Grace Hochstatter (White & Case, Law Clerk, Washington, DC) contributed to the development of this publication.
On 15 January the European Commission (“EC”) took its latest (prudent) step towards an outbound investment screening regime, with the publication of its ‘Recommendation on reviewing outbound investments in technology areas critical for the economic security of the Union’ (the “Recommendation”). We take a look at what the Recommendation indicates about the EU’s direction of travel for investments by European investors in certain highly sensitive technologies.
Enhancing EU Economic Security: the Recommendation in Context
Business has, in recent years, had to adapt to a proliferation of foreign direct investment screening (“FDI”) regimes, with notification obligations and transaction review procedures becoming a standard feature of M&A transactions globally. The European Union (“EU”) has been an enthusiastic proponent of these developments. Although the EU does not operate a standalone notification regime it has successfully prompted the rollout of national screening mechanisms by practically all EU Member States via the EU FDI Screening Regulation,1 which also created a cooperation-mechanism to enable Member State and European Commission (“EC”) cooperation on FDI review.
In parallel and further to the US policy, the EC had started to look at potential regulation of outbound investments. Back in June 2023, the EC published a Joint Communication on a European Economic Security Strategy (the “Security Strategy”).2 The aim of that strategy is to “protect the EU’s economic security and reinforce the resilience of our economy, while working to ensure that we maintain and grow our technological edge”. As well as updating the EU FDI Screening Regulation, the Strategy identified a need to explore outbound investment control, and specifically “controls to counter the risk of technology and know-how leaking” via that outbound investment.
Since then, the EC has taken certain key steps towards outbound investment controls:
- July 2023: the EC established an Expert Group on Outbound Investments composed of EC and Member State experts (the “Expert Group”), to examine the risks of critical technology and know-how leakage via outbound investment.
- October 2023: the EC publishes its ‘Recommendation on critical technology areas for the EU’s economic security for further risk assessment with Member States’.3 This Recommendation identified ten technology areas for further risk assessment with the Member States. This has led to in-depth collective risk assessments, which remain ongoing.
- January 2024: the EC publishes a White Paper on Outbound Investments,4 which sets out the EC’s proposed next steps for review of outbound investments.
- January to April 2024: the EC consults on targeted fact-finding and analysis of selected outbound investments in recognition of an obvious absence of information, identified by the Expert Group, in terms of the information already available to Member States on outbound investments in critical technologies.
- July 2024: the results of the consultation are published indicating broad recognition of a need to assess potential risks.
- January 2025: the EC’s Recommendation is published, broadly as a fact-finding exercise to address perceived information gaps on outbound investment flows by the Member States.
The Recommendation: what now?
The chief purpose of the Recommendation is to gather information, as the various steps taken to date have established that the Member States do not systematically gather data on individual outbound investments. The Recommendation, therefore, asks Member States to collect data, including via review of outbound investment screening transactions. The Recommendation does not require Member States to establish a screening mechanism, but does encourage them to “establish an adequate system for review that may provide for voluntary provision of information on transactions”. The Recommendation encourages Member States to consider adapting “existing mechanisms” for these purposes, with the most likely candidates likely to be existing export control regimes.
Which transactions are Member States encouraged to review?
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Relevant Transactions
The Recommendation encourages review of a broad range of investments conducted by “natural or legal persons resident or established in the Union” (“EU Investors”). The Recommendation is explicit that indirect investments by EU Investors should also fall in scope. Reviewable transactions for these purposes include, acquisition or a company or a stake in a company that enables effective participation or control in the management or control of that company, mergers, tangible and intangible asset transfers, greenfield investments, joint ventures and the provision of venture capital.
While the range of investments is very broad, there is some silver lining for private equity and institutional investors in that reviews “should exclude non-controlling investments that are limited to seeking a return on invested capital”. However, the temporal range is not comforting with Member States encouraged to review new and ongoing transactions, but also “transactions completed since 1 January 2021”, or even before that if the Member State deems that appropriate.
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Target Sectors
The Recommendation specifically targets outbound investments in three sectors:
- Semiconductor Technologies: this sector encompasses a broad profile, including core components of semiconductor manufacturer equipment and materials used in the fabrication of integrated circuits and other semiconductors;
- Artificial Intelligence (“AI”): including generative AI systems meeting certain specifications; and
- Quantum Technologies: i.e., any technology or know-how “related to” quantum computing, quantum communications and/or quantum sensing.
Drawn from the EC’s Recommendation of October 2023, these three technologies were deemed to pose the most significant risk in terms of critical know-how.
“The risks caused by technology leakage are likely to be particularly acute for a narrow set of technological advances that can enhance military and intelligence capabilities of actors that may use them to undermine international peace and security. Such leakage should not be fuelled by Union capital, expertise, and knowledge: including in the context of outbound investment from the Union.”5
What should Member State review involve?
Member States are encouraged to gather comprehensive information about the parties involved (e.g., place of incorporation, ultimate owners, and their country of origin); the type and approximate value of the investment, including equity stakes and voting rights; the products, services, and technologies concerned; any relevant contractual arrangements; the planned or actual completion date of the investment; previous and announced transactions by the parties; and any public funding received from the EU or a Member State related to the technology areas in question.
For each transaction under review, the Recommendation advises Member States to conduct a qualitative, case-by-case risk assessment to determine the presence or absence of risks to economic security. This assessment should identify risk elements and potential vulnerabilities, particularly related to technology leakage, and should consider the main threats, threat actors, and geopolitical factors relevant to the likelihood of economic security issues. Risk assessments should encompass considerations such as the context of the transaction, the current maturity level of the technology, its availability in the target country, the value and supply chain, relevant technological developments, the global interconnectivity of the technology ecosystem, and the company's involvement in EU projects, when relevant.
The Recommendation: what next?
For now, the Recommendation is not legally binding. Member States are requested, however, to provide an update on the process of their reviews by 15 July 2025 and to submit a report on that exercise by 30 June 2026. In terms of a potential outbound investment screening regulation, or directive, any further decision on policy, or legislative developments, is likely to be taken once those reports are available to the EC and the Expert Group.
It is clear from the Recommendation, however, that the EC at least anticipates the development of a “common methodology” for risk assessments, to be developed in coordination with the Expert Group.
In terms of predictions for how common assessments may emerge, which agencies Member States choose to designate as responsible for review will be of interest. The obvious candidate agencies, as noted in the Regulation, may be those that administer dual-use export controls, but with practically every Member States now operating an FDI screening mechanism via a designated agency, FDI screening authorities may also be a candidate with knock-on effects in terms of those agencies’ typical approaches to risk assessment.
That agency designation will also be important on a practical level as Member States are requested to utilise existing instruments, where possible, to fulfil their information gathering and risk review. Businesses who have contacts with designated national agencies (whether export control, FDI or other authorities) may be the first target of Member State ‘requests for information’ as Member States start to put the requested information together.
Global trend: learning from the US?
Notably, the Recommendation follows shortly after the roll out and enactment of the United States’ Outbound Investment Security Program (“OIP”), administered by the US Treasury Department. Like the Recommendation, the OIP specifically limits outbound investment review to transactions and also takes a technology specific approach: targeting transactions involving semiconductors, quantum computing, and artificial intelligence. However, unlike the Recommendation, the OIP is not country neutral. Notably, only investments involving countries of concern fall under the purview of the OIP and, to date, China, including Hong Kong and Macau, is the only listed country of concern. The OIP prohibits US persons from participating in certain types of technology transactions while mandating that other types of transactions are reported by US persons to Treasury.
The Recommendation is a new prudent step towards a potential binding EU outbound investment screening system.
1 Regulation 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (the “EU FDI Screening Regulation”).
2 20 June 2023, Joint Communication to the European Parliament, the European Council and the Council on “European Economic Security Strategy” JOIN (2023) 20.
3 3 October 2023, Commission Recommendation on critical technology areas for the EU’s economic security for further risk assessment with Member States, C(2023) 6689.
4 24 January 2024, White Paper on Outbound Investments, COM (2024) 24.
5 Recommendation, Recital 4.
