Following lengthy consultation throughout the second half of 2023, the European Commission is expected to publish proposals to reform the EU FDI Regulation later this week.
This post takes a quick look at the key changes expected in the proposed reform, with a more detailed analysis of the proposed changes to follow.
Expected EU FDI Reform: expanded scope and increased harmonisation
The proposal to reform the EU FDI Regulation comes off the back of the EC’s reports highlighting that – despite regular cooperation with Member States and moves to facilitate alignment of national screening mechanisms – there remain significant divergences between screening mechanisms, particularly with respect to timing, coverage, and notification procedures.
We expect reforms to the EU FDI Regulation to address these points in the following ways:
- Extended scope. Widening the scope of the EU FDI Regulation to capture investments from EU entities whose ultimate owners are non-EU investors (in response to the Court of Justice’s judgment in the Xella decision). Such reform is expected to go beyond what was envisaged in Xella (i.e. capturing “artificial arrangements” which attempt to circumvent the filtering mechanism) and lead to the screening of entities legitimately established in the EU. However, considering the overlay of the Court of Justice’s long-established case law on when restrictions on EU-resident investors are permissible, we anticipate that the implementation of this broader scope to FDI screening into national laws will be rather complex.
- Requirement on Member States to enact FDI legislation. Requiring that all Member States establish screening mechanisms within 15 months of the proposed reforms being enacted. While the vast majority of EU Member States (22 out of 27) now have national regimes in place, a further five Member States (Ireland, Croatia, Cyprus, Greece and Bulgaria) are preparing legislation. Such reforms would see the last remaining Member States being required to put comprehensive FI screening in place.
- Harmonisation of national screening mechanisms. Introducing a set of minimum requirements that national screening mechanisms must meet, in order to harmonise foreign investment screening across the Union (for example, setting a minimum for the scope of investments to be screened and the screening procedure’s essential features). However, it is not clear whether the proposals will address the concerns raised with respect to different sector definitions resulting in varying sector coverage (i.e. it will remain possible for individual Member States to apply stricter measures).
- Alignment of multi-jurisdictional transactions. Measures to improve predictability in multi-jurisdictional transactions (in addition to the harmonisation measures noted above) such as: (i) requiring applicants in multi-jurisdictional transactions to file in all Member States at the same time, (ii) imposing additional cooperation requirements on Member States in multi-country transactions; (iii) requiring Member States to collect the same types of information in notifications. The proposals are also expected to impose some requirements on Member States as to deal timing (for example, imposing uniform deadlines for providing comments and opinions on notified investments, as well as those investments that have been completed but not notified). However, it is not clear whether this can be expected to completely address the concerns raised around the lack of synchronicity with multi-jurisdictional deals, particularly with respect to review timelines. It is also not clear how any requirements on applicants to file simultaneously in multiple jurisdictions would be imposed considering the very heterogenous frameworks that currently exist in all Member States. Essentially, achieving this degree of harmonisation would require material reforms to the national screening regimes of most Member States.
- More active involvement from EC (and other Member States).The EC taking a more active role in coordinating multi-country transactions, with provision made for the EC (alongside other affected Member States) to participate and attend meetings to address cross-border risks and discuss whether intended outcomes are compatible across borders - and with Member States being required to give “utmost consideration” to comments from other affected Member States or opinions from the EC.
- Own initiative procedure. Introducing an “own initiative” procedure, enabling the EC or a Member State to open an own initiative procedure when it considers that a foreign investment in the territory of a Member State hasn’t been notified to the cooperation mechanism. As FDI screening is currently an exclusive competence of the Member States, it is, however, unclear how the EC plans to establish its own proceedings in this space.
- Judicial review. Introducing a requirement that Member States allow for applicants to seek judicial recourse against screening decisions, adding a welcome element of due process in investment screening and providing more certainty for applicants negotiating processes that are often opaque.
- Harmonisation with other EU instruments. Proposals to improve harmonisation between the EU FDI Regulation and other EU instruments, such as the EU Merger Regulation, the Foreign Subsidies Regulation, the Critical Entities Resilience Directive, and sector-specific rules (such as those relating to cybersecurity, energy, and air transport).
EU outbound investment screening: still in the (very) early stages
The EC first announced its plans to develop an outbound investment review mechanism in June 2023 when it published its Joint Communication on a European Economic Strategy (which we covered in an earlier blog post). The Communication suggested that outbound investment screening was needed to counter the risk of technology and knowhow leakage, and to protect the EU’s security interests.
It appears that outbound investment screening remains firmly on the agenda, with the EC expected to put forward a non-legislative White Paper on both outbound investment and export controls. However, it is unlikely a regime will be introduced in the near future.
Instead, we expect that the EC will be focused on working with Member States over the coming months to monitor and assess the current situation to better understand outbound investments in certain strategic sectors (especially emerging technologies such as advanced AI or quantum computing) before establishing whether mitigating measures are needed.
EU export controls – proposals incoming
The EC is also expected to put forward a White Paper proposing export controls of dual-use technologies that impact EU security. We anticipate this will involve a short-term proposal to introduce uniform controls for specific items, alongside the proposed creation of a forum for political coordination to help Member States reach a common position on export controls.
What’s next?
The EC is expected to publish an Economic Security package including the above initiatives on 24 January. The revision of the FDI Screening Regulation will have to follow the ordinary legislative procedure and be amended by both the European Parliament and the Council of the EU. This process will likely be delayed due to upcoming elections in June and there is a very high likelihood that the above proposals will need to be revisited after the EU elections.
Stay tuned for a more detailed analysis of the proposed changes.