This is the first part of a two-part post. For the second part of this post, click here.
On 14 February 2019, the European Parliament agreed to establish an EU-wide mechanism to screen foreign direct investment (“FDI”) on grounds of “security or public order” to protect certain sectors within the European Union (“EU”). Thus, the new Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the European Union (“FDI Regulation”) came into force – the FDI Regulation is applicable since 11 October 2020 and is binding in its entirety as well as directly applicable in all EU member states.
In the shadow of the increasing number of foreign acquisitions in the EU, scepticism towards such FDIs seemed to grow. The European Commission carried out a detailed analysis of FDI into the EU as part of its initiative on the screening of FDI. According to this analysis non-EU investors represented more than 35 percent of total assets and around 16 million jobs in the EU by merely owning or controlling three percent of European companies in 2016. This analysis shows, besides the importance of FDIs into the EU, the constant increase in foreign ownership over the last ten years due to the acquisitions of large, listed companies.
Moreover, according to the Foreign Ownership Database (“FWD”), drawn up by the European Commission’s Joint Research Centre, 2.8 percent of companies were owned by non-EU investors in 2016. These companies were again holding just over 35 percent of total assets. While 9.3 percent of companies listed on the stock exchange are owned by foreign investors, 2.8 percent of unlisted companies and public companies not listed on the stock exchange have a foreign owner. Although companies that are listed on the EU stock exchanges represent a minor share of 0.16 percent of all companies, they cover 20.5 percent of all assets. In the FWD, listed companies are 150 times bigger than unlisted companies with regard to assets.
Key parameters of the new FDI Regulation of the EU
The subject matter and the scope of the new FDI Regulation of the EU is to establish a framework for
- the screening of FDIs into the EU by its member states on the grounds of “security or public order“; and
- a mechanism for cooperation between EU member states, and between EU member states and the European Commission, with regard to FDIs likely to affect “security or public order“.
- The FDI Regulation includes also the possibility for the European Commission to issue opinions on such FDIs.
The new FDI Regulation should cover a broad range of FDIs which “establish or maintain lasting and direct links between investors from third countries including State entities, and undertakings carrying out an economic activity” in an EU member state. Portfolio investments, however, shall not be covered by the FDI Regulation. In a “portfolio investment” an investor buys shares in, or debt of, a foreign company without controlling that company.
The new FDI Regulation defines foreign investor as “a natural person of a third country or an undertaking of a third country, intending to make or having made a foreign direct investment” and an FDI as “an investment of any kind by a foreign investor aiming to establish or to 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 on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity“.
The new EU-wide investment screening mechanism will have crucial consequences for foreign investors in the EU. According to an initial analysis, some of the impacts of the new FDI Regulation on cross-border M&A transactions and investments are as follows:
A. Potential delay in the approval procedure
The European Commission and the other EU member states shall notify the respective EU member state undertaking the screening of their intention to provide an opinion or comments no later than 15 calendar days following the receipt of certain information above. This notification may also include a request for information additional to that already provided.
The European Commission’s opinion and other EU member states’ comments should be addressed to the Member State undertaking the screening and shall be sent to it within a “reasonable period of time“, in any case no later than 35 calendar days following the receipt of the respective information. In case additional information was requested by the European Commission and/or other EU member states, the opinion or the comments shall be issued no later than 20 calendar days following the receipt of the additional information. Furthermore, the European Commission may again issue an opinion following the comments from other EU member states, where possible within the deadlines referred to in this paragraph, in any case no later than five calendar days after such deadlines have expired.
However, in an exceptional case where the EU member state undertaking the screening of an FDI considers that its “security or public order” requires immediate action, it should notify the European Commission and the other EU member states of its intention to issue a screening decision before the timeframes referred to above and duly justify the need for immediate action.
B. Assessment of the factual control of a foreign company
EU member states with a screening mechanism in place should take the necessary measures – in compliance with the EU law – to prevent circumvention of their screening mechanisms and decisions. Such measures shall cover investments made through “artificial arrangements” that do not reflect the economic realities and circumvent the screening mechanisms and decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country such as China, Russa or the United States.
The restraint of a multi-level acquisition structure – through a subsidiary with its seat in the EU, EEA or Switzerland, but with the ultimate beneficial owner in a third country – was to be expected because this would have constituted a “circumvention of the screening mechanism” which the EU member states shall prevent according to the FDI Regulation.
C. Consideration of the other EU member states’ comments and the European Commission’s opinions on FDIs into the EU
An EU member state where an FDI is planned or has been completed shall give “due consideration” to the comments of the other EU member states and to the opinion of the European Commission. The EU member state must take the opinions of the European Commission into account when applying the Union law and when interpreting national law – thus within the framework of the interpretation in conformity with the Union law.
In case an FDI is likely to affect the “projects or programmes of Union interest” on grounds of “security or public order” and the European Commission issues an opinion addressed to the EU member state where the FDI is planned or has been completed, the respective member state shall “take utmost account” of the European Commission’s opinion and provide an explanation to the European Commission if its opinion is not followed.
The new FDI Regulation of the EU – applicable since 11 October 2020 – will have a crucial impact on cross-border M&A transactions and inbound investments as it grants, for example, the European Commission and the other EU member states the right to intervene in local approval procedures by issuing opinions and comments on FDIs into the EU on the grounds of “security or public order“.
Moreover, in case of an FDI that is likely to affect “projects and programmes of Union interests” the European Commission has an additional right to provide its opinion, and the EU member state concerned should take “utmost account” of this opinion and provide a justification if it is not following that opinion. The European Commission’s opinions will therefore be relevant for foreign investors and influence, to a certain extent, the national approval procedures as the local authorities may have to justify why they do not consider the European Commission’s opinion.
Tuğçe Yalçın is a Visiting Researcher at the University of Oxford Law Faculty and Senior Consultant in the M&A/Corporate team and Head of Austria-China-Desk at DLA Piper.
 REGULATION (EU) 2019/452 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (OJ L 79I).
 COMMISSION STAFF WORKING DOCUMENT on FOREIGN DIRECT INVESTMENT IN THE EU
Following up on the Commission Communication “Welcoming Foreign Direct Investment while Protecting Essential Interests” of 13 September 2017 <https://trade.ec.europa.eu/doclib/docs/2019/march/tradoc_157724.pdf> accessed 7 August 2021.
 SWD(2019) 108 final as of 13 March 2019, COMMISSION STAFF WORKING DOCUMENT On FOREIGN DIRECT INVESTMENT IN THE EU Following up on the Commission Communication “Welcoming Foreign Direct Investment while Protecting Essential Interests” of 13 September 2017, 7.
 Art 1 (1) FDI Regulation.
 Recital 9 FDI Regulation.
European Commission, Investment <https://ec.europa.eu/trade/policy/accessing-markets/investment/#:~:text=Foreign%20direct%20investment%20(FDI)%20%E2%80%93,company%20without%20controlling%20that%20company.> accessed 7 August 2021.
 Article 2 (1) and (2) FDI Regulation.
 Article 6 No 6 FDI Regulation.
 Article 6 No 7 FDI Regulation.
 Article 6 No 8 FDI Regulation.
 There are 18 EU member states that put a national FDI screening mechanism place; see “List of screening mechanisms notified by Member States – Last update: 14 July 2021” <https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157946.pdf> accessed 7 August 2021.
 Recital 10 FDI Regulation.
 Art 8 FDI Regulation.