Background

On 11 October 2020, the EU Regulation establishing a framework for the screening of foreign direct investments (the "FDI Regulation") came into force. 

The FDI Regulation introduces an obligation for EU Member States to cooperate - among themselves and with the Commission - in connection with the screening of foreign investments. EU Member States are obliged to notify the Commission of any foreign investment which is subject to national screening, following which the Commission and the other Member States have a possibility to express opinions on the investment.  

The FDI Regulation does not order EU Member States to adopt national FDI screening mechanisms. However, in the aftermath of the COVID-19 crisis, the Commission has encouraged EU Member States to adopt national FDI screening mechanisms. The FDI Regulation lays down certain minimum requirements for the Member States deciding to adopt FDI screening mechanisms, such as requirements for transparent rules and procedures. But it is up to the individual Member States to lay down specific rules and procedures for the screening of foreign investments. 

On 23 November 2021, the Commission published its first annual report regarding the application of the EU Foreign Direct Investment (FDI) Regulation (the "FDI Regulation"). The report is based on Member States' reports and a general consultation process through which Member States have been given a possibility to comment on the FDI Regulation. 

Implementation of national FDI screening mechanisms

When the Commission tabled its first proposal for the FDI Regulation in 2017, 11 Member States had adopted - more or less extensive - national FDI screening mechanisms. Since the FDI Regulation came into force, all these Member States have amended their national screening mechanisms, while a number of additional Member States have adopted national FDI screening mechanisms or initiated a process expected to result in the adoption of such mechanisms. 

Accordingly, 24 out of a total of 27 EU Member States have either amended their national FDI screening mechanisms, adopted national FDI screening mechanisms or initiated a process expected to result in the adoption of such mechanisms or in the amendment of their national screening mechanisms. These Member States are the following:

• Adoption of amendments to an existing national FDI screening mechanism: Austria, France, Finland, Germany, Hungary, Italy, Latvia, Lithuania, Poland, Romania and Spain.
• Initiation of a process expected to result in the amendment of existing national FDI screening mechanisms: the Netherlands and Portugal.
• Adoption of national FDI screening mechanisms: the Czech Republic, Denmark, Malta, Slovenia and Slovakia.
• Initiation of a process expected to result in the adoption of a national FDI screening mechanism: Belgium, Estonia, Greece, Ireland, Luxembourg and Sweden.

The Commission notes that it is the Commission's strong expectation that more Member State will have adopted national FDI mechanisms prior to the publication of the next annual report in 2022. 

Experiences of national FDI screening so far

As opposed to, for instance, the merger control rules, screening of foreign investments is exclusively carried out nationally. The Commission's investigations show that 1,793 investments were notified to the national enforcement authorities in the EU during the period from 1 January to 31 December 2020. The following was the result of a review of these screenings:

• Of the investments notified, 80% were not screened, because they were found to fall outside the scope of the national FDI screening mechanism.
• Of the investments notified, 20% underwent screening, of which
  o 79% were approved without conditions;
  o 12% were approved with conditions;
  o 7% were aborted during the screening process (for instance because the parties aborted the transaction);
  o 2% were prohibited. 

Accordingly, the majority of the notified investments undergoing screening were approved without conditions, while only seven investments were prohibited by the national enforcement authorities in 2020. 

Experiences of the cooperation mechanism so far

As mentioned, under the FDI Regulation, EU Member States are obliged to notify the Commission about all foreign investments undergoing national screening in order that the EU Commission and the other Member States have a possibility to comment on or ask questions about the investment before the screening Member State makes a decision.

The Commission's investigations show that a total of 265 investments were reported during the period from 11 October 2020 to 30 June 2021. The following was the result of a review of these screenings:

• In terms of 80% of the investments, neither the Commission nor the other Member States notified within the time limit of 15 calendar days that they intended to issue an opinion. 
• In terms of 14% of the investments, neither the Commission nor one or several Member States notified within the time limit of 15 calendar days that they intended to issue an opinion or had questions to the investment.
• When the investigation was closed, 6% of the investments were still outstanding.

In the cases where the Commission and/or the other Member States had questions to the investment, they typically concerned the following subjects:

• products and or services of the target company;
• possible dual-use classification of such products and/or services;
• customers, competitors and market shares of the target company;
• IP portfolio and R&S activities of the target company;
• characteristics of the investor.

The Commission's investigations further show that the notified investments vary greatly, including in terms of the activities of the target company, the value of the investments and the domicile of the foreign investor. Notifications of investments range from as much as EUR 34bn to as little as EUR 1,200 across all sectors. The fact that an investment has a limited economic value does not rule out that it may be subject to FDI screening and must consequently be notified to the Commission.

Other comments by the Member State

The Commission's annual report includes a number of other comments provided by the Members States in the course of the consultation process. 

Several Member States have pointed to resource constraints in terms of the cooperation mechanism as, by virtue of this mechanism, Member States are ordered to consider investments which are of no relevance under their national rules. Member States have proposed that a set of uniform criteria be defined for investments reported under the cooperation mechanism. So far, the Commission has refused this. 

Further, several Member States have pointed out that having to manage investments notified to and reviewed by national authorities in several Member States can be challenging. The EU Commission concedes that the significant variations in national FDI screening mechanisms may give rise to challenges. In view of the large number of investments being notified in several Member States (29% of the reported investments) it should be considered how this issue is best managed in future.

Plesner's comments

The Commission's annual report is interesting in several respects. Firstly, the report shows that in the past year several Member States have decided to put in place national FDI screening mechanisms (for example Denmark) or have initiated a process expected to result in such a mechanism being put in place. It is particularly relevant to be aware of this in M&S transaction processes where it will have to be assessed to a higher degree whether a potential M&A  transaction will require authorisation in one or more Member States. If the target company has subsidiaries in several Member States, there may potentially be a duty of notification in each of the relevant Member States if the conditions for notification are otherwise fulfilled. In such situations, it may be necessary to carry out - sometimes very extensive - FDI screenings of several Member States' FDI rules. 

In this context, foreign investors should note in particular that national rules may vary greatly in terms of, for instance, the sectors at issue. When planning an investment, it should be assessed carefully whether the relevant investment will give rise to a duty of notification in one or several Member States. By virtue of the cooperation mechanism, all investments undergoing screening in one Member State will be notified to the other Member States. If, as an investor, you overlook a duty of notification in a Member State, you risk that the Member State becomes aware of this through the cooperation mechanism and initiates an investigation into the investment itself.

Plesner will be following developments in this area.

Read the EU Commission's annual report