On March 19, 2019, the European Union adopted a regulation for the screening of foreign direct investments into the EU (the Regulation).1 The Regulation sets forth national security factors that EU member states (Member States) and the EU Commission (the Commission) may consider when assessing foreign direct investments by non-EU investors. The Regulation entered into force on April 10, 2019, and will have direct effect in Member States from October 11, 2020. This transitional period is meant to enable Member States and the Commission to put in place tools and resources in place to fully apply the Regulation.2
Background and Approach
In September 2017, the Commission's president, Jean-Claude Juncker, unveiled an initial proposal for an EU regulatory framework on foreign direct investments during his State of the Union address. In his speech, President Juncker placed particular emphasis on foreign state-backed acquisitions of European infrastructure and key technology. After extensive discussions and consultation, the European Parliament, Council and Commission eventually reached an agreement on a legal framework for screening foreign direct investments in November 2018, clearing the way for the Regulation to be adopted.
The Regulation takes a very cautious approach: It does not set up a centralized screening mechanism at the EU level (Member States that have screening mechanisms in place will continue to screen foreign direct investments at the national level); it does not grant any approval or veto powers to the Commission; it does not require Member States to put in place a foreign investment screening mechanism if they do not already have one (Member States have sole responsibility to decide whether to screen foreign direct investments); and Member States are free to decide the type of screening procedure to implement notably, they can choose whether to implement a prior authorization regime or an ex post screening mechanism.
The main purpose of the Regulation is to create a legal framework for screening foreign direct investments that may affect security or public order in the EU, and to establish a cooperation mechanism among Member States and the Commission in this field.
The Regulation covers only investments by non-EU investors in the EU and does not extend to intra-European foreign investment flows. The Regulation broadly defines foreign direct investment as:
"an investment of any kind by a foreign investor that aims to establish or maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry out an economic activity in a Member State, including investments that enable effective participation in the management or control of a company carrying out an economic activity."
Each Member State is responsible for establishing the appropriate criteria, through national legislation, for transactions that may qualify as foreign direct investments pursuant to their national law (e.g., acquisition of control, ownership thresholds, influence on sensitive activities or industries, etc.).
Screening Factors and Process
The Regulation covers foreign direct investments that are likely to affect security or public order interests. The Regulation does not, however, provide a general definition of national security. Instead, the Regulation provides a list of non-exhaustive factors that Member States or the Commission may consider when determining whether a foreign investment is likely to affect security or public order. These factors relate to the potential effects of the foreign investment on, among other things, critical infrastructure,3 critical technologies and dual-use items,4 supply of critical inputs,5 access to or the ability to control sensitive information,6 and the freedom and pluralism of the media.