Foreign direct investment (“FDI”) screenings have become a relevant factor for global transactions in recent years. More and more jurisdictions are introducing or ramping up their powers for scrutinising FDI, which parties to M&A transactions and their advisors need to consider when structuring such deals and planning for completion of the projects. In Europe, the European Commission (“Commission”) boosted this trend with its recently adopted Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of FDI into the EU (“the Framework Regulation”).
In order to increase the visibility of FDI screening regimes, the Commission on 24 June 2019 published a list of FDI screening mechanisms notified by Member States [see the list here]. As part of the Framework Regulation, Member States with an FDI screening mechanism in place are obliged to notify the Commission of such mechanisms. The Commission is, in turn, responsible for maintaining an updated list of notified mechanisms. The recently published list is the first such consolidated list of FDI screening mechanisms in the EU and is likely to spur the debate about introducing such a system in those EU Member States which have not yet done so.
To date, 14 out of the 28 Member States already have in place mechanisms scrutinising FDI, ranging from screening procedures to partial or total prohibition of FDI in specific sectors. Albeit diverse in their nature and procedures, these mechanisms aim to address challenges raised by FDI into sectors that are deemed sensitive or strategic to their economy and national security. Recently the trend has been for existing FDI screening mechanisms to be expanded – especially in developed countries such as Germany, Austria, France, the UK, and – outside the EU – in the US. At the same time, new FDI regimes are being added or considered in countries which have not screened FDI previously (such as in the Netherlands).
Sectors Most Commonly Screened
The most common sector to be scrutinised is military and defence. However, even more relevant for M&A projects is the broadly defined area of “critical infrastructure”. “Critical infrastructure” is a defined term within Directive (EC) 2008/114 (on the identification and designation of European critical infrastructures and the assessment of the need to improve their protection) as an asset, system or part thereof which is essential for the maintenance of vital societal functions, health, safety, security, economic or social well-being of people. While definitions in individual jurisdictions differ, this usually includes the energy, water, telecommunications, healthcare, transport and infrastructure, and certain IT and finance infrastructure sectors.
In addition, data-intense emerging and foundational technologies in the IT sector have recently gained attention. Authorities are focussing more and more on areas such as artificial intelligence, autonomous vehicles, robotics, and the “internet of things”. To this end, the Framework Regulation specifically cites “access to sensitive information, including personal data, or the ability to control such information” as a factor for authorities to consider when conducting FDI screenings. With the ever growing importance of the data driven economy we expect this area to become even more relevant for FDI screenings.
Background: The Framework Regulation on FDI
For the first time, the Framework Regulation establishes a common structure for the screening of FDI into the EU on grounds of security or public order, aiming at enhancing cooperation of Member States’ national screening mechanisms. The Framework Regulation sets out common requirements that national mechanisms must comply with. Importantly, it does not create a mandatory screening mechanism at EU-level, nor does it impose an obligation upon Member States to adopt such a mechanism. FDI screening remains within the competence of Member States. The Framework Regulation establishes a cooperation mechanism among Member States and between Member States and the Commission, which aims at facilitating the exchange of information concerning potential investments that might have an impact on other Member States’ national security or other strategic or sensitive areas, or on projects and programmes of EU interest [see our previous post on the Regulation here].
While the Framework Regulation will become fully applicable only on 11 October 2020, it is already indirectly increasing pressure on EU Member States to consider how to deal with potential security issues in the context of M&A transactions. Companies are well advised to conduct a global assessment of how such national reviews can affect a planned transaction, including by compiling a list of subsidiaries by jurisdiction and their business areas and customers – in particular those affiliated with the government such as military forces or security institutions. Such proactive preparation will facilitate engagement with authorities and help avoid unexpected surprises.
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