knowledge 18 December 2023 |

Expected Revision of the EU’s FDI Screening Regulation

The FDI Screening Regulation created a cooperation mechanism for Member States and the Commission to exchange information, raise security-related concerns and identify solutions with a view to ensuring the protection of security and public order. Unlike the EU Foreign Subsidies Regulation and the EU Merger Regulation, the FDI Screening Regulation does not give the Commission the ability to issue screening decisions for FDI itself, but leaves this to the relevant Member State authorities. Rather, it effectively encourages the adoption of FDI screening at Member State level and sets out a coordinating framework for the Member States’ respective FDI regimes.

Since the adoption of the FDI Screening Regulation, there has been a proliferation of FDI screening mechanisms in the EU with the Commission expecting that 23 Member States will have a screening mechanism in place by early next year, including Ireland (see our briefing on the recently adopted Irish regime here).

Over the last year, the Commission has been busy evaluating the functioning and effectiveness of the FDI Screening Regulation to ensure that it remains fit for purpose in a changing global security context. This evaluation included a study published by the OECD in 2022 and a public consultation ran by the Commission, the results of which have recently been published.

While the Commission’s proposal is yet to be published, the Commission’s Deputy Director-General and Chief Trade Enforcement Officer, Mr Denis Redonnet, hinted towards the content of the potential changes during a recent presentation to the European Parliament’s Committee on International Trade. These include:

Extension of the FDI Screening Regulation to foreign “indirect” investment

This is a point that gained prominence following the judgment from the Court of Justice of the European Union (“CJEU”) in Case C-106/22 - Xella Magyarország. In Xella, contrary to the Opinion of Advocate General Ćapeta, the CJEU called into question the application of the FDI Screening Regulation to investments made by undertakings registered in an EU Member State, over which an undertaking registered in a third country has “majority control” (so-called foreign “indirect” investment).¹

Mr Redonnet indicated that there was “considerable support” expressed in the responses to the Commission’s public consultation for covering foreign indirect investment and that this would be a consideration going forward.

Importantly, any proposal put forward here will need to comply with the EU rules on fundamental freedoms, in particular the freedom of establishment but also, where applicable, the free movement of capital.² In Xella, the CJEU found that regimes restricting the freedom of establishment can only be justified on the grounds of public policy and public security if they address a “genuine and sufficiently serious threat to a fundamental interest of society”. Purely economic reasons are not sufficient. FDI regulators will be keenly waiting to see how the Commission will address the CJEU’s judgment, which may lead to the Commission demanding a higher threshold for intervention in the case of foreign indirect investment.

Power to act on cross-border risks and concerns

It was highlighted that few Member States have the power to act on cross-border risks or are equipped with the legal basis to take into account concerns expressed by other Member States or the Commission. This was expressed as a “gap” in the FDI Screening Regulation and a “limitation to a fully-fledged cooperation mechanism”. Currently, Member States are required to give “due consideration” to comments received from Member States or an opinion from the Commission.³

Catching critical cases and avoiding non-critical cases

Mr Redonnet emphasised that the main objective of the revisions would be to ensure that Member States screen foreign acquisitions of EU companies in certain sensitive sectors and to improve the functioning of the FDI Screening Regulation. It was acknowledged that as it stands the mechanism both misses critical cases and sees too many non-critical cases meaning that a “plus and a minus” must be applied to the recalibration of the mechanism. This echoes the findings of the Commission’s Third Annual Report in which it was reported that there has been a “significant increase” in formally reviewed cases, however, less than 3% of cases resulted in a Commission opinion.⁴

A “less is more” approach was suggested whereby fewer unproblematic cases would be channelled through the cooperation mechanism, while at the same time making sure there are no gaps for potentially sensitive transactions.

It will be interesting to see how the Commission proposes to resolve this issue. It may pay closer scrutiny to the sectors defined within the FDI Screening Regulation. As the OECD noted, the Regulation leaves broad scope for Member States to design the parameters of national screening mechanisms and many Member States have different views on the sectors that are more vulnerable to public order or security risk from FDI. Additionally, the Commission may focus on the high degree of heterogeneity of national procedures, for example national pre-screening procedures.

Next Steps

The Commission initially indicated that its proposal would be published by the end of 2023, and therefore it is anticipated that it may be published in the coming weeks.

Also contributed to by Louise O’Callaghan