COVID-19 and EU FDI: Towards a European CFIUS

Strong signal that the EU wants to protect its critical businesses and that the European Commission’s “advisory” role under the EU FDI Regulation will be significant

Key Takeaways

In response to concerns raised by Member States, the European Commission has issued Guidelines on how to prevent or moderate investments by non-EU investors in European companies in the healthcare sector. Healthcare is the most critical industry in the current Covid-19 context but the Guidelines also refer to other sectors such as energy and finance.
The EU’s new Foreign Direct Investment Regulation (EU FDI Regulation), which will enter into full force in October this year, leaves the decisional powers in relation to FDI with the Member States and grants the European Commission no more than advisory powers. The new Guidelines however demonstrate that the European Commission intends to play a leading role in FDI assessments in Europe. In particular:
- The European Commission will not limit itself to providing advice in relation to specific cases but will issue broader guidelines seeking convergence in certain aspects of FDI rules across the Member States.
- The European Commission wants FDI regimes across Europe: all Member States should make use of existing FDI regimes or set up FDI screening regimes where they do not yet exist.
- The European Commission will not shy away from using its power to provide ex-post advice within 15 months after the FDI has been completed. This could lead to ex-post investigations by Member States able to retroactively review deals under their national legislation and possible orders to unwind or adopt mitigating measures post-closing.
- The European Commission will monitor investment structures which aim to circumvent FDI screening. A request to Member States to be vigilant in this respect features in the recitals of the FDI Regulation. The current Guidelines indicate that, certainly in the Covid-19 context, the goal of protecting the EU’s security (specifically healthcare) is the priority. Member States should apply any means to achieve that objective, be it national FDI screening mechanisms, the acquisition of golden shares or the application of exceptions to EU free movement principles.
The US has not (yet) issued Covid-19 specific CFIUS guidelines but there will undoubtedly be heightened scrutiny for non-US investors taking equity stakes or providing financing which grants the lender equity type rights. In the US, there has been increasing focus in recent years on so-called “critical infrastructure” – which is understood to encompass aspects of the economy related to healthcare, pharmaceuticals and related supply chains – and CFIUS regulations already call for heightened scrutiny of foreign investments in critical infrastructure.
Dechert will soon launch a series of publications with analysis and practical tips about the EU FDI Regulation, complementing its newsletters on CFIUS.

On 25 March the European Commission issued its Communication with Guidance to the Member States concerning foreign direct investment (FDI) and free movement of capital from third countries to protect Europe’s strategic assets (the Guidelines), available here. This guidance was published ahead of the EU FDI Regulation’s full entry into force on 11 October 2020. It also responds to the request to European Council President Charles Michel from nine Member States to ensure that no strategic assets fall prey to hostile takeover by non-EU investors during this time of economic difficulties. A week earlier, in response to the Covid-19 epidemic, Spain had already decided to block all FDI from outside the EU or the European Free Trade Association (including state-owned companies) in strategic economic sectors of Spain, e.g. healthcare, energy, finance, etc., for reasons of public safety, public order and public health. This applies to acquisitions of a 10% or higher stake in Spanish companies or when the non-EU investor obtains control over the company’s board. Other countries such as France, Germany and Italy are contemplating to introduce further restrictions for non-EU investments.

The European Commission’s Guidelines thus respond to a concern shared among the European Member States that the EU’s strategic industries, in particular healthcare, are at risk of opportunistic investments from outside the EU which may affect the EU’s ability to address the Covid-19 pandemic. Concerns exist in relation to acquisitions by non-EU investors which would deploy the output of medical equipment, for example, for export outside the EU. The European Commission’s Executive Vice President Margrethe Vestager recently emphasized that EU businesses must be protected from hostile non-EU takeovers. She said that this is “also why we work intensively on our ideas on how to prevent acquisitions that … backed by subsidies from foreign states." The Guidelines aim to address these concerns: the EU wants its Member States to make every effort to ensure that the supply of medical equipment or the development of vaccines, for example, is not endangered by non-EU takeovers. It is also concerned to ensure that no sell-out of EU strategic companies occurs in the current volatile market as these businesses will be crucial to rebuilding the European economy post the Covid-19 crisis.

FDI screening regimes can prevent acquisitions by non-EU investors or impose conditions on the basis that the investment threatens the security or public order of a Member State: risks to critical health infrastructure and supply of critical inputs are explicitly recognized by the EU FDI Regulation as factors to be considered when Member States screen an FDI.

In the European Union, the responsibility for screening FDI rests with the Member States. Interestingly, the Communication adds that this is the case “at present”: these two words signal the ambition to elevate decision-making power to the European level. The European Commission did not bid so high when proposing the EU FDI Regulation, but there was always the suspicion that the Regulation was only a stepping-stone: the Guidelines add credence to that notion. For now the Guidelines make clear that the European Commission will not only make active use of its advisory role under the EU FDI Regulation but will also issue broader guidance to the Member States. For example the Guidelines:

Require Member States to take account of the FDI’s impact on the EU and capacity of EU industry rather than limit their reviews to national issues.
Require Member states to coordinate and seek advice given inter-dependence within the internal market.
Encourage Member States to provide comments on specific FDIs in other Member States since - in light of the internal market - risks arising from an investment do not respect national borders.
Suggest that the size and value of the target should not determine the need for FDI review: SMEs and start-ups can be critical businesses, in particular in the current context.
Recall that any mitigating measures, e.g. supply guarantees, should not only cover a Member States’ needs but the interest of the EU as a whole.
Recall that in certain circumstances the Regulation requires Member States to take the “utmost account” of the European Commission’s advice, e.g. where the EU target has received funding under the EU Research and Innovation programme Horizon 2020 which covers many of the current European COVID-19 support measures.
Encourage Member States to consider reviewing portfolio investments where relevant to security or public order: for example, where a small shareholding (e.g. 5%) may confer relevant rights on the investor. The FDI Regulation does not include minimum shareholding thresholds but does not draw attention either to the potential harmful effects of small shareholdings. Based on these Guidelines, the European Commission will clearly be focused on all types of acquisitions regardless of their size.

The Guidelines also recall other means beyond national FDI screening which Member States can use to protect the EU’s security and public order given the current Covid-19 pandemic:

The acquisition of “golden shares” where Member States hold special rights in companies, giving scope to impede any acquirer.
The application of public policy or public security exceptions to the free movement of capital under Article 63 TFEU; or, alternatively, regulatory measures to impose public service obligations in certain sectors, or measures to address threats to financial stability.
The Guidelines refer to the case law of the European Court of Justice which has recognized public health as an overriding reason in the general interest which can justify limiting e.g. the free movement of capital. The Guidelines also identify other general interests, allowing the inference that a benign view would be taken of Member States in acting where necessary to protect consumers, preserve the financial equilibrium of the social security system or serve social policy objectives.
The Guidelines also mention that safeguards can be adopted in case of serious difficulties (or the threat thereof) in the operation of the Economic and Monetary Union and for balance of payments for Member States outside the euro area.
Finally, the Guidelines say that investments from non-EU countries might be prevented on more and broader grounds than would apply to intra-European investments.

While the Communication is no more than soft law, it must be a good indicator of the European Commission’s ambitions. CFIUS reviews are equally in a phase of increased intensity. While the US government has not (yet) announced any revisions to restrict non-US investments, the CFIUS will continue to focus on national security which includes critical infrastructure; accordingly, we expect close scrutiny of non-US investments into the medical sector given its importance in the current crisis. Dechert will maintain a sharp focus on these developments in the weeks and months ahead.