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As part of the European Economic Security Package, the European Commission (‘Commission’) has recently proposed a number of legislative proposals and white papers aimed at better protecting Europe’s strategic interests. We have described a broader effort here.
This blog post discusses certain aspects of the proposed amendments to the FDI Review Regulations (the “Proposals”). The proposal would repeal and replace Regulation 2019/452 (commonly known as the FDI Review Regulation), an existing legal instrument established to deal with the acquisition of foreign control over strategic assets in the EU. The purpose is
So far: Is the current FDI review regulation a toothless tiger?
Member state-level FDI screening mechanisms, once heavily scrutinized by the European Commission as restricting the EU’s fundamental freedoms, have steadily proliferated since the 2010s. At some point, the European Commission also supported this trend and sought to bring some order to the blossoming diversity of state institutions. However, the European Commission was careful not to infringe on member states’ prerogatives regarding national security.
The result of this balancing of interests was the FDI Review Regulation, which came into force in October 2020. The Regulation introduced only light rules requiring Member States to notify and coordinate with the Commission and other Member States when reviewing FDI. Rather, it was intended to enable, encourage, and sensitize member states, so it did not provide for specific FDI review duties or the Commission’s decision-making powers.
National mechanisms therefore continue to vary in scope, timeline, substantive and procedural criteria. Some Member States have not even introduced an FDI screening mechanism at all yet (Bulgaria, Cyprus, Greece and Ireland are in the process of introducing such legislation; Croatia has no such legislation; It is the only EU member state with no current plans to introduce it). Some cover only a limited number of sectors. Stakeholder consultation and the OECD assessment show that this fragmentation is a major problem, as it leaves regulatory gaps that can be exploited by potentially problematic foreign investors. Identified. This situation is further exacerbated by the fact that the FDI Review Regulation does not apply to indirect FDI, as confirmed in the CJEU’s Zella decision. In other words, vehicles within the EU managed by foreign corporations are officially traded. However, most of the EU’s domestic FDI mechanisms accept indirect FDI.
And given that the geopolitical environment has become increasingly unstable since the introduction of the FDI screening rules (think COVID-19, think Russia’s invasion of Ukraine), the Commission The proposals currently aim to remedy some of the perceived shortcomings of the FDI Review Regulations.
What is new about this proposal?
Targets indirect investment and greenfield investment
EU-based companies controlled by foreign shareholders fall within the scope of the FDI Review Regulation. This is a significant change compared to the previous situation, which forced the Commission to choose Article 114 TFEU as the legal basis for the amended Regulation, i.e. the power to harmonize internal markets (on common regulations). In addition to Article 207 TFEU). commercial policy).
Furthermore, the European Commission has made it clear that it considers greenfield investments to be within the scope of the FDI screening rules and encourages Member States to include greenfield investments in their screening mechanisms (proposal, Announcement 17).
FDI screening becomes mandatory in some sectors
Another major change is that member states will no longer have the option of anticipating no FDI screening mechanism at all. The proposal provides that certain his FDIs will be subject to mandatory review. This includes (i) investments in projects or programs of EU interest (defined in detail in Annex I and relating primarily to a number of EU-funded initiatives); and (ii) investments in certain It concerns investments in companies operating in the list of sectors (as follows). (as defined in Annex II).
Annex II contains surprising areas such as military/munitions. It also lists semiconductors, AI, quantum technology, biotechnology, advanced digital and electronics, space and propulsion technology as sensitive industries. Additionally, areas requiring review include energy-related technologies, robotics, advanced manufacturing, and certain resource extraction technologies. Finally, certain transactions related to critical pharmaceuticals and financial sectors will also need to be reviewed.
Clarification about what transactions need to be notified
The current FDI review rules require member states to notify the Commission of all FDIs that are under review. The proposal opts for a more targeted approach, stipulating the requirement only for transactions that would be required to be reviewed under the new rules and meet certain other criteria. These additional criteria relate to investors controlled by third country governments, investors associated with sanctioned entities, and investors already subject to a prohibition or relief decision (proposed Article 5. Section 1). Additionally, all Phase II investigations must be notified (Proposed Article 5, Section 2; see below). All other FDIs may be notified if the Member State concerned considers it beneficial (Proposed Article 5(3)).
The association of the investor with a sanctioned entity (or the risk of sanctions evasion) was also added to the list of factors that Member States should consider when deciding on FDI (proposed Article 13.4(b)). ) and (d)).
More detailed procedural requirements
Furthermore, all Member States’ review mechanisms shall be subject to a more stringent set of procedural minimum requirements in the future. Current FDI review rules only envisage very high standards for member states, including non-discrimination, time limits, and the possibility of pursuing legal recourse. In addition to this, this proposal: especially next:
- The Phase I to Phase II model known from merger control procedures (Proposal, Article 4(2)(a)).
- By authorization of the competent Member State authorities, after– Investigation of unannounced transactions for at least 15 months after completion (Proposal, Article 4(2)(c)). A corresponding right for the Commission or a Member State to intervene if it considers that it may be affected by unnotified FDI taking place in a different Member State is also foreseen for up to 15 months after completion of the transaction (Proposal, Article Article 2).9).
- As far as mandatory reviews are concerned, the requirement that a decision be made before the transaction is completed (proposed Article 4(g)).
- Power to effectively counter gun-jumping in reviewable transactions (proposed, Article 4(2)(h)).
- The right to a hearing for investors facing the imposition of prohibitions or mitigation measures (Article 4(3) of the proposal).
- Possibility to obtain information also from third parties (Proposal, Article 10(4) and (5)).
If Member States or the Commission raise concerns regarding FDI, the proposal will include strengthened language. The Member State responsible for the review must give “the utmost consideration” to such comments (Article 7(5) of the proposal). Furthermore, Member States should discuss and motivate their decisions if they disagree with the concerns expressed (proposed Articles 7(6), (8)(b) and (9)). ).
Supports FDI screening across multiple jurisdictions
It is not uncommon for the target of an M&A transaction to have subsidiaries established in a number of member states. As a result, multiple parallel applications for his FDI review may be required. In order to reduce the complexity and uncertainty of this procedure, the proposal provides for multi-jurisdictional submissions to be made simultaneously to all Member States concerned, after which Member States can proceed through the examination process. You will be asked to adjust the The necessary parallel notifications to the cooperation mechanism by several Member States shall also be made on the same day (Proposal Article 6(2)). Decisions involving conditional authorization shall be coordinated among the Member States concerned (Article 7(6) of the proposal) and deadlines for comments etc. shall be adjusted (Article 8(8) of the proposal).
What is the impact?
The impact of stricter EU FDI screening regulations is certainly significant, but it should not be overstated. For investors, relevant domestic laws will remain important, and some of these domestic review mechanisms will not need to be adapted as much once the proposals are adopted. Many Member States already screen intra-EU investments and indirect FDI, for example. The impact will instead be felt in Member States where no or only limited review mechanisms have been in place. These countries need to scale up their testing efforts. However, important jurisdictions such as Germany, Italy and France have already introduced strong review rules many years ago, and the changes will not be significant.
On the other hand, greater levels of harmonization and coordination will come as a relief to investors who have previously faced complex applications across multiple jurisdictions in a heterogeneous legal environment. Still, many differences will remain. Member States will be free to expand the scope of the review requirements beyond the minimum required by the proposed regulation and will be able to design many aspects of the procedure as they wish, such as final approval deadlines.
Finally, the proposed power to intervene in a transaction for 15 months after completion could be highly explosive, even in situations where notification was not required under the applicable regulations. . Faced with the possibility of being forced to later unwind a completed transaction, many investors file for precautionary reasons, or for peace of mind even in connection with seemingly innocuous transactions. You might be seen doing it. Therefore, the proposed goal of increasing legal certainty is very likely to be reversed.
But this proposal is just a suggestion for now. It remains to be seen to what extent the legislative negotiations with the European Parliament and the European Council, which are about to begin, will bring about changes.
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