislation on critical infrastructure, critical technologies or critical inputs.
The cooperation mechanism, which is the core of the proposals, would require EU Member States to notify others and the Commission about any FDI under review at the national level. EU Member States would be able to raise concerns about FDI in another EU Member State and provide formal observations. The Commission would also be able to issue its own (non-binding) observations on such FDI.
At the time of writing, we understand the aim is for agreement to be reached on the Proposed Regulation before the European Parliament elections in late May 2019.
Other Developments – the UK and the US
On 11 June 2018, the UK introduced new rules relating to enterprises engaged in specified activities in connection with military or dual-use goods, computer processing units, and quantum technology, which we blogged about here: Greater national security scrutiny at the heart of new UK merger control reforms blog. The UK Government then published a White Paper on proposed long term reforms to FDI screening, which would introduce a new stand-alone regime to review transactions which may have national security implications. You can read our blog post on the White Paper here.
In the US, the Committee on Foreign Investment in the United States (“CFIUS”) is authorised to review certain transactions involving FDI on grounds of national security.
On 13 August 2018, the Foreign Investment Risk Review Modernization Act 2018 (“FIRRMA”) was signed into law in the US. FIRRMA, the first major overhaul of CFIUS in over a decade, expands the scope of the transactions which may fall to be reviewed, provides for mandatory notification of transactions in certain circumstances and requires specific reporting to Congress on the subject of FDI originating from China. For more information, see our blog on Top takeaways from CFIUS reform here.
While the Proposed Regulation comes nowhere near to the powers and reach of the CFIUS regime, it is the first time the Commission has moved forward to propose legislation that involves an EU-level FDI regime – an area that has traditionally been the domain of the EU Member States. It is a “toe in the water” for the Commission in the field of harmonising and coordinating FDI that could develop in the direction of CFIUS over time.
BCLP’s Antitrust & Competition team is continuing to monitor the progress of the Proposed Regulation and will provide further updates as it progresses through the legislative process in Brussels. Should you have any questions about the Commission’s proposal, or other foreign direct investment issues, then do not hesitate to get in contact with any of the lawyers listed.