In his State of the European Union speech on September 13, 2017, the President of the European Commission (the “EC”), Jean-Claude Juncker, announced a proposed regulation which would create a new framework for closer cooperation and better coordination between European governments when reviewing foreign investments.¹

The proposal stops short of creating a European equivalent to the national security review process overseen in the United States by the Committee on Foreign Investment in the United States (“CFIUS”), as it would not establish a formal European mechanism to review foreign takeovers. Rather, it focuses on the existing vetting regimes in Member States, their better coordination and the minimum requirements for such regimes. 

The only indication of a more interventionist approach at EU level is the proposed new powers for the EC to review a transaction itself if EU funds are at stake. This is likely to create controversy in particular in the energy sector.

The Proposal 

Following last year’s controversial acquisition of Germany’s Kuka, a robotics company, by China’s Midea Group, there had been calls for the creation of a European Committee on Foreign Investment along the lines of CFIUS. The regulation proposed, however, does not aim to impose an obligation on all Member States to adopt such laws but rather aims to ensure that existing review mechanisms meet some basic requirements, such as allowing for judicial review, nondiscrimination between various third countries and transparency. The EC also invites governments to exchange concerns on foreign investments and to seek the EC’s opinion on problematic acquisitions.

The list of industries that would be monitored includes infrastructure, technology, data storage, cybersecurity, artificial intelligence, robotics, nuclear power and the financial sector. In addition, the EC suggests a right to intervene to ensure the “security of supply of critical inputs” and “access to sensitive information” – two phrases that unless clearly defined may create uncertainty for business. (U.S. standards for national security reviews by the CFIUS similarly refer to “critical infrastructure” and “critical technologies.”)

In addition, the EC proposes the establishment of a coordination group to assess the Union’s critical assets and to begin an in-depth analysis of trade flows into the EU, in particular when the investor is owned or controlled by a third country and/or benefits from non-EU government funding. 

Screening of Investments in EU-Funded Projects

The EC proposal to review foreign investments in an indicative list of EU funded projects and programmes² will have implications for business, especially in industries such as energy. The EU has sponsored numerous energy infrastructure projects, so under the new regime, the EC would be allowed a say in related energy investment deals with a non-EU government/company. The extent to which Member States will agree to surrender decision-making powers over energy assets currently within national competence is likely to be a major discussion point in the Council. Larger countries such as Germany and France may support the EC’s plan, but other countries such as Greece and Hungary have already expressed their intention to maintain control over inbound investments into their states from countries such as Russia and China. 

Vetting of Foreign Takeovers in Other Jurisdictions

Outside the EU, a number of countries have long-established centralized mechanisms for vetting of foreign investments. Most notably, the CFIUS in the United States, the Canadian government under the Investment Canada Act, and the Foreign Investment Review Board (“FIRB”) in Australia all have the authority to investigate, block or unwind acquisitions by foreign persons that could threaten national security or where the foreign entity is controlled by a foreign government or significantly funded by it.

The national security review process outside the EU poses more than a theoretical stumbling block for transactions involving targets active in sensitive industries and/or acquirers whose nationality or ultimate ownership may cause concern. For example, in the last year alone the CFIUS blocked or proposed to block Philips’ proposed sale of its Lumileds LED unit to a consortium headed by a Chinese company, the proposed US$226 million acquisition of Global Communications Semiconductor (GCS) by a Chinese firm, and the acquisition of the U.S. business of Aixtron, a German semiconductor equipment producer, to a buyer ultimately owned by Chinese parties. (The German government also raised objections regarding the proposed acquisition of the German parent entity.) Those transactions that were not formally blocked were abandoned by the parties in the face of CFIUS opposition.

Delineation from Antitrust Should Remain

The European Commissioner for competition, Margrethe Vestager, has warned that any additional screening of foreign acquirers should be kept separate from EU merger control. She has been clear that the new legislation should be a separate, complementary process that proposed transactions will need to clear, rather than a new requirement within the merger control regime.

The EU Merger Regulation (EUMR) already explicitly states that while Member States cannot apply their national competition rules to a transaction which falls under the EUMR, they may however protect so-called “legitimate interests” outside the realm of antitrust as long as such national measures are compatible with EU law. The EUMR defines “legitimate interests” to include public security, plurality of the media and prudential rules. For example, 21st Century Fox's proposed acquisition of Sky was recently cleared by the EC without prejudice to the UK's ongoing media plurality review of the proposed transaction. If Member States want to block a transaction for another reason, they have to communicate that new “public interest” to the Commission for prior approval.

Key Takeaways

• The proposed legislation stops short of creating a new uniform EU-level mechanism to review all foreign investment acquisitions: only those involving EU funding would be subject to review by the EC.
• Requiring Member States to monitor foreign investments and particularly their inbound investment flows is a step towards addressing the fact that EU Member States are subject to EU state aid rules, whereas third countries are only subject to WTO-level subsidy rules – which are subject to much looser scrutiny.
• Non-EU acquirers of EU businesses should reckon with a climate of increasing foreign investment scrutiny within the EU going forward. The new regulation may mean that Member States currently without foreign investment review legislation take steps to put such rules on their statute books, while others improve the content and use of their existing laws. Further, the EC will be conducting new reviews for transactions involving EU funding. These regulatory reviews will be in addition to merger control, and are likely to increase the cost, uncertainty and delay in closing transactions.