Foreign direct investment regulation of increasing importance – EU about to make the next step
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In foreign investment context, for governments it is essential to provide a framework that will stimulate investments with the potential of creating value. On the other side, there might be also foreign direct investments which are at risk for national interests. Bringing this field of tension in balance is currently a main challenge for the regulators - as the European Union has already developed a structured foreign direct investment regulation it seems now time for the next step with respect of closing potential white spots and reacting on ongoing geopolitical disruption.
The update of the EU FDI SR
On 24 January, the EU Commission presented reform proposals for the screening system for foreign direct investment (FDI). The current EU FDI Screening Regulation (EU) 2019/452 came into force in 2020 and was mainly aimed at establishing cooperation between Member States (so called cooperation mechanism) that screen an investment. The background to the reform proposal is the commission's third annual report, which states that the importance of screening foreign direct investment is increasing due to geopolitical challenges.
Obligation to set up a screening mechanism
The current FDI Screening Regulation does not provide an obligation for Member States to introduce a screening mechanism or to determine the manner of this implementation. However, the political context has changed in recent years, meaning that risks need to be recognized more effectively. Therefore, the reform proposal now requires Member States to establish a screening mechanism that aligns the requirements of the Reform Proposal. They are afforded a period of 15 months following the enactment of the Reform Proposal to fulfill this obligation.
The Reform Proposal requires minimum screening requirements. To facilitate this process, a two-stage system is planned. In a first step, the screening authority should check whether it is responsible for examining the FDI and conduct a preliminary examination (phase I). If necessary, the authority will proceed to an in-depth examination of the FDI in a second step (phase II). Registration and review of the foreign direct investment should now be standardized prior to implementation. Additionally, all parties involved will have the right to present their views before any measures are taken by screening authority. To maintain confidentiality, the screening authority will also take necessary precautions to protect sensitive information throughout the entire process.
Recording of investments by foreign-controlled EU companies
Another proposed amendment is to extend the scope of the FDI Screening Regulation to include investments made by a European company controlled by a non-EU investor. This extension is intended to ensure that transactions involving such investments are subject to review, as the decision-making authority lies with the non-EU investor. Furthermore, the reform regulation now includes coverage of greenfield investments. While Member States are not obliged to review these, the Commission recommends that they be included within the scope of application, particularly when greenfield investments are made in sectors that are important for the security and public order of the respective member state.
Risks assessing approach
In order to ensure a harmonized standard of assessment, the Reform Proposal outlines several criteria for assessing the potential risks to security and public order. During the review, negative effects on the security, integrity and functioning of critical infrastructure; the availability of critical technologies; the continuity of supply of critical inputs; the protection of sensitive information, including personal data, in particular with regard to the ability of the foreign investor to access, control, and otherwise process such personal data, or the freedom and pluralism of the media, including online platforms that can be used for large scale disinformation or criminal activities must be taken into account. When assessing a potential threat to security or public order, the circumstances or context of the foreign direct investment should also be taken into account. This includes factors such as whether the investor is directly or indirectly controlled by a third country's government or is involved in the pursuit of political objectives of third countries to promote their military capabilities.
