On 14 February 2019, the European Parliament agreed to set up an EU-wide foreign direct investment (FDI) screening mechanism on grounds of security or public order to protect, inter alia ‘critical infrastructure’ and ‘critical technologies’ such as energy, transport, water, health, communications, data processing, and aerospace, as well as cybersecurity, robotics, nanotechnologies, biotechnologies and artificial intelligence.
The new ‘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’ (EU-FDI Regulation) shall be binding in its entirety and directly applicable in all Member States (MS) from 11 October 2020.
However, the EU-FDI Regulation is already increasing pressure on MS to consider how to deal with potential security issues related to M&A transactions.
Until now, there has been no EU-wide tool regarding the screening of FDI into the EU (the EU published on 24 June 2019 a list of FDI screening mechanisms notified by the MS which was last updated on 12 December 2019). The EU-FDI Regulation marks therefore a first step of the EU towards a common structure for the screening of FDI into the EU by creating a close cooperation and information-sharing mechanism between the MS and the European Commission (EC).
For those commercial transactions and FDI into the EU that fall within the EU-FDI Regulation's scope, the new EU-wide screening mechanism will have material procedural and timing impact.
Potential consequences of the new EU-FDI Regulation for foreign investors can be briefly described as follows:
- Potential Delay in the Investment Approval Procedure
- Each MS has the right to decide whether or not to screen a particular FDI within the new framework. In case a MS decides to examine a FDI, it shall notify the EC and other MS of any FDI that is undergoing a national screening process by providing certain information (eg, ownership structure of foreign investor, approximate value of FDI, products, services and business operations of the foreign investor, funding and source of investment) ‘as soon as possible’.
- Following the receipt of that information, the MS and the EC shall notify the respective MS undertaking the screening of their intention to provide comments or an opinion by no later than 15 calendar days.
- The comments of MS and the opinion of the EC shall be sent to the MS undertaking the screening within a ‘reasonable period of time’, and in any case no later than 35 calendar days following the receipt of the respective information mentioned above.
- There is the possibility to request for additional information – in such a case the comments of MS or the opinion of the EC shall be issued no later than 20 calendar days following the receipt of the additional information.
- In addition, the EC may issue an opinion following the comments from other MS, where possible within the applicable deadlines, and in any case no later than five calendar days after those deadlines have expired.
In exceptional cases, however, where the MS undertaking the screening considers that its security or public order requires immediate action, it shall notify other MS and the EC of its intention to issue a screening decision before the timeframes referred to above and
- Examination of the Factual Control of a Foreign Company
According to the recital of the EU-FDI Regulation, the MS having a screening mechanism in place should take the necessary measures, in compliance with the Union law, to
Such measures shall cover investments from the Union made through ‘artificial arrangements’ that do not reflect the economic realities and circumvent the screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country.
- Consideration of MS's Comments and EC's Opinion
The MS where the FDI is planned or has been completed is required to give due consideration to the comments of other MS and to the opinion of the EC. The respective MS must take the opinions of the EC into account when applying the Union law and when interpreting national law – thus within the framework of the interpretation in conformity with the Union law.
In case a FDI is likely to affect the ‘projects or programmes of Union interest’ on grounds of security or public order and the EC issues an opinion addressed to the MS where the FDI is planned or has been completed, the respective MS is required to take utmost account of EC's opinion and
Conclusion and Current Prospects
Investors should take any potential delays into account as well as conduct assessments of how and to what extent investment screening mechanisms could affect a planned transaction in advance when structuring company acquisitions, restructurings or planning for completion of projects.
MS's comments and/or the EC's opinion on a particular FDI will in practice not be insignificant for foreign investors and will to some extent also influence the national approval procedures because the authorities may have to justify if they do not take the EC's opinion into account.
In the UK, it remains to be seen what the screening mechanism for FDI will look like given Brexit. However, the UK government announced plans on 14 October 2019 to introduce new laws to bring the new UK FDI Scrutiny Regime (The Queen's Speech and Associated Background Briefing, on the Occasion of the Opening of Parliament on Monday 14 October 2019).
The purpose of the ‘National Security and Investment Legislation’ (NSIL) is to ‘strengthen the Government's existing powers to scrutinise and intervene in business transactions (takeovers and mergers) to protect national security’ as well as to ‘provide businesses and investors with the certainty and transparency they need to do business in the UK’.
One of the main benefits of the NSIL would be ‘introducing measures to ensure that hostile parties or groups cannot circumvent our rules on a technicality by acquiring an asset rather than acquiring the business itself’.
The main elements of the NSIL would be:
- A notification system, allowing businesses to flag transactions with potential security concerns to Government for quick, efficient screening;
- Powers to mitigate risks to national security – by adding conditions to a transaction or blocking as a last resort plus sanctions for non-compliance with the regime; and
- A safeguarding mechanism for parties to appeal where necessary.
Tuğçe Yalçın is an Associate in the Corporate and M&A team at DLA Piper and currently a PhD Candidate at the University of London as well as the Editor-in-Chief of the IALS Student Law Review (University of London).