The European Commission (EC) on 24 January 2024 published a proposal to strengthen the foreign direct investment (FDI) screening regime in the EU (FDI Proposal). The aim being to establish more comprehensive provisions for screening foreign investments and to strengthen cooperation and information exchange among EU Member States. Some of the key updates are:

• Mandatory national FDI screening regimes: All EU Member States must have a FDI screening regime in place – currently, 22 Member States have FDI regimes with Bulgaria, Croatia, Cyprus, Greece, and Ireland the last remaining Member States yet to introduce their regimes (Ireland is imminent). 
• Extended scope to cover indirect investments: The scope will be extended to include investments by EU investors that are ultimately controlled by individuals or entities from non-EU countries.
• Sectoral scope: There will be an expanded sectoral scope for national screening regimes, along with other standards.
• Mandatory clearance prior to closing: National screening will need to be completed before investments are completed.
• Enhanced cooperation: There will be enhanced cooperation, information sharing, and reporting between Member States and the EC as well as meetings to discuss planned decisions and remedies and an “own initiative” procedure.

The FDI Proposal included a backward-looking approach and the EC noted that over the last three years it has reviewed over 1200 cases across a number of sectors including energy, aerospace, defence, semiconductors, health, data processing and storage, communications, transport and cybersecurity. 

The FDI Proposal is part of the European Economic Security Package, which includes other legislative initiatives/white papers governing:

• Export Controls White Paper– this includes proposals to expand the list of items subject to EU controls, develop a high-level forum to discuss developments and foster a common EU position, improve co-ordination between Member States and bring forward review of the Dual-Use Regulation (EU) 2021/821 to 2025. 
• Outbound Investment White Paper – the EU is launching a data gathering exercise to monitor and review outbound investments and will carry out a risk assessment to determine if additional measures are required to protect EU security. 
• Support for research and development involving technologies with dual-use potential - White Paper – this will review the support offered under current EU funding programmes and identify options for their enhancement (e.g., EU Defence Innovation Scheme (EUDIS) under the European Defence Fund (EDF)). 
• Research Security - proposed Council recommendation to support research to identify and address research security risks to strengthen resilience in the research and innovation sector.

The FDI Proposal seeks to update regulation 2019/452 (FDI Regulation) which established the FDI framework and introduced a coordination mechanism for national FDI screening and set out minimum conditions for national screening regimes. The FDI Proposal goes further and aims to ensure that every Member State has a robust screening system in place. This is to prevent any loopholes in the screening process for potentially risky transactions and to prioritise cases with the highest risks. Additionally, the FDI Proposal extends the cooperation mechanism to intra-EU transactions where the investor is controlled by a foreign company and seeks to enhance accountability within the system by addressing security or public order concerns raised by Member States and/or the Commission. However, like today - the final national security decision on relevant transactions will remain a matter for each Member State to determine. 

Broader scope - indirect investments  

The current framework for FDI in the EU focuses on investments in EU companies made by non-EU entities. However, the EC is proposing to broaden the scope to include investments from EU companies whose ultimate owners or controlling entities are non-EU investors. The rationale behind this proposal is that investments made by foreign investors through an EU subsidiary can pose similar risks to security or public order as direct investments from third countries.

This proposal is a response to the July 2023 Xella judgment by the European Court of Justice (ECJ), which clarified that the FDI Regulation does not currently apply to EU investments made by EU companies ultimately owned or controlled by non-EU investors, except in cases where artificial arrangements are used to deliberately bypass screening mechanisms. 

However, Member States have had the right to establish national FDI screening mechanisms that cover indirect or intra-EU investments before, as long as they comply with EU fundamental freedoms. Many Member States have already implemented such mechanisms, see here. Therefore, the practical impact of this proposed extension on national regulatory frameworks is uncertain.

Greenfield investments 

The FDI Proposal also aims to encourage Member States to extend their screening mechanisms to greenfield investments which will inevitably have a substantial impact on investments especially in the area of alternative energies or semiconductors where most recently several companies announced investments in newly built plants across the EU. 

At this stage of the process, it remains unclear whether turnover thresholds or asset values will be introduced to determine if a greenfield investment will be subject to further review and/or notification.

Enhanced harmonisation within the EU both in scope and scrutiny

Mandatory FDI screening mechanisms are now set to be introduced across all Member States, marking a significant move towards greater harmonization in the EU. While the EC has been actively encouraging the adoption of national FDI regimes by Member States, the FDI Regulation itself does create a directly applicable EU-wide foreign direct investment screening regime.

Under the new framework, all Member States will be obligated to establish screening regimes in alignment with the revised minimum standards within 15 months of the proposed reforms taking effect. This could potentially lead to updates in legislation across all 27 Member States.

Setting out the minimum criteria for screening mechanisms throughout the EU, the FDI Proposal emphasizes key procedural aspects. This includes screening potentially critical transactions prior to completion, conducting in-depth investigations, safeguarding confidential information, and providing annual reports on screening activities.

Impacted Sectors

The proposed reform of the FDI Regulation also sets out a number of key sectors that must undergo screening. 

Annex I of the FDI Proposal provides that investments which involve projects and programmes of Union interest will require review. These are projects or programmes covered by EU law which provide for the development, maintenance or acquisition of critical infrastructure, critical technologies or critical inputs which are essential for security or public order. Where the EU target is part of or participates in a project or programme of Union interest, Member States are required to screen and notify the foreign investment concerned to the EC and other Member States.

Annex II of the FDI Proposal lists the technologies, assets, facilities, equipment, networks, systems, services, and economic activities of particular importance for the security or public order interests of the Union. Where the EU target is economically active in an area listed in Annex II, Member States are required to screen the foreign investment. 

The listed products and technologies are dual-use items, military technology and equipment, advanced semiconductors, AI, quantum technologies, biotechnologies, advanced connectivity, navigation and digital technologies, advanced sensing technologies, space and propulsion technologies, robotics and autonomous systems, advanced materials, manufacturing and recycling technologies, specific medicines and critical entities and activities of the EU’s financial system.

Substantive scrutiny and Member State scrutiny must (at least) be based on the respective investment’s impact on security and public order covering the security, integrity and functioning of critical infrastructure, availability of critical technologies, the continuity of supply of critical inputs, protection of sensitive information and freedom and pluralism of the media but Member States are allowed to apply stricter rules to cover jurisdiction-specific factors.

Greater co-operation across the EU

The EC also proposes measures to enhance cooperation and information exchange between Member States, including submitting notifications to all screening authorities on the same day, coordinating reviews of cross-border investments, and sharing relevant information.

This will be established via a pre-defined procedure triggered by one Member State and allows for meetings between the relevant stakeholders to discuss how to best address the risks identified. This is accompanied by mandatory information exchange including notifying the respective Member States and the Commission on the screening decision and the lead Member State providing a written reasoned explanation addressing the Member States' comments or the Commission’s opinion. In case of disagreement on this, the lead Member State shall organise a meeting between the relevant stakeholders. 

The procedural timescale envisages a deadline for a Member state to confirm that it will provide comments no later than 15 calendar days following the notification while the actual comments shall not be issued later than 35 calendar days. The Commission’s decision on whether to issue their opinion must be communicated to the Member State no later than 20 calendar days with the actual opinion being delivered no later than 45 days. If, however, the Member State or the Commission request additional information, the second deadline will be reduced to 20 or 30 days, respectively after receipt of the complete additional information.

Additionally, an "own initiative" procedure will allow the EC or Member States to initiate a review of a foreign investment in another EU jurisdiction if it has not been notified and is likely to negatively affect security or public order.

A notable addition in the FDI Proposal is the requirement for Member States to establish judicial recourse against screening decisions. This development is likely to be well-received by investors, possibly fostering a greater inclination to challenge foreign investment decisions in court and to potentially place a limit on political interference.

Alignment with other EU Instruments

To ensure consistency with other EU instruments, the EC proposes measures such as aligning with the EC Merger Regulation (ECMR). For instance, in cases where a foreign investment also constitutes a concentration under the ECMR, the application of the draft regulation should not affect the application of Article 21(4) ECMR allowing Member States to take appropriate measures to protect legitimate interests. Further, the EC also wishes to align the regime of the recently introduced Foreign Subsidies Regulation, the NIS2 directive in terms of cybersecurity, the legislation covering energy, the rules on operation of air transport and the sanctions regime. The aim is to apply all instruments consistently and coherently to avoid friction between them.

Outlook

The proposed reform will require Member States to update their national legislation within 15 months from the entry into force of the reforms. However, it remains to be seen how much harmonization will be achieved and how Member States will incorporate the proposed changes into their national regulatory frameworks.

The EC's aim is to enhance and protect EU economic security amidst growing geopolitical tensions and technological shifts. The proposed reform seeks to address issues identified with the current framework, improve cooperation, and increase certainty for dealmakers.

The FDI Proposal will undergo scrutiny from the European Parliament and the Council of the EU before it can take effect. Implementation could potentially occur as early as 2026, but the legislative process may be subject to delays due to the upcoming European Parliament elections in June.

If you need more information or further guidance in this area, please contact Anthony Rosen, Tamy Tietze and Luca Koenes.

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