[co-author: Graham Nicholson]*

On 20 November 2018, the European Commission (Commission) announced a draft EU framework for screening foreign direct investment (FDI) in response to concerns regarding foreign investment in EU-based businesses active in strategic or sensitive sectors, particularly where the foreign investors are state-owned and/or where the target of investment is critical technology or infrastructure. Currently there are no EU-wide measures for screening FDI on security grounds.

Overall, it can be expected that the new EU regulation will have a significant impact on M&A transactions. For those Member States that already have a national security screening mechanism, the new rules will likely impact both the timing and the substantive assessment. It remains to be seen how the EU framework will work with the proposed UK national security regime. See UK National Security Investment Regime: What might it mean for Private Equity?

Features of the EU Framework

• the criteria for intervention in FDI decisions will be "public order and security"

• the regulation provides a non-exhaustive list of issues that Member States may take into account when conducting their assessment, including: 
  • impact on critical infrastructure
  • advanced/critical technologies
  • security of supply of critical inputs
  • access to sensitive information (or the ability to control such information)

• not sector specific
  • sectors captured under the regulation would likely include, among others, energy, transport, communications, data storage, artificial intelligence, robotics, semiconductors, technologies with potential dual-use applications and cybersecurity

• creates a "cooperation mechanism" for exchange of information amongst Member States and the Commission, in particular where FDI is undergoing screening by a national authority

• allows the Commission to issue non-binding opinions
  • in cases of FDI in one Member State which would likely affect security or public order in one or more other Member States; or 
  • where a proposed investment might affect a project or programme of interest to the whole EU (citing Horizon 2020 or Galileo as examples) where the Commission will also carry out its own screening process

• encourages international cooperation on screening policies
  • including sharing experience and best practices as well as information regarding investment trends

• reaffirms that national security interests are the responsibility of Member States
  • will not affect a Member State's ability to maintain any national review mechanisms already in place
  • will not require a Member State, where it does not currently have a national FDI regime, to adopt one

• allows Member States to have the final say as to whether a specific investment should be permitted or not in their territory

Implementation

The expectation is that the new rules will be adopted in the first quarter of 2019.

Practical implications for Private Equity

PE funds involved in cross-border M&A in the EU will need to engage even more thoroughly than today in an analysis of potential cross-border security issues in order to map out where FDI filings are required or advisable. While the Commission only has a coordinating role, it could become a relevant player in the political vetting process of foreign investments. M&A participants will need to consider the EU screening process and take it into account in the timetables of processes for relevant targets.

*Counsel Knowledge Lawyer

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