On 24 January 2024, the EU Commission unveiled five initiatives to advance its European Economic Security Strategy, which aims to give the EU a seat at the table of the global power play between the major political and economic powers. The geopolitical developments and uncertainties of recent years (caused, for example, by the COVID-19 pandemic and the war in Ukraine) are reflected in a handful of more or less concrete proposals that underline the Commission's intention to make the EU less dependent on other global players, allegedly regardless of whether they are allies or "systemic rivals", while trying to uphold its openness for trade and business.

Proposal for a new FDI Screening Regulation

As one of five proposals forming part of the EESP, the Commission intends to strengthen the effectiveness and efficiency of the FDI Screening Regulation (Regulation (EU) 2019/452). The FDI Screening Regulation, which became fully applicable on 11 October 2020, established a framework for EU Member States to screen investments in their territory for security or public order reasons. It also set out a cooperation mechanism allowing Member States and the Commission to exchange information on investments and to assess risks to security or public order in Member States or in the EU as a whole.

The proposal for a new FDI Screening Regulation builds on the experience of the first three years of operation (during which more than 1,200 transactions have been screened), an OECD study and the results of a targeted consultation.

While the published document is only a first proposal, which will have to make its way through the Parliament and the Council and is likely to be amended before being adopted, the new FDI Screening Regulation is expected to bring some key developments to FDI screening in all Member States, by:

1. ensuring that all Member States have an FDI screening mechanism in place,
2. harmonising key elements of national FDI screening mechanisms across the EU,
3. improving the cooperation mechanism between Member States and the Commission,
4. extending the scope of the FDI Screening Regulation, and
5. special rules for multi-country transactions.

Requiring all Member States to establish an FDI screening mechanism

The current FDI Screening Regulation gives Member States the freedom to "maintain, amend or adopt mechanisms to screen foreign direct investment in their territory".

Previous Communications have shown that the Commission's position on this issue has become stricter over the years. For example, in a Guidance for Member States concerning FDI from Russia and Belarus issued in 2022, the Commission urgently called on Member States to "set up a comprehensive FDI screening mechanism" to avoid loopholes in the screening of risky transactions – according to EU data, around 20% of investments in the EU still go to Member States that do not have an FDI screening mechanism.

The proposed new Regulation marks the final stage of this development. It requires all Member States to establish, no later than 15 months after its entry into force, a mechanism enabling them to screen FDI on security or public order grounds.

This does not change the fact that there will be no supranational FDI screening mechanism at EU level as in the case of merger control. Member States will remain solely responsible when it comes to deciding whether to clear, restrict or even prohibit transactions. However, the requirement to have an FDI screening system in place could raise questions of legal competence, given that national security falls within the exclusive competence of Member States.

In any case, the practical implications of the requirement should be relatively small, as 22 Member States already have FDI screening mechanisms in place. At present, only Bulgaria, Croatia, Cyprus, Greece and Ireland do not have a comprehensive FDI screening regime in force. Work on FDI legislation has started in several of these countries, and the implementation should only be a matter of time – for example, Ireland's FDI screening regime is expected to come into force in Q2 2024.

Harmonising key elements of national FDI screening mechanisms

Of more practical relevance will be the Commission's push for a higher degree of harmonisation of FDI screening regimes between Member States.

Differences in national FDI screening laws exist and are increasing, given the rapid pace of legislative change in this field of law. The Commission aims to reduce divergences on key elements of national FDI screening mechanisms, i.e. the scope of transactions subject to FDI screening, essential procedural features and the criteria used to assess the likely negative impact on security or public order. In particular:

• Member States must ensure that an investment is subject to a notification requirement and a standstill obligation until it has been cleared by the national screening authority, if the target company in their territory
  • participates in projects or programmes of EU interest listed in Annex I (e.g. Space Programme, Horizon Europe, Trans-European Networks and European Defence Fund), or
  • is active in an area of technologies, assets, facilities, equipment, networks, systems, services and economic activities of particular importance for the security or public order interests of the EU listed in Annex II (e.g. dual-use, defence, semiconductors, artificial intelligence, batteries, autonomous driving, 6G, space, critical medicines and the financial system).
• The national screening authorities must have the power to screen ex officio investments which are not subject to a notification requirement for at least 15 months post closing.
• Member States must ensure that the deadlines and procedures of their national FDI screening mechanisms allow for their effective participation in the EU cooperation mechanism. In particular, screening mechanisms must not allow Member States to take a final decision before other Member States and the Commission have had time to provide comments or an opinion.
• The Commission again emphasised that parties in a FDI screening procedure must have the possibility to seek judicial recourse. This requirement already exists in the current FDI Screening Regulation, but is becoming more important as courts at both national and European level have recently issued rulings that limited national screening authorities’ powers.
• There is a non-exhaustive list of factors to be taken into account when determining whether an investment is likely to affect security or public order – it is currently up to each Member State to decide whether or not to take these into account:
  • target-related factors, such as the security, integrity and functioning of critical infrastructure, the availability of critical technologies, the continuity of supply of critical inputs, the protection of sensitive information, the freedom and pluralism of the media; and
  • investor-related factors, such as whether the foreign investor has been involved in an investment previously screened by a Member State and which was prohibited or cleared with conditions, has been sanctioned, has been involved in activities negatively affecting the security or public order, has been engaged in illegal or criminal activities, or is likely to pursue a third country's policy objectives or facilitate the development of a third country's military capabilities.
• Finally, there are detailed reporting requirements for Member States on their activities under the national FDI screening and the EU cooperation mechanisms.

While greater convergence between Member States' FDI screening regimes is beneficial for potential investors in terms of predictability and deal certainty, some Member States' screening authorities have already expressed concerns about the Commission's interference in their national administrative procedures.

The clarification in Annex II of what constitutes critical infrastructure and critical technologies will be a particular welcome feature, given the abstract concepts found in the current FDI Screening Regulation and in FDI screening laws of many Member States. The Commission will have the possibility to amend both Annexes through delegated acts in order to react quickly to relevant developments.

Improving the cooperation mechanism

The Commission aims to focus the cooperation mechanism between Member States and the Commission on cases which present the highest risks for public order and national security. 

Today, Member States are formally obliged to notify the Commission and other Member States of any transaction in their territory that is subject to FDI screening. It has become clear that each Member State applies this requirement in a different way (e.g. Austria notifies every screened transaction, Germany only when an in-depth review (phase II) is opened).

Going forward, there will be a common minimum scope of transactions that Member States will have to notify to the cooperation mechanism. A transaction will have to be notified if:

• the target company participates in a project or programme of EU interest listed in Annex I,
• the target company is active in critical infrastructure or critical technologies listed in Annex II, and
  • the foreign investor is either controlled by the government of a non-EU country, or
  • subject to economic sanctions,
• FDI screening at Member State level moves to a phase II procedure, or
• in a phase I procedure, the Member State exceptionally intends to impose a mitigating measure or prohibit the transaction without opening a phase II review.

The Commission also wants to make the Member State in which the investment takes place more accountable to comments from other Member States or an opinion from the Commission. To ensure that the likely impact of an investment on security or public order is properly addressed, Member States will have to give such comments or an opinion "utmost consideration" instead of just "due consideration" as in the current Regulation. The Member State will call for a meeting with the Member States concerned and the Commission to discuss how to best address the risks identified. The final decision will remain the sole responsibility of the Member State where the investment takes place, but it will be required to provide a written explanation of the decision taken, including the reasons for any disagreement with the comments of other Member States or the Commission' opinion.

Member States and the Commission will still be able to provide comments or an opinion to a Member State where an investment takes place or up to 15 months after its closing, even if that Member State has not screened the investment or if the investment has been screened but not notified to the cooperation mechanism (now referred to as the own initiative procedure).

The system of deadlines by which Member States and the Commission must provide comments or an opinion will be clearer, without changing the length of the deadlines. The Commission expects the procedure to take 20-45 days. However, experience shows that in some cases it can take considerably longer. This will be even more the case with the introduction of mandatory meetings between Member States and the Commission and the requirement to provide written explanations as mentioned above. Practice will show how these requirements translate into the reality of the authorities. According to the Commission's Third Annual FDI Report, Member States have provided comments in around 7% of cases and the Commission has issued an opinion in less than 3% of the cases.

Another potential source of delay is "any substantial new information or circumstances relevant to the assessment" after the notification to the cooperation mechanism, which can now lead to a "mutually acceptable" extension of the deadlines. Important for year-end business: all deadlines are suspended between 25 December and 1 January.

Extending the scope of the Regulation

The Commission intends, on the one hand, to extend the scope of the FDI Screening Regulation to indirect investments in the EU made by foreign investors. These investments are made by an EU entity that is ultimately controlled by a non-EU investor. While most Member States already screen such intra-EU investments, the current EU cooperation mechanism does not apply to these transactions unless they are part of a scheme to circumvent FDI screening, which is challenging to prove.

This gap in the applicability of the Regulation, and thus in the requirements it imposes on national FDI screening mechanisms, was exposed by the European Court of Justice in the "Xella Magyarország" case.

Entities without third country participation or with only a non-controlling participation of a foreign investor (portfolio investments) are not covered.

Another proposed extension of the scope of the Regulation concerns greenfield foreign investments. These occur when a foreign investor sets up, directly or indirectly, new facilities or a new undertaking in the EU. Greenfield investments can be considered relevant to the security or public order of a Member State, in particular when such investments occur in critical sectors or when they feature characteristics such as particular size or essential nature. There is already a trend in some Member States to make greenfield investments subject to FDI screening, for example in Germany, where this is expected to be part of the new Investment Screening Act due later this year.

Special rules for multi-country transactions

Given the degree of integration of the EU internal market, a single transaction can have an impact beyond the borders of one Member State, in another Member State or at EU level. The Commission has recognised that this calls for a more efficient procedure for the assessment of transactions requiring FDI clearance in more than one Member State (so-called multi-country transactions).

Parties will have to file their notifications in all Member States concerned on the same day. This is delicate because different timelines and risk profiles in individual jurisdictions often lead parties to transactions to take a staggered approach to filings.

To ensure efficient management of multi-jurisdictional transactions, the Member States concerned should notify the transaction to the cooperation mechanism on the same day. In addition, the Commission pushes for a more stringent and synchronised system for the exchange of information obtained in the course of an FDI screening, e.g. through requests for information.

Moreover, Member States will have to coordinate on the final decision and the proposal increases the hurdles for Member States to disregard comments or concerns from other Member States or the Commission, even if the final decision still rests with the national screening authorities.

Outbound investment: baby steps towards possible measures

There has been growing concern about outbound investment (i.e. investment by EU companies in third countries) in a narrow range of advanced technologies that could enhance the military and intelligence capabilities of countries that might later use them to threaten EU and wider global security.

Unlike in the US, where the Biden Administration issued an executive order on outbound investment screening in 2023, there is currently no screening of outbound investment to complement the measures on the screening of inbound FDI and export controls of dual-use items.

The EESP does not change this. The Commission published a White Paper on Outbound Investment. Recognising the complex and sensitive nature of the issue, the Commission is launching a multi-stage process to gather data and evidence on the potential risks of outbound investment, which will ultimately determine whether and how any further policy response should be formulated: published.

• January - April 2024: public consultation on a proposed monitoring and review of certain outbound investment and related activities;
• Summer 2024: assessment of the results of the consultation and adoption of a recommendation to Member States to monitor and review certain outbound investment;
• Summer 2025: conclusion of the monitoring and review by Member States and risk assessments of outbound investment transactions;
• Autumn 2025: Commission assessment of the need for and possible content of policy responses in this field.

Outlook

Member States and foreign investors will carefully review the Commission's proposal for a new FDI Screening Regulation, which could have a major impact on the competence of national legislators to independently define which transactions are important to them from a national security perspective and how to deal with them.

The goal of better harmonising national FDI screening regimes is shared by many stakeholders in order to make procedures more consistent and predictable. In practice, the benefits of a more focused cooperation mechanism are likely to outweigh any additional administrative burdens, which are expected to be relevant only in a limited number of cases.

It remains to be seen how many of the proposed changes will actually find their way into the final text, striking a balance between a more European approach and preserving national sovereignty over FDI.  Given the upcoming European elections in June, it could well be that the Parliament will not deal with the matter until the second half of 2024. It will take even longer for the new FDI Screening Regulation to enter into force, given the 15-month transition period.

The Commission highlights the specific nature of multi-country transactions. Hogan Lovells has a global team of FDI experts and is therefore uniquely placed to advise clients on transactions that trigger FDI notification requirements in one or more countries in the EU or around the world. Our Global Legal Guide provides insight into and comparison of FDI screening regimes in 20+ key jurisdictions where Hogan Lovells has offices, including the EU (Belgium, France, Germany, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Poland and Spain).

Stay tuned for our next blog, which will focus on the export control aspects of the EESP.

Authored by Falk Schöning, Julius Gertz, Stefan Kirwitzke, and Philipp Reckers.