EU foreign investment screening mechanism brings heightened transaction scrutiny

Over the past 12 months, we have witnessed an increasing number of EU Member States adopt or modify foreign investment screening regimes. As many of these regimes have suspensory notification requirements, this has had an impact on M&A execution in affected sectors.

Effective 11 October 2020, the EU framework for the screening of foreign direct investments (see here for our alert on the Regulation) looks set to further increase the level of scrutiny over current and future transactions affected by these regimes.

Enhanced cooperation among Member States and the European Commission

The EU framework does not introduce its own stand-alone screening mechanism. However, while the decision on whether and what types of foreign investments to screen remains the responsibility of individual Member States, the EU framework is intended to complement national screening mechanisms and strengthen their effectiveness.

Of practical importance for transaction parties is the enhanced cooperation mechanism between Member States and the EC. A Member State that has received a notification will now have an obligation to communicate that notification to all other Member States and the EC as soon as possible. As such, all regulators will become aware of transactions notified in other Member States and may well inquire as to whether they should also have received a notification.

Moreover, both Member States and the EC will be able to intervene in the national screening process by making comments or issuing (non-binding) opinions when a foreign investment potentially threatens the security or public order of other Member States, or when a foreign investment could potentially affect projects or programmes of Union interest on grounds of security or public order. Where Member States and/or the EC provide comments, the Member State processing the filing will need to take these into account. Further, the Member State running with the process may base an intervention on effects in another Member State, thereby significantly increasing the overall level of scrutiny. We therefore expect considerable delays in foreign investment review periods where this procedure applies.

More complexity to follow

As it stands, 15 Member States already have foreign investment screening regimes in place. Moreover, the EC issued Guidelines calling upon all Member States to set up a fully-fledged screening mechanism (see here for our alert on these Guidelines). This message seems to have been well-received with Belgium, Ireland, the Netherlands and Sweden each in the process of adopting their own regimes and Germany set to update its own rules for a third time in 2020 and with another expansion looming on the horizon for early 2021. The UK Government is also expected to introduce its National Security and Investment Bill into Parliament imminently.

Transaction parties now, more than ever, need to ensure that foreign investment filing requirements are factored into the timetable and associated risk assessment for deals involving assets in affected sectors. In particular, with a potential hard Brexit approaching, UK acquirers face the prospect of being treated as any other foreign acquirer, thereby facing more foreign investment proceedings across EU Member States.