Screening FDI


Financier Worldwide Magazine

May 2019 Issue

On 20 November 2018, the European Parliament, European Council and European Commission reached an agreement on the proposed European Union (EU) framework for screening of foreign direct investments (FDIs). The proposal, put forward by the Commission in September 2017, is designed to protect key strategic industries and assets in Europe, while maintaining the EU’s appeal to foreign investors.

“Europe that protects has become a reality,” said Franck Proust, the MEP guiding the measure through the European parliament. “This mechanism is a concrete step against threats to our industries, technologies and strategic interests. We have succeeded in setting up this mechanism quickly, despite the sensitivity of the subject, some reticence and unprecedented pressure. Europe is taking control of its destiny, while staying open for foreign investment.”

The measure has been introduced in response to concerns regarding foreign investment in EU-based businesses active in strategic or sensitive sectors, particularly where the foreign investors are state-owned or where the target of the investment is critical technology or infrastructure.

It was announced in March that the Council had adopted the new regulation. It marks the first time the EU has introduced a comprehensive framework to monitor investments into EU businesses by investors from outside the EU. Previously, there were no EU-wide measures designed to screen FDI on security grounds, with 14 Member States having their own mechanisms in place. Some of those measures, in the UK, France and Germany, for example, have been strengthened over time. But there was no uniform policy, despite the urging of Member States including Italy.

The new framework is timely, as there was €6.295bn worth of foreign investment stock held by third-country investors in the EU at the end of 2017. The geopolitical climate has also contributed significantly to the tightening of foreign investment rules in the EU. Indeed, recent foreign state-backed investments in critical EU infrastructure have created concern that the region’s collective security may be compromised due to the lack of a harmonised foreign investment control framework.

The measure has been introduced in response to concerns regarding foreign investment in EU-based businesses active in strategic or sensitive sectors.

The EU is not alone in this concern, of course. In the US, for example, the Foreign Investment Risk Review Modernisation Act (FIRRMA) reformed the Committee on Foreign Investment in the United States (CFIUS) and helped to close gaps between those transactions that CFIUS has been able to review and those that it has been unable to review despite them raising national security concerns.

Efforts in the US and EU have, largely, been designed to curtail Chinese investments in sensitive areas. In the EU, Member States have expressed concern at the increase in Chinese acquisitions in strategic industries, a lack of reciprocity in market openness by China, the prominent role of Chinese state-owned enterprises fuelling oversees investments, anxiety related to the potential economic harm caused by Chinese investments and a renewed realism in relations with China. To that end, the focus of the new regulation will be on critical infrastructure and technologies, food security and free press. Additionally, scrutiny will also be applied to investments by foreign governments, including through their state bodies or armed forces.

In the EU, the new measures create a cooperation mechanism through which Member States and the European Commission will be able to exchange information and raise concerns. The Commission will also be able to issue opinions in cases concerning several Member States, or where an investment could affect a project or programme of interest to the whole EU. Member States will then be able to review and block any FDI on security or public order grounds. Member States will also be able to establish and maintain national screening mechanisms wherever they are deemed necessary, though these new screening regimes will have to be in line with a number of EU-wide requirements set out in the new regulation.

The Commission will be able to issue non-binding opinions covering cases concerning a number of Member States, for example it may advise Member States where it considers that an investment would likely affect security or public order in one or more Member States or where a proposed investment might affect a project or programme of interest to the whole of the EU.

While the EU was initially hesitant to adopt a CFIUS-like approach to FDI screening for fear of “sending the misleading signal that the EU is stepping back from its commitment to an open investment regime”, the regulation, which will begin to apply from October 2020, is an important step on the road to increasing transparency surrounding international investment.

© Financier Worldwide


Richard Summerfield

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