One year on… How the EU foreign investment screening landscape has changed
October marked one year since the EU screening mechanism came into effect. While it is still early days, clear trends have emerged that can be expected to impact M&A-execution in Europe for years to come. Below we set out the main takeaways based on our experiences.
Going back to come forward
As a short reminder, the EU FDI screening mechanism (for more details please see our previous blog posts here and here) does not set out a standalone review/approval system (similar to, for example, the EU merger control regime) requiring foreign investments to be notified and approved at the EU level.
Instead, the EU FDI screening mechanism creates a framework of cooperation where Member State authorities exchange information with those in other Member States and the Commission - the aim being to promote awareness and allow interested stakeholders (i.e., other Member States and the Commission) to ask questions and issue opinions on the process. Importantly, these opinions, even from the Commission, are not binding on the Member State carrying out the review.
In addition, the EU FDI screening mechanism endeavours to promote “best practice” when it comes to FDI screening in Europe - for example, as to the relevant legal standard for review, which sectors can be considered sensitive, and when the FDI might be deemed to be against the public interest.
What we’ve seen so far
Despite the largely coordinative nature of the framework (given its lack of direct decision-making powers) the influence of its implementation is increasingly clear to see.
Firstly, the foreshadowed proliferation and anticipated lack of coherency in approach between the design of each regime continues to bear out.
- Upon its inception in 2019 only 14 (out of 27) Member States had an FDI review tool in place. While this number had risen to 15 one year ago, it now stands at 18 and counting - with Belgium, Ireland, Luxembourg, the Netherlands, and Sweden also having draft legislation in the pipeline (and expected to come into force over the next 12 months). The remaining Member States seem almost certain to follow suit in one way or another. This, inevitably, means that transaction parties will incur greater delays / costs associated with navigating the larger number of requisite approval processes (with the related risk of divergent outcomes between regulators).
- Alongside the growth of newly established regimes, several Member States have eagerly revised their existing regimes to broaden the scope of transactions requiring review. Particularly, France, Germany, Italy and Spain have made a variety of amendments to their respective regimes over the past 12 months. While in the most case these amendments tend to converge on the approach suggested under the EU screening mechanism, many are still taking a nuanced approach focused on areas of national interest and in several instances intentionally deviating from the EU approach, which creates a fairly heterogenous set of legal frameworks, adding some complexity to the identification of filing requirements.
Secondly, we’ve seen several emerging practical risks and challenges associated with navigating this increasingly occupied (and ever-evolving) minefield.
- It is now routine for authorities to whom a filing has been submitted to ask follow-up questions driven by the EU screening mechanism procedures. These manifest in three ways (i) completing the information notice required to be shared with the Commission / other Member States; (ii) questions received from Member States in which filings have not been made (focused on the target’s activities in their respective countries); (iii) questions received from the Commission (particularly focused on activities of wider European interest).
- As a result of the information-sharing procedure, it is now common for Member States in which filings have not been made to seek details (via the reviewing authorities) regarding the target’s activities in their country and, in particular, to try to understand whether these may fall within their own regime. We have seen this result in authorities requesting that a filing be submitted. It goes without saying that this can have significant implications for the closing timetable given that the request can arise relatively late in the overall process. Acquirers may also be exposed due to SPA conditions not explicitly covering unexpected regimes.
- The inevitable consequence of the above developments is that review timetables have become more protracted and predictability of process reduced. On the one hand, some Member States pause their own review timetable pending completion of the EU-level process (which can potentially last in excess of 1 month). While on another, Member States do not seem to be taking a consistent approach as to when, and in what way, they participate in the process or reveal information obtained from another Member State as part of the process. This can lead to delays and questions arising at different stages of reviews in various countries - and we have seen examples of individual authorities asking different questions through two or more reviewing Member States at different times. Equally we have seen that some Member States disclose information they have received through the screening mechanism to the parties of a transaction – which is very welcome and increases transparency and facilitates due process – whereas other Member States very much treat the EU FDI screening mechanism and all coordination as a black box.
- While the EU FDI screening mechanism has significantly increased the number of interactions between the EC and the various Member States (irrespective of whether they have been notified directly or not), the ultimate decisions still appear to be primarily driven by national considerations by the relevant authorities (rather than comments or opinions from the EC or other Member States). In this regard it will be interesting to see if the expected annual review report - to be published by the EC in the coming weeks - will give greater insight as to whether the process has also altered the substantive assessments in certain cases.
What does this all mean?
As Member States and the EC become increasingly familiar with the procedures and how best to utilise them, their practice will continue to evolve. Hopefully this will lead to greater transparency, predictability and co-ordination, minimising the potential for unnecessary delays and associated costs/burden. Nonetheless, the sheer number of potential regulators that may need to be dealt with in each case will ensure that, even in the smoothest case, the level of complexity will remain high.
As a result, it is more important than ever that transaction parties now prepare for these processes carefully. Having a detailed understanding of the target’s activities in each Member State will (i) ensure that the correct filings are made upfront (and not requested at a late stage); and (ii) enable the parties to quickly respond to questions from the EC and other Member States (thereby mitigating delays). In addition, acquirers will increasingly want to consider whether a backstop (“catch-all”) condition may be warranted to guard against unexpected filing requirements - particularly in light of the broad / subjective nature of some of the regimes.