Foreign Investment Controls in Europe Comparative Overview: EU
Introduction
The European Union ('EU') has one of the world's most open investment regimes. Nevertheless, there have been growing concerns in recent years about the impact of certain foreign investments on security and public order. A key issue has been the increasing level of Chinese foreign investment that takes place in the technology sector, with prominent examples in Europe including the takeover of the German robotics manufacturer Kuka by Midea and the attempted takeover of the chip equipment manufacturer Aixtron by Fujian Grand Chip Investment Fund.
Partly as a result of such acquisitions, member states of the European Union (the 'Member States') and EU decision-makers have become increasingly concerned about European know-how and consumer data being transferred to China and related security issues. In early 2017, Germany, France and Italy proposed in a letter to the EU Trade Commissioner that the Member States should be able to block investments from non-EU countries. At the same time, several Member States, including Germany and Italy, tightened or considered tightening their national investment control regimes. As of April 2020, 14 Member States[1] have national screening mechanisms in place aimed at preserving security and public order at national level. In November 2018, a political agreement was reached by the European Parliament, the Council and the Commission on an EU framework for screening foreign direct investment into the European Union and in March 2019 a regulation of the European Parliament and of the Council establishing a framework for the screening of foreign direct investments into EU was adopted. In March 2020, as part of the overall response to the economic effects of the COVID-19 pandemic, the European Commission issued guidance to the Member States concerning foreign direct investment and the protection of EU's strategic assets, in particular in healthcare-related industries.
Against this background, Ashurst Guantao (FTZ) Joint Operation Office seeks to give general insights into the foreign investment control regimes in the European Union and in the major European jurisdictions, including Belgium, France, Germany, Italy, Luxembourg, Spain, and the United Kingdom.
Please feel free to contact any of your Ashurst contacts in case of any questions.
The Ashurst Team
European Union
As a result of growing concerns in the EU about the impact of certain foreign investments on security and public order, a cooperation mechanism for screening foreign direct investments is due to come into effect in October 2020 (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 (the EU Screening Regulation)). The mechanism gives the Member States and the European Commission (the 'Commission') the possibility to exchange information, provide comments and issue opinions on foreign direct investments, while the ultimate power to review and potentially block such investments on security and public order grounds and to set up and maintain national screening mechanisms will remain with the Member States.
As a reaction to the economic effects of the outbreak of the COVID-19 pandemic, on 25 March 2020 the Commission issued Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe's strategic assets, ahead of the application of the EU Screening Regulation[2] (the 'FDI Guidance'). In the FDI Guidance the Commission urged Member States to:
• Be particularly vigilant to avoid a selling off of EU businesses;
• Make full use of their foreign investment screening mechanisms to take fully into account the risks to critical health infrastructures, supply of critical inputs, and other critical sectors; and
• For those Member States that do not currently have a (full-fledged) screening mechanism, to set up such mechanism and in the meantime to use all other available options to address cases where a foreign acquisition would create a risk to security or public order in the EU, including a risk to health infrastructures and supply of critical inputs.
Furthermore, the Commission pointed to the possibility of introducing restrictions on the free movement of capital based on the public interest (which includes public health) or public security exceptions set out in Art. 65 of the Treaty on Functioning of the European Union. Such restrictive measures could in particular be taken to (i) ensure security of supply or provision of essential public services, (ii) address threats to financial stability and (iii) restrict 'predatory buying' by foreign investors of companies with valuations on capital markets well below their true or intrinsic value based on the actual or potential impact of those investments on the safeguard of the public interest.
What are the key laws and regulations governing restrictions and controls of foreign investments?
The key legal act is the EU Screening Regulation [3] which entered into force on 10 April 2019 and will directly apply in all Member States from 11 October 2020. However, as explained by the Commission in the FDI Guidance, the Member States and the Commission may provide comments and opinions within 15 months after the foreign investment has been completed. Therefore, a foreign investment completed in April 2020 could be subject to ex post comments by Member States or opinions by the Commission from 11 October 2020 until July 2021.
How is a foreign investor defined?
A foreign investor is a natural person of a third country or an undertaking constituted or otherwise organised under the laws of a third country, intending to make or having made a foreign direct investment.
Which transactions will be scrutinised and which sectors will be affected?
Subject to the scrutiny will be all types of investments aiming to establish or to maintain lasting and direct links between foreign investors (including state-owned entities) and undertakings carrying out an economic activity in a Member State, including investments which enable effective participation in the management or control of a company. The scrutiny should, however, not cover portfolio investments.
Sectors which will most likely be affected include, among others, aerospace, artificial intelligence, communications, cybersecurity, data processing and storage, defence, electoral and financial infrastructure, energy, health, media, nanotechnology and biotechnology, quantum and nuclear technologies, robotics, semiconductors, transport, and water, in particular when involving critical infrastructure or technologies.
Who will be the decision-maker?
The ultimate decision as to whether a foreign direct investment should be permitted will remain with the Member State where the investment is conducted.
Are Member States obliged to adopt national screening mechanisms?
The Member States are not obliged to adopt national screening mechanisms and the decision on whether to set up such a mechanism or to screen a particular transaction remains the sole responsibility of the Member States. However, where a Member State has adopted a screening mechanism, it needs to comply with certain requirements, in particular as regards transparency of rules and procedures, non-discrimination among foreign investors, timeframes, protection of confidential information, the right to seek recourse against screening decisions and measures to identify and prevent circumvention by foreign investors.
The Member States are obliged to notify the Commission of their screening mechanisms and any amendments thereto and the Commission will make publicly available a list of such national screening mechanisms. Moreover, each Member State must submit to the Commission an annual report including aggregated information on foreign direct investments that took place in their territory and provide aggregated information on the application of their screening mechanism if such a mechanism is in place.
What will the cooperation between Member States and the Commission look like?
Where a foreign direct investment is screened by a Member State, this Member State will be required to notify other Member States and the Commission thereof and provide them with certain information. Both the Member States and the Commission will have the right to request additional information. Member States that consider that a foreign direct investment in another Member State is likely to affect their security or public order, or have information relevant for such screening, may provide justified comments to the Member State where the investment takes place, irrespective of whether that Member State has a screening mechanism in place, or such an investment is undergoing screening. The Commission may issue a justified opinion addressed to that Member State if it considers that a foreign direct investment is likely to affect security or public order in more than one Member State, or has relevant information for such screening. The Member State where a foreign direct investment is planned or has been completed shall give due consideration to the comments and opinions received but retains the final word on how to treat such an investment.
What criteria may be taken into consideration?
The EU Screening Regulation includes a non-exhaustive list of factors which the Commission and the Member States may take into consideration when determining whether a foreign direct investment is likely to affect security or public order. These include:
• The potential effects of the transaction on:
- critical infrastructure;
- critical technologies;
- the supply of critical inputs, including energy or raw materials, as well as food security;
- access to or the ability to control sensitive information, including personal data; and
- the freedom and pluralism of the media.
• Whether the foreign investor:
- is directly or indirectly controlled by the government of a third country; or
- has already been involved in activities affecting security or public order; and
• Whether there is a serious risk that the foreign investor engages in illegal or criminal activities.
What information will be exchanged?
The Member States and the Commission will exchange information on:
• the ownership structure of the foreign investor and of the target;
• the value of the foreign direct investment;
• the products, services and business operations of the foreign investor and of the target;
• the Member States in which the foreign investor and the target conduct business operations;
• the funding of the investment and its source; and
• the (planned) completion date.
Will there be any time limits for providing comments and opinions?
The Commission and the Member States will generally have up to 35 days to submit their views following the receipt of the information from the Member State where the direct foreign investment takes place. This deadline can be extended if additional information was requested or if the Commission issues its opinion after receipt of the comments from other Member States.
Where the transaction is not subject to screening in the Member State, the Commission and the other Member States can request information and submit their views on the transaction no later than 15 months after the completion of the foreign direct investment.
Are there any special regulations for foreign direct investments in projects or programmes of EU interest?
Yes. The Commission has a possibility to provide an opinion with regard to foreign direct investments likely to affect projects and programmes of EU interest on grounds of security or public order. This includes in particular projects and programmes involving substantial EU funding or established by EU law regarding critical infrastructure, critical technologies or critical inputs. A list of such projects and programmes is set out in the annex to the EU Screening Regulation and currently includes European GNSS programmes (Galileo & EGNOS), Copernicus, Horizon 2020, Trans-European Networks for Transport, Energy and Telecommunications, European Defence Industrial Development Programme and projects to be developed under permanent structured cooperation (PESCO). The Member State where the foreign direct investment is planned or has been completed shall take utmost account of the Commission's opinion and provide an explanation to the Commission if the opinion is not followed. However, the final decision in relation to the foreign direct investment remains the sole responsibility of the Member State.
Can the Member States or the Commission cooperate with third party authorities?
Yes, both the Member States and the Commission may cooperate with the responsible authorities of non-EU countries on issues relating to the foreign investment screening on grounds of security and public order in order to strengthen the effectiveness of the screening process.
Are any significant changes planned?
The Commission shall evaluate the functioning and effectiveness of the EU Screening Regulation by 12 October 2023 and every five years thereafter and present a report to the European Parliament and to the Council. The report may be accompanied by an appropriate legislative proposal to amend the EU Screening Regulation.
[1] According to the List of screening mechanisms notified by Member States, dated 12 December 2019: Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Romania and Spain. The United Kingdom is technically no longer an EU Member State following its decision to exit the EU, although it remains subject to EU rules for a transitional period, which currently lasts until 31 December 2020. The UK does have a national screening mechanism, although there have been proposals to strengthen it.
[2] C(2020) 1981 final.
[3] OJ L 79, 21.03.2019, p. 1.
Key Contacts
Belgium
David Du Pont
Partner
T +32 2 626 1923
M +32 471 129987
david.dupont@ashurst.com
France
Anne Reffay
Partner, Avocat à la Cour
T +33 1 53 53 54 99
M +33 6 11 49 04 71
anne.reffay@ashurst.com
Germany
Matthias von Oppen, LL.M.
Partner
T +49 (0)69 97 11 28 32
M +49 (0)170 63 26 165
matthias.vonoppen@ashurst.com
Luxembourg
Isabelle Lentz
Partner, Avocat à la Cour (Luxembourg)
T +352 2813 3222
M +352 621 798357
isabelle.lentz@ashurst.com
Spain
Jorge Vázquez
Partner
T +34 91 364 9899
M +34 676 622 948
jorge.vazquez@ashurst.com
United Kingdom
Neil Cuninghame
Partner
T +44 20 7859 1147
M +44 7917 064 750
neil.cuninghame@ashurst.com