Foreign direct investment ("FDI") screening was one of the major topics of 2023 as a myriad of new regimes joined the FDI club and its more seasoned members continue to strengthen scope and enforcement, with the impacts felt in transactions across a multitude of sectors and geographies. The European Union, therefore, was right on trend when it published proposals to reform the EU FDI Screening Regulation. The proposed measures include mandatory screening in all Member States, revisions of the sectoral scope, as well as rules aimed at capturing foreign-backed transactions realised through EU vehicles. We take a look at how far these proposals go, and what they would mean for transaction planning and certainty if adopted.

The EU FDI Regime

The EU FDI Screening Regulation entered into force in October 2020.¹ It established an EU-wide 'Cooperation Mechanism' whereby EU Member States that operate FDI regimes are required to notify the other Member States and the European Commission (the "EC") of any FDI in their territory that is undergoing national screening by providing information that must include, at least, transaction value, the investment funding and its source, and details of both the target and the investor's business operations.² This provides the other Member States and the Commission with a forum through which they can raise questions and concerns with the notifying Member State. 

The EU FDI Screening Regulation does not, however, establish an FDI review mechanism at EU level, or require Member States to adopt a national screening mechanism. Rather, it encourages them do so and sets minimum standards for those that do. These include, for example, the protection of confidential information, transparency of rules and procedures and an obligation to notify the EC if the Member State adopts, or adapts, a national regime. Notably, although the EU FDI Regulation requires screening-Member States to have timeframes, it does not prescribe either minimum or maximum deadlines. 

Proposed reforms: towards harmonisation? 

Mandatory screening 

The EC's proposal for a new regulation, repealing and replacing the current EU FDI Screening Regulation, was published on 24 January 2024.³ One of the most obvious changes under the Proposal is that Member States will now be required to implement a national screening mechanism within 15 months of the Proposal's entry into force.

The EC justifies the need for a new regulation, at least in part, based on findings that "a significant share of FDI into the EU goes to Member States without screening mechanisms; therefore, it is appropriate to require all Member States to have a screening mechanism."⁴ In support of this, the EC relied on raw data retrieved from a commercial dataset that concluded that nearly 23% of foreign acquisitions was attributable to non-screening Member States.⁵ However, given the proliferation of new regimes and the "clear trend" towards adoption by Member States identified by the EC, by the time 15 months has elapsed since the coming into force of any version of the Proposal, this will almost certainly be a fait accompli. Practically, therefore, the Proposal is unlikely to be a 'game-changer' for investors. Rather, it builds on an existing trend of broadening scopes and more regimes. In terms of transaction timelines, investors in the EU will continue to face a range of national regimes – with potential review under the Coordination Mechanism on top.

Sectoral scope 

The Proposal does not require Member States to replace their current FDI regimes but will, at least, require certain revisions to existing mechanisms to enable its full implementation. One of these areas is screening scope. The Proposal requires that foreign investments into a target that is established (i) under the laws of that Member State, and (ii) in its territory, must be subject to an authorisation requirement under a national screening mechanism where that target:

(a) participates in one of the projects or programmes of Union interest listed in Annex I of the Proposal. This is a list of 20 projects and programmes, including, for example, the Space Programme, Horizon 2020, the European Defence Fund, the Digital Europe Programme and the Trans-European Networks for Energy and Telecommunications ("Annex I investments"); or 

(b) is "economically active" in any of the areas listed in Annex II of the Proposal. The long list of areas includes, for example: items subject to export control for dual-use items or military technology or equipment; any "critical technologies" (ten distinct categories, including, inter alia, semiconductors, artificial intelligence, and energy technologies – each with multiple sub-segments); critical medicines; or any of the critical entities and activities related to the Union's financial system (including large credit institutions, payments systems and payment institutions, and markets operators or investment firms that operate a multilateral or organised trading facility)("Annex II investments").

The scope of Member States' existing regimes varies significantly⁶ but, none currently capture all of the activities contemplated by the Proposal. This includes recent and forthcoming regimes such as Ireland and Romania that have replicated the suggested list of sectors contained in Article 4 of the current EU FDI Screening Regulation. While the Proposal's list is certainly more prescriptive than its current Article 4 counterpart, it will no doubt be beset by some of the same issues of diverging interpretation. When a target will be considered 'economically active' in a sector, for example, is also a candidate for interpretation. Certain broad sectors such as "new fuels" will likely also require further definition at the national level.

In terms of the scope of regimes, it's important to emphasise that Member States are not required to replace their national criteria with those in the Proposal.⁷ In practice, therefore, Member States' existing regimes can be supplemented rather than replaced, meaning triggering criteria may continue to vary across the Union. The Proposal would require Member States to expand their FDI regimes to additional sectors, potentially increasing the number of notifications and the corresponding administrative burden for both transaction teams and national authorities.

Foreign investors

One specific deficiency in the EU FDI Screening Regulation that the Proposal attempts to address is that the Cooperation Mechanism "cannot be used for investments by non-EU investors if those investors invest via an entity set up in the EU".⁸ The definition has, therefore, been updated to cover not just investments through undertakings "constituted or otherwise organised under the laws of a third country",⁹ but also investments throughs subsidiaries directly or indirectly controlled by such undertakings. This will address the issues raised in the Xella case,¹⁰ in which the Court of Justice held unequivocally that the current definition did not look-through to controlling shareholders. The Proposal would, therefore, align the EU Regulation with most of the EU FDI regimes that already cover investing entities in the EU indirectly controlled by non-EU investors.

Process, timelines, and changes to the Cooperation Mechanism

The Proposal mandates certain general features for national regimes (in-depth review of certain transactions, protection of confidential information, etc.). It also introduces various procedural improvements, including requirements for Member States to keep investors informed, to give reasons prior to imposing remedies or prohibitions, and to provide investors with an opportunity to be heard and express their views on Member States' concerns.

However, the Proposal does not prescribe any target timescales, meaning the differential in decision-making timeframes by Member States will remain. Indeed, the only harmonised timescales that it proposes are in relation to the Cooperation Mechanism and an obligation on investors to make filings in multi-jurisdictional transactions simultaneously¹¹. Investors will be required to file for approval in all relevant Member States on the same day. Given some Member States (notably Italy) have short filing deadlines where others have none, this will effectively create a universal deadline dictated by the Member States with the shortest deadline.

If, after filing, the investment is in scope of the Cooperation Mechanism, all relevant Member States must notify the other Member States and the EC on the same day and within certain deadlines. If adopted, this will be a welcome improvement to the Cooperation Mechanism as there is currently no deadline for Member States to notify under the Cooperation Mechanism. In multi-jurisdictional deals, the same transaction can be subject to multiple notifications, potentially extending the timelines in which other Member States and the EC can comment on the transaction multiple times.¹²

At the same time, the Cooperation Mechanism will hopefully be of less relevance to the majority of transactions, as efforts have been made to limit its review to more critical cases. While all Annex I investments will still need to be notified under the Cooperation Mechanism, Annex II investments will only require notification if:

(a) the foreign investor is controlled by a third-country government; 

(b) the foreign investor, or any of its controllers, beneficial owners, subsidiaries or group members, is subject to EU sanctions; or 

(c) the foreign investor has had a previous investment blocked or subjected to conditions by a Member State. 

This is along with any other investments that the Member State wishes to notify in its discretion and any investments that it intends to subject to in-depth review, prohibition, or conditions. In terms of review, the EC will take a more active role, and discussions on multi-jurisdictional cases of concern (i.e., those likely to involve potential prohibition or conditions), will benefit from coordinated meetings between the EC and the Member States, which should hopefully streamline coordination and engagement.¹³

Balancing the reduced scope of notifications under the Cooperation Mechanism, however, the Proposal also introduces new powers for both Member States and the EC to open the "own initiative procedure" for deals that are not escalated via the Cooperation Mechanism. The EC can do so if it considers a foreign investment is likely to negatively affect the security or public order of more than one Member State or projects or programmes of Union interest.

This power, to effectively commence an ex officio screening of a (completed) transaction under the Cooperation Mechanism, lasts for up to 15 months post-closing. As the option only relates to transactions that were not already notified by the Member State to the Cooperation Mechanism, it will apply to a broader range of transactions than those mandating notification. Such transactions may also have already navigated a national procedure in one Member State, before another Member State elects to trigger. Ex-post review procedures exist in a number of Member States (although not all), but typically only in respect of transactions that have not been reviewed by that Member State already. Procedurally, therefore, the "own initiative procedure" may require the creation of ex-post review powers where they do not already exist, and extend those that do to cover even transactions that have already been through national review at least once already. Given the potential undermining effect this may have on transaction certainty, it is critical that this power is used sparingly and with appropriate caution.

A more general change concerns the amount of information that notifying parties will likely need to provide.¹⁴ Member States will be required to submit substantial amounts of information under the Cooperation Mechanism and so may be tempted to extend those information requirements to all national notifications so that they have the information readily available if required, inclined, or requested to notify the deal via the Cooperation Mechanism. The EC will produce a template for these purposes prior to implementation. This is likely to be largely similar to the template that the EC has developed for the same purposes under the current EU FDI Screening Regulation (accessible here).

Broader landscape 

The Proposal ultimately forms part of a package that comprises five discrete initiatives to "strengthen the EU's economic security at a time of growing tensions and profound technological shifts". The other initiatives include coordination on export controls, improving R&D support for technologies with dual-use potential, enhancing research security and, importantly, a consultation on identifying potential risks stemming from outbound investments.

Assessment and Outlook 

The Proposal and its accompanying SWD show welcome acknowledgment of the issues that investors are facing in trying to navigate a patchwork of discrete regimes with varying processes, timeframes, and degrees of transparency. The Proposal goes some way towards addressing that, but there is some way to go. 

With a European election taking place in June 2024, the proposals in the broader package are not likely to reach maturity until the new legislative session has begun. It also remains to be seen how Member States will react to new prescriptions on their policies and processes, especially when so many of them have only recently introduced, or adapted, their FDI screening processes, to the current EU FDI Screening Regulation. Indeed, Ireland has already legislated for its new regime (set to come into force this year), and Bulgaria has already published draft proposals for its new national screening mechanism. It is also unclear how Member States will react given the scale of reform, and resources, that may be required.

1 Regulation 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments in the Union, accessible here.
2 The full list of information that must be provided under the Cooperation Mechanism is set out in Article 9(2) of the EU FDI Regulation. 
3 Commission Proposal for a regulation on the screening of foreign investments in the Union and repealing Regulation (EU) 2019/452 (the "Proposal"). 
4 EC Staff Working Document, Evaluation of the EU FDI Regulation accompanying the Proposal, (the "SWD"), p. 7. 
5 Ibid. 
6 Certain national regimes are "general" in scope, covering a wider range of activities (e.g., Germany, Italy, Spain or the new Swedish regime) while others are focused on certain limited sectors (e.g., Finland or Portugal).
7 See Article 1(3) of the Proposed Regulation: "Member States may adopt or maintain in force national provisions in fields not coordinated by this Regulation". 
8 SWD, p. 36. 
9 EU FDI Regulation, Article 2(7). 
10 Case C-106/22, Xella Magyarország Építőanyagipari Kft. v Innovációs és Technológiai Miniszter, 13 July 2023.
11 Proposal, Article 6. 
12 Proposed Regulation, Article8. 
13 Proposed Regulation, Article 7. 
14 Proposed Regulation, Article 10.