EU to Enhance National Security Screening of Foreign Direct Investment (FDI)

The EU has agreed in principle on a strengthened framework to ensure that foreign investment does not threaten security and public order, while keeping the EU open to foreign investment. The draft FDI Regulation does not go as far as introducing an EU screening mechanism whose decisions are binding on Member States. But it would enhance transparency and cooperation between the Member States, and create an advisory role for the European Commission. The Regulation is expected to be formally adopted in Spring 2019 and to apply from late 2020.

A range of countries are already strengthening their scrutiny of foreign investment including the U.S.,¹ Germany,² UK³ and UAE.⁴ The EU has decided to take less radical but similar steps by approving a draft Regulation, initially proposed in September 2017,⁵ aimed at striking a balance between maintaining the EU's general openness to FDI and ensuring that its essential interests are not undermined.

While FDI has been an important source of economic growth in the EU, there are growing concerns that such investment could undermine security, particularly if the investor is a state-owned enterprise or if the investment is in critical infrastructure projects or in enterprises working with key technologies.

Currently only 13 of the 28 EU Member States have a mechanism to screen FDI on the grounds of security or public order. The systems vary widely in their scope and enforcement, and countries do not coordinate their approaches even where investments might affect multiple countries.

With respect to Brexit: in addition to developing its own national legislation, the UK would be subject to this EU Regulation until the end of the Transition Period (end-2020, extendable to end-2022) if the Withdrawal Agreement is approved. Given that the Regulation is likely to be implemented only in late-2020, application to the UK would be at most for a limited period.

Main Features of the Draft Regulation

• Member States will retain ultimate discretion over whether to adopt or to maintain a screening mechanism, and whether specific FDI should be permitted in their territory.

• Existing and new screening mechanisms in Member States will have to meet a number of EU-wide characteristics including non-discrimination between investors, protection of confidential information, the right to judicial review of national authorities' decisions and clearly defined procedural rules. Member States will need to report annually on their FDI national security reviews and will be encouraged to share experience on screening policies, best practices and investment trends.

• Member States will need to inform each other and the Commission of any FDI which they are screening. Upon request, they will also need to make available certain information concerning the FDI under review, such as the ownership structure of the foreign investor and the financing of the investment. Other Member States may deliver comments to the reviewing Member State, which is obliged to give the comments due consideration.

• Other Member States may also request information and provide comments on FDI in another Member State that is not subject to screening but which they consider is likely to affect their security or public order.

• Significantly, the Commission will be given a new role: to issue advisory opinions to Member States in certain circumstances:
  • where it considers that an investment, whether planned or completed, and whether or not already subject to screening by the Member State concerned, would be likely to affect security or public order in one or more Member States;
  • when an investment could affect a programme of interest to the whole EU, such as Horizon 2020 or Galileo;
  • if so requested by a Member State that is undertaking screening; and/or
  • when at least one third of Member States consider that an investment is likely to affect their security or public order.

The Commission's opinion will not be binding but the Member State concerned must "take utmost account of the Commission's opinion and provide an explanation to the Commission in case its opinion is not followed."

• The draft Regulation specifies non-exhaustive criteria to be taken into account by Member States and the Commission when considering whether FDI is likely to affect security or public order, including:
  • Critical infrastructure, including energy, transport, communications, data storage, space or financial infrastructure as well as sensitive facilities;
  • Critical technology, including artificial intelligence, robotics, semiconductors, technologies with potential dual-use applications, cybersecurity, space or nuclear technology;
  • Critical inputs, to ensure their security of supply;
  • Sensitive information: to protect access to or the ability to control sensitive information;
  • Media freedom and pluralism;
  • The acquirer: whether they are directly or indirectly controlled by the government of a third party, including through ownership structure or significant funding; or they have already been involved in activities affecting security or public order of a Member State; or if there is a serious risk that they are engaged in illegal activities.

The new draft Regulation will, once adopted, represent an important step towards a strengthened, more unified approach to managing the risks of FDI in the EU. It will not directly impose any legal obligation on businesses. But companies and investors should nonetheless familiarise themselves with the implications of the Regulation so as to be well-placed ahead of any future relevant merger that might raise national security-related concerns.