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In response to rising geopolitical tensions and technological change, the European Commission on 24 January 2024 presented five new initiatives to strengthen the EU’s economic security. Part of this package is a proposal for new regulations on the examination of foreign investments, the purpose of which is to update Regulation 2019/452 (FDI Regulation), which is currently in force. As the European Commission explained, “the proposed changes reflect new geopolitical and security challenges” and “address gaps and shortcomings” in the existing system.
background
The FDI Regulation, which has been in force since October 2020, established a framework for EU member states to review certain foreign direct investments (FDI) within their territories in order to protect national security and public order. At EU level, the framework is primarily aimed at establishing cooperation between member states, although the review itself takes place at national level. Since October 2020, the European Commission and Member States have investigated over 1,000 FDI transactions. However, based on the experience of the current framework and the results of the public consultation launched in June 2023, the European Commission has decided that the time has come for a review. The proposal aims to close identified loopholes, such as fragmentation of national regimes and lack of cooperation between national review authorities, but it does not provide a degree of harmonization on trigger points, processes and required information that companies hope will is still a long way off.
Mandatory approach for EU member states
Current FDI regulations give member states the freedom, but no obligation, to screen FDI within their territory. This would change under the new regime, as the proposal introduces an obligation for all member states to adopt a foreign investment screening mechanism. The new requirements will only affect Bulgaria, Croatia, Cyprus, Greece and Ireland, as 22 member states already have such mechanisms in place, although Ireland’s review system will come into force in the coming months. That is scheduled.
expand the scope
This proposal expands the interpretation of what constitutes a “foreign investment.” Unlike the current approach under his FDI regulations, the new regime will cover both direct and indirect foreign investments. The test will be whether the investment “establishes or maintains a permanent and direct link” between the foreign investor and an entity operating in the EU. From a practical point of view, this means that the foreign investment review applies not only to foreign direct investments in EU institutions, but also to (i) investments in EU subject areas by EU institutions controlled by foreign investors; ) means that it also applies to investments by foreign investors. Foreign investors in non-EU targets with EU subsidiaries. Although this approach has already been adopted in some Member States, it has not been applied to FDI regulation (except in exceptional circumstances). Greenfield investments will also be subject to the new regime, meaning foreign investors establishing new facilities in the EU will be subject to a foreign investment review.
For companies, this does not represent a noticeable change. National legislation already covers indirect investments, and in many cases, EU cooperation mechanisms operate in the background.
The proposal maintains exceptions to current FDI regulations, with pure financial investments and intra-group restructuring operations (which do not affect the influence of foreign investors) remaining exempt. However, as before, Member States remain free to widen the scope and introduce stricter rules at national level, as already happens in some Member States to capture intra-group transactions. can.
2 stage screening
Greater convergence between the foreign investment regimes of Member States with respect to the main features of the procedure is an important objective of this proposal. Under the new regime, sectors requiring minimal scrutiny are harmonized by outlining two investment categories that are subject to mandatory scrutiny and standby obligations.
- The first is investments in specific projects or programs that are subject to EU law listed in Annex I (e.g. Trans-European Transport Network, Trans-European Energy Network, Trans-European Telecommunications Network, European Defense Fund Such).
- The second is investment in areas of particular importance listed in Annex II (e.g. dual-use items, military equipment, critical technologies including artificial intelligence, robotics and autonomous systems, critical pharmaceuticals, financial specific entities and activities in the system). .
Furthermore, national authorities should have the power to review investments that do not fall into these two categories. ex officio 15 months after completion of transaction.
Again, it is questionable whether this will lead to changes in the company. Again, the national system is involved. There may be some (limited!) additional legal certainty for Member States that have simply copied and pasted very broad standards under the current framework (and they may be interpreted differently). Masu).
Coordinating transactions across multiple jurisdictions
The proposal aims to strengthen cooperation between national examination authorities. For example, it sets out a minimum scenario in which a Member State must notify transactions to her EU Cooperation Mechanism. This applies to (i) all investments that are subject to Annex I; and (ii) high-risk investments that are subject to Annex II (e.g., investments that are state-controlled foreign investors or investors associated with sanctioned entities). (iii) applies to investments in the United States. This replaces the previous regime, which also required notification of FDI examinations, but was applied differently across member states.
Furthermore, the proposal sets out a coordination procedure aimed at allowing Member States to fully take into account comments from other Member States or the European Commission. For example, Member States must provide written reasons if they disagree with comments received and cannot complete the review before the comment deadline has expired. For companies, it is likely to mean further delays as national ministries and authorities will need to draw up the inferences, but since decisions are made on a national basis, this is likely a dead-end mandate. Dew.
Special rules are envisaged for cross-jurisdictional investments requiring parallel examination in Member States. In such cases, applicants must file all applications on the same day with appropriate references.
It is true that companies are seeking harmonization of rules as FDI screening becomes increasingly burdensome. The proposal does not address these concerns and instead imposes unrealistic obligations on companies.
Conclusion and outlook
If passed in its current form, the proposal could increase the number of notifications going through the EU process, creating further administrative hurdles and potential delays. However, many countries with high M&A activity have already developed FDI screening mechanisms, so the practical impact of substantive changes (such as adjustments to scope or screening criteria) is likely to be limited. expensive.
The most visible changes are likely to occur at the procedural level for transactions that affect multiple Member States. The proposal aims to strengthen EU cooperation mechanisms to address cross-border impacts at EU level, while keeping reviews domestic and allowing member states to protect safety and security. There is. The adjustment is also expected to provide certainty to potential investors. Time will tell whether these goals will be achieved. On the other hand, increased EU cooperation could result in a suspension of review schedules to allow for adjustments, or ‘same-day’ notification requirements could make planning more complex and costly for investors.
The proposal still has to go through the EU’s normal legislative process, and not all of the proposed changes will necessarily make it into the final document. The Commission also expects that after the Regulation is adopted, there will be a 15-month transition period before it fully enters into force. With this in mind, while the new rules are unlikely to apply for several more years, there is nothing to prevent Member States from anticipating and starting to introduce changes in advance.
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