The EU tightens its grip on FDI: A new proposed regulation to close loopholes and harmonise screening

Since the adoption of the European Commission’s Regulation on the screening of foreign investments in the EU (the FDI Regulation) in 2019 and the UK National Security and Investment Act 2021 (NSIA), there has been an increased focus in the UK and EU on monitoring foreign investment (FDI) in sensitive industries. As these regimes have taken shape it is unsurprising that both the Commission and the UK Government have turned their attention to refining the scope of their respective regimes.

In the UK, this has so far taken the form of a call for evidence on the operation of the NSIA in November 2023 (the Call for Evidence).  Whilst the scope of the Call for Evidence was broad, the Government focused in particular on a) the types of transactions captured by the regime, and b) the scope of the mandatory notification sectors and how these could be better targeted (whether through changes to the underlying legislation or through more targeted guidance).  Whilst it is too early to speculate on the extent to which the UK regime will evolve following the consultation, the direction of travel identified in the Call for Evidence has been well received.

The Commission is at a more advanced stage and proposed a new regulation on the screening of foreign investments in the EU (the Proposed FDI Regulation) in January, as part of the broader European Economic Security Package.  The Proposed FDI Regulation would repeal the original FDI Regulation and adopt a new regime.  Whilst the building blocks of the regime will remain familiar, the Proposed FDI Regulation has three key ambitions:

1. closing loopholes in relation to indirect acquisitions of control by ex-EU investors;
2. reducing the number of notifications made by Member States to the Commission under a cooperation procedure established in the original FDI Regulation; and
3. reducing the level of discrepancy between FDI rules in different Member States.

We discuss each of these areas in turn.

The FDI Regulation only applies to investments made by non-EU investors in EU businesses. In 2023, the Hungarian FDI authority attempted to prohibit a transaction that involved the acquisition of a sensitive business by an EU incorporated subsidiary of a non-EU investor.  On appeal, the Court of Justice ruled that a prohibition of the transaction on the basis that the purchaser was controlled by non-EU shareholders infringed the fundamental rights of businesses to freedom of establishment¹.

The judgment has raised questions over whether hostile actors could evade proper scrutiny under EU foreign investment rules by investing through EU established operating entities.

The Commission has used the opportunity to propose a clarification of the scope of EU FDI rules, to also capture investments from EU companies whose ultimate owners/controlling entities are non-EU investors.

Under the FDI Regulation, Member States with FDI screening rules must notify the Commission of transactions falling within national regimes (the Cooperation Procedure).

One particular concern from the Commission relates to the notification of transactions to the Cooperation Procedure whilst they are still in pre-notification at national level. This is necessary because, in certain jurisdictions, the time afforded to Member States to review the transaction under the Cooperation Procedure exceeds the statutory deadline for completing the review at national level.  There is a suggestion that such pre-notification use of the Cooperation Procedure, can lead to an over-notification of transactions on a precautionary basis as a result of speculative concerns that are not credible once complete information is available.

This can lead to resources at Commission and Member State level being directed to low-risk transactions, rather than focusing on more problematic cases.  The Commission has stressed the importance of appropriately calibrating transactions for this purpose and has taken steps in the Proposed FDI Regulation to clarify the types of transaction that should be subject to the Cooperation Procedure.

In particular, the Proposed FDI Regulation would require the harmonisation of the criteria for transactions that Member States must notify to the Cooperation Procedure, focusing on the most critical transactions.

The Proposed FDI Regulation requires only that transactions satisfying one or more of the following criteria should be notified under the Cooperation Procedure:

1. the target participates in one or more “projects or programmes of Union interest”; or
2. the target is active in one or more sensitive sectors (including e.g. critical infrastructure, critical technologies, critical inputs, access to sensitive information, media, or electoral infrastructure, defence etc) and:
   1. foreign investors that are directly or indirectly controlled by the government or public authorities of a third country, including through ownership structure or significant funding; or
   2. foreign investors that have been involved in activities affecting security or public order in a Member State, or that have been subject to investigations or sanctions by national or international authorities for such activities; or
3. the Member State initiates an in-depth investigation.

The Commission hopes that these criteria (which mirror the UK NSIA themes of target risk, acquirer risk and control risk) will narrow the number of transactions that are referred to the Cooperation Procedure, in particular, by focusing on circumstances where some form of material control is acquired by a governmental investor and/or the target company has activities that are genuinely sensitive.

That said, the Proposed FDI Regulation still provides Member States with significant discretion to refer a transaction where it considers that other Member States may be interested in the transaction.  Accordingly, there remains potential for scope creep.

The FDI Regulation does not require Member States to adopt FDI screening rules, which remains voluntary.  Moreover, where regimes have been adopted, there is little alignment on substantive matters including the types of transactions captured, the concept of control, or procedural matters such as timelines.  This can result in a considerably more complex jurisdictional analysis than is the case for European merger control (where the underlying principles are more harmonised).

Nevertheless, the majority of Member States have now implemented FDI regimes or are in the process of doing so.  Therefore, a new requirement under the Proposed FDI Regulation that all Member States must have FDI regimes in place may not lead to a radical change in this regard.  However, the Proposed FDI Regulation establishes minimum requirements on procedural and substantive matters that must be incorporated into such regimes. 

The Proposed FDI Regulation does not prevent Member States going beyond the scope of these minimum requirements and it does little to narrow the scope of some of the more expansive regimes.

Procedural Harmonisation

There are several areas where, whilst alignment is not strictly enforced, one would expect national authorities to gravitate towards similar, if not identical approaches:

1. the Commission will require Member States to submit a standard notification form when referring a transaction to the Cooperation Procedure. Whilst this does not require Member States to follow the same template in their national procedures, Member States’ own notification forms may start to gravitate to this format to reduce the administrative burden associated with a referral;
2. a requirement to ensure that national FDI regimes enable the proper consideration of comments and information requests from the Commission or other Member States under the Cooperation Procedure. The Proposed FDI Regime sets out clear timelines for the Cooperation Procedure which all Member States will need to take into account when setting their own national review timelines.

Further, the Proposed FDI Regulation requires Member States to put in place mechanisms to ensure that multi-jurisdictional transactions are notified simultaneously across Member States to better manage procedural alignment.  Given that certain Member States have strict timing requirements for submitting notifications, this will present a challenge for deal planning as it will require that all notifications need to be submitted on the date of the earliest filing deadline. For example, the current Italian regime requires notifications to be submitted with 10 business days of signing – in practice, meeting this deadline for large, multi-jurisdictional transactions may prove onerous and will likely require parties to prioritise the preparation of EU FDI notifications above merger control and non-EU FDI filing requirements.

Finally, the Proposed FDI Regulation requires Member States to put in place a process to allow authorities to undertake an “own initiative” investigation for a minimum period following completion of a given transaction.

Substantive Harmonisation

In addition to clarifying what the Commission considers to be the key assessment criteria for identifying problematic investments and requiring Member States to take these into account when assessing transactions, the Proposed FDI Regulation includes a minimum scope for target activities that must be reviewed.  This falls into two parts, a set of sector criteria, (which include the typical set of advanced technologies, critical infrastructure, telecommunications, space, energy, etc.) and a list of projects or programme of Union interest where the target’s participation will be deemed sufficiently sensitive to merit an investigation.

Two points bear mention within the substantive elements:

1. where a Member State considers that a transaction is likely to negatively affect security or public order in any Member State, the authority must either prohibit the transaction or impose mitigating measures; and
2. if the transactions potential effect on security and public order can be addressed by appropriate measures available under other Union or national law, the authority must authorise the transaction without conditions.

This has some interesting implications, including the prospect that one authority could intervene to prohibit a transaction if it considers it might negatively impact security or public order in another Member State, despite the same deal being approved in that other Member State (either having rejected those concerns or in reliance on provisions of national law to protect against any adverse impact. The EU has always preserved the jurisdiction of Member States over national security matters. However, the Proposed Regulation obliges Member States to intervene in national security considerations relating to other Member States, creating a natural tension with the existing principles on national security matters.

It will however be interesting to see how this works in practice given that, any such prohibition would necessarily have had to be submitted to the Cooperation Procedure through which such differences in opinion should be ironed out.

First, it is clear that the Commission is committed to ensuring a robust and effective FDI screening regime whilst also allowing Member States to exercise their well-established rights on matters of national security and to enjoy material autonomy.  Accordingly, whilst we can expect the implementation of minimum standards and attempts to harmonise European FDI Regimes, it is unlikely to be a precursor to an EUMR style one-stop shop for FDI screening.

Second, businesses will need to be prepared for potentially much shorter timelines for submission of European FDI notifications, with the shortest statutory deadline de facto applying to all Member States.

Third, the Commission has, alongside the Proposed FDI Regulation, introduced new proposals for screening requirements on outbound investments that might risk critical technology transferring to hostile actors – for example via the sharing of knowhow and other IP in the context of R&D cooperation.