The EU FDI Screening Regulation’s impact on foreign investment procedures to Member States.   

The EU’s Foreign Direct Investment (FDI) Screening Regulation was enacted on 11 October 2020. The new legislation aims to increase transparency and information exchange between EU Member States by standardising the regulatory FDI review procedures across the EU. However, the Regulation’s enforcement rights ultimately remain in Member States’ hands.

The EU’s FDI Screening Regulation aim to ensure that the European Commission (EC) and all indirectly affected Member States are aware of any non-EU investments coming into other Member States in the bloc.  

The new regulation aims to add clarity and transparency to FDI activity across the European Union. Member States will continue to self-review FDI activity in their countries. Still, by standardizing the review process, the regulation offers the EC and the other Member States a comprehensive insight into FDI activity across the bloc. As part of the new screening regulation, the European Commission and all Member States can offer non-binding opinions on FDI activity under review in any Member State. Additionally, the regulation allows the EC and the other Member States to offer non-binding opinions on FDI activity in another Member State that, for various reasons, was not subjected to an official review by the Member State in question.

While final decision-making in relation to any FDI screening procedures remains solely under the jurisdiction of the relevant Member State, smaller EU countries may experience considerable pressure to conform to opinions expressed by the EC and the other Member States.

As a result of the EU’s screening regulation, several Member States have voluntarily introduced new FDI screening regimes where there wasn’t one before. These include Poland, Slovenia, the Netherlands, the Czech Republic, Sweden, and Denmark. More are expected to follow.

Beyond standardization and transparency, the screening regulation also sets out fundamental principles that national FDI regimes should adhere to. Firstly, reviews should only consider FDI activity in the context of security and public order. Secondly, investments that may be deemed problematic include those in critical infrastructure (e.g., transport, health, media, defence, finance); critical technologies (e.g., artificial intelligence, nuclear technologies, cybersecurity); and supply chain of critical inputs (e.g., raw materials, food security, and sensitive information). Thirdly investments, where a foreign government or government-affiliated agency would gain significant control over the acquirer, should be considered particularly problematic.  

First annual report of the EU FDI Screening Regulation

On 23 November 2021, the European Commission published the First Annual Report on the screening of foreign direct investments into the Union.

According to the report, the COVID-19 pandemic resulted in a sharp fall in global FDI flows to €885bn in 2020, a 35% decline from the previous year. The hit to inward FDI in the European Union was more severe than the world average, falling to €98bn in 2020, a 71% year-on-year decline. Thus, the number of FDI transactions submitted for review under the EU FDI Screening Regulation likely reflects the stunted FDI activity in the EU.

The EC reported 265 FDI activities submitted for review between 11 October 2020 and 30 June 2021 by 11 Member States. Over 90% of the notified cases came from just five Member States: Austria, France, Germany, Italy, and Spain. The submitted transactions varied greatly regarding the sector, investment size and value, or investor origin. However, the most reported transactions were in the ICT, Manufacturing, and Wholesale and Retail sectors.

The regulation anticipates a two-phase review process. All transactions are reviewed under Phase 1, while a more detailed Phase 2 review is performed only on a limited number of transactions deemed potential risks to security, public order, and other interests of the EU. Out of the 265 cases, 80% were closed in Phase 1, 14% proceeded to Phase 2 for additional information, and 6% were still ongoing at the time of the report.  

Additional information the Commission may request to see in Phase 2 of the FDI screening procedure can include: data on products and services of the target company; possible inconsistencies in the classification of products; consumers, competitors, and market shares; IP portfolio and R&D activities of the target company; and additional characteristics of the investor.

How the EU FDI Screening Regulation adds value for the Member States

When surveyed, Member States uniformly agreed that the Screening Regulation is valuable for gaining a comprehensive insight into FDI activity in the bloc. The Regulation is thought to help foster greater awareness among the Member States on how their FDI operations can indirectly affect the other Member States in the bloc. It also facilitates transparency, discussion, and exchange among the Member States on the topic of FDI.

Procedural challenges ahead

An often-expressed concern of the Member States was resource constraints, particularly in the availability of staff to prepare adequate notifications under tight deadlines. Some expressed concern that the scope of transactions qualifying for notification under the Regulation is too vast, thus spreading thin vital resources. Others pointed to “overly burdensome” requests for information that should always be duly justified.

Key takeaways

The EU Screening Regulation is essentially a “soft law” that does not grant the European Commission decision-making jurisdiction over FDI activity in the Member States.  Rather, it seeks to increase transparency and information exchange between the States. Nevertheless, the Regulation will likely pressure Member States to consider broader EU security issues when engaging in inward FDI activities.

Investors should know that the screening mechanism means that all Member States can access information on transactions reported to authorities anywhere in the EU. In addition, investors should be prepared to carry out a comprehensive and multijurisdictional FDI assessment, mainly if dealing in a strategic sector. This will help better prevent unanticipated additional information requests that could negatively impact the timeline towards successful transaction closure.