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The EU framework on the screening of FDI

Lourdes Catrain and Eleni Theodoropoulou

Hogan Lovells

Tuesday 08 January 2019


In September 2017, the president of the European Commission (the Commission) announced a legislative initiative for a regulation providing for the framework of foreign direct investment (FDI) screening. Discussion on the matter had been ongoing for a few years, with several member states advocating for the introduction of European Union (EU) uniform rules to allow for the screening of FDI at EU level.

The increasing volume of Chinese FDI into the EU, which in 2017 reached €28.5 billion, accompanied by the constant focus of Chinese acquirers on the sectors of advanced industrial machinery and equipment, information and communications technology, utilities, transport, infrastructure and energy, raised concerns among EU member states and regulators. This is because, often, these sectors are considered sensitive sectors and acquisitions by non-nationals raise national security concerns.

Currently, there are no FDI screening rules at EU level. Such rules and mechanisms are available in 12 member states (ie, Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain and the United Kingdom). These apply different procedures, criteria and substantive rules for the screening of acquisitions by non-EU nationals or companies.

On 13 September 2017, the Commission tabled a proposal for a regulation establishing a framework for the review of FDI in the EU (Commission Proposal) (Proposal for a Regulation of the European Parliament and of the Council establishing a framework to review FDIs into the EU, COM(2017)487/947294). Pursuant to the ordinary legislative procedure, the European Parliament (Parliament) and the Council of the EU (Council) are involved in the legislative process, submitting their respective proposals for amendments to the Commission Proposal. Their positions will be subject to negotiations among the three institutions, with a view to finding a compromise solution on the text, which will be then adopted into law.

In May and June 2018, the Parliament and the Council finalised their respective position on the Commission Proposal. At the time of the writing of this article, the negotiations among the three institutions are ongoing, with a view to reaching a compromise on the final text most likely by the end of the current legislature in April 2019.  

Scope of the Commission Proposal

The Commission Proposal provides for an enabling framework for member states to review foreign investments on grounds of security and public policy. It does not aim to establish an EU-wide screening mechanism such as the Committee on Foreign Investment in the United States. Rather, it provides for certain common principles with which national screening mechanisms must comply.

In particular, member states would not be obliged to put in place a mechanism for FDI screening. However, member states that already have a screening mechanism and procedures must notify the Commission and report on the operation of such mechanism.

Such mechanisms must abide by certain principles (ie, transparency, non-discrimination and providing the foreign investor concerned with the possibility of judicial review). In this regard, member states will need to set out the circumstances triggering the FDI screening, the grounds for such screening and the applicable procedural rules. They must also establish time frames for issuing their decisions, while also protecting confidential information provided by the foreign investor concerned.

Further, member states that do not have a screening mechanism will be required to report on the FDI taking place in their territory on an annual basis.

The Commission Proposal identifies certain sectors that member states may consider in their screening of whether a particular FDI is likely to affect public policy and public security. These sectors are:

  • critical infrastructure (which includes energy, transport, communications, data storage, space or financial infrastructure and sensitive facilities);
  • critical technology (which includes artificial intelligent, robotics, semiconductors, technologies with potential dual-use applications, cybersecurity, space or nuclear technology);
  • the security and supply of critical inputs; and
  • access to or the ability to control sensitive information. In this determination, other factors such as control of the foreign investor by a third country government may also be taken into account.

In their respective positions, the Parliament and the Council proposed broadening the categories of sectors proposed in the Commission Proposal to include a category, that of plurality and independence of media (with the Parliament going even further, to propose the inclusion of services of general interest and services of general economic interest, as well as cultural services, sports facilities, betting services and cultural heritage).

The Parliament also proposes making mandatory the consideration of the following criteria: (i) whether there is risk of disruption, failure, loss or destruction of supply, that could affect a member state or the EU; (ii) whether a foreign investor is directly or indirectly owned or controlled by a foreign government or is part of a state-led project or of an economic industrial or political strategy of a third country aiming to acquire or transfer key enabling technologies; and (iii) whether the foreign investor has been involved in the past in projects threatening security or public order of a member state.

Further, the Parliament’s proposal includes a series of further criteria that may be taken into account by member states in their determination:

  • the overall circumstances under which the investment is made;
  • whether there is a risk of breach of international human rights and labour rights instruments or the investor engages in criminal activities (eg, money laundering);
  • any change of ownership clauses in the statues of the FDI concerned;
  • whether an FDI might lead to a monopolistic structure;
  • whether there is reciprocity in the market of the country of origin of the foreign investor concerned;  
  • previous relations of the member state or the Commission with the foreign investor concerned; and  
  • functioning of the review process

The Commission Proposal will not affect the national procedure applicable in the existing screening mechanisms of member states. However, it will add more obligations on member states with respect to reporting and exchange of information, with a view to increasing transparency. It will also add a role for the Commission with respect to acquisitions by non-EU investors that could affect EU projects and programmes.  

In particular, the Commission will also be able to screen FDI on the grounds of security and public policy if a certain foreign investment is likely to affect projects and programmes of EU interest, such as the Horizon 2020 or Galileo. In such cases, the Commission may issue an opinion addressed to the host member state, which must also be communicated to the other member states. The member state concerned must ‘take utmost account’ of the Commission’s opinion. For this purpose, the Commission will be able to request all necessary information from the member state where the FDI is planned or has been completed. The host member state will need to justify its decision if it does not follow the Commission’s opinion.

Furthermore, the Commission Proposal provides for the establishment of a cooperation mechanism between the member states and the Commission. This will allow member states to:

  • inform the Commission and the other member states of all FDI undergoing screening;
  • provide comments to the member state where the FDI is planned or completed, if they consider that the FDI is likely to affect their security and public order; and
  • exchange information on FDI that might present threats to security and public order.

This mechanism will also allow the Commission to provide its comments where it considers that an FDI may affect security or public order of a member state. The cooperation mechanism will be an additional step towards enhancing coordination of review decisions by member states and increasing awareness about proposed investments that might threaten security and public policy.

Finally, information requested by the Commission or other member states may include information requested by the Commission or other member states may include the foreign investor’s ownership structure, the value of the FDI concerned, the products, services and business operations of the foreign investor, the member state and the undertaking in which the FDI is planned or completed, as well as the funding of the investment.

An additional element proposed by the Parliament is an increased role for economic operators, civil society organisations and trade unions. These groups would be able to request a member state to screen a foreign investment and to provide information concerning such foreign investment that causes them substantial and duly justified concerns.

The Parliament has also proposed the establishment of an Investment Screening Coordination Group, which would comprise representatives of member states and be chaired by a representative of the Commission. This Group would act as a forum where member states would address concerns and share best practices.

Procedural implications

The Commission Proposal adds new steps in the screening process of member states, which would need to notify the other member states and the Commission of ongoing screenings, ensure that their mechanisms comply with the principles set out in the Commission Proposal, abide by several deadlines and take into account the opinion of other member states and the Commission (and, potentially, of other economic actors, if the Parliament’s proposal is accepted) on planned or completed investments that are likely to affect public security and public order. However, member states will remain the actors taking the final decision on whether a planned FDI should be blocked on public security grounds.

Further, although the existing screening mechanisms and procedures in member states would not change as such, the Commission Proposal introduces several deadlines within which member states and the Commission, as applicable, will have to comply with when it comes to notifications and exchanges of information on a given FDI.

The deadlines currently proposed by the Commission are:

  • five working days from the start of the screening for the notification to the Commission and the other member states that a given FDI is undergoing screening;
  • comments to the screening member state in the context of the cooperation mechanism should be submitted within ‘a reasonable period of time’ and in any case no later than 25 working days following receipt or the relevant information;
  • the Commission would have an additional 25 days in case its opinion follows comments from other member states; and
  • 25 working days from receipt of relevant information, or of any additional information if required, for the Commission to issue its opinion on an FDI likely to affect EU projects and programmes.

These deadlines would impose additional obligations to member states when screening FDI.

Further, the obligation of member states to request comments by the other member states and the Commission on the FDI under screening and to exchange information in this regard would also add additional steps in the approval process, albeit it would increase transparency and awareness on planned FDI activities within the European Union.


The Commission Proposal has been submitted under the ordinary legislative procedure. This means that the final text to be adopted into law must be agreed by all three EU institutions (ie, the Commission, the Parliament and the Council). At the time of writing this article, negotiations between the three institutions are ongoing. The Commission Proposal is among the legislative priorities of the Commission and is expected to become legal act before the end of the current legislature in April 2019.

The Commission Proposal will set out a framework for the review of FDI in the European Union, under certain common principles, providing for increased transparency and cooperation among the member states and the Commission. It does not purport to amend the existing national screening mechanisms, but rather to enhance coherence of their application. This is done in a fashion that strikes a balance between maintaining the EU openness to FDI, while at the same time being cautious of the risks for public security and public policy.

The Commission Proposal has received mixed reactions from the business community. On the one hand, the need to take a risk-based approach on the matter has been acknowledged. On the other hand, there are concerns with respect to the scope and the administrative burden of the FDI screening framework, which should be as limited as possible, and the need to protect the confidentiality of commercially sensitive information.

Member states have also expressed diverging views. Germany and France have been great advocates of the Commission Proposal. By contrast, others have raised concerns that the Commission proposal would open the door to protectionism and more control from the Commission over issues pertaining to their national matters. Italy, which was among the strongest supporters of the Commission Proposal, has reportedly recently changed its stance, over concerns that the Commission Proposal would intervene with member states’ competence to make the ultimate decision on a given FDI. However, the final position of the Council is a strong indication that member states recognise the necessity to act on this matter and are, indeed, ready to act.

 The final text agreed by EU institutions will be released soon. But the overall initiative is moving ahead at a better pace than expected.

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