EU FDI “Upgrade,” Outbound Investment Control and More to Come

Building on the European Security Strategy of June 2023, the European Commission on January 24, 2024, adopted a package of five initiatives aiming to enhance the EU’s economic security. The package contains a far-reaching revision of the EU FDI Screening Regulation, which has been in place for just over three years (the “Proposal”). It also contains several early-stage, non-legislative instruments: White Papers on Outbound Investment, Export Controls and Dual Use Research as well as a proposed Council Recommendation on enhancing Research Security.

The package demonstrates that the EU takes national and economic security seriously, including the ability to respond to geopolitical trends, tensions, and crises. It adds instruments to the regulatory landscape in the foreign trade and national security space, and these instruments are increasingly converging. At the same time, the block continues to promote openness for trade, investment, and research in the interest of the EU’s economy.

Foreign investors and EU businesses alike should be prepared to navigate through the expanding regulatory landscape and weigh in to help shape the upcoming rules.

New FDI Screening Regulation

The European Commission’s proposed revision of Regulation (EU) 2019/452 (the “FDI Screening Regulation”) is based on an extensive evaluation of the existing framework. The Proposal incorporates insights from the first three years of the FDI Screening Regulation, a recent public consultation and call for evidence in relation to the existing regime, an OECD assessment of the effectiveness and efficiency of the FDI Screening Regulation in November 2022, and recommendations from a European Court of Auditors report published in December 2023.

The Proposal does not touch upon the current allocation of responsibilities under the FDI Screening Regulation—investment screening in the EU will remain a decentralized task of the Member States. However, the Proposal requires Member States to establish national screening regimes (this is currently left to the discretion of national governments). It also aims at further harmonizing the national screening rules, in particular by setting out detailed criteria for activities that trigger a mandatory notification and far-reaching requirements for the national filing procedures. The Proposal seeks to enhance the effectiveness and efficiency of the FDI Screening Regulation by addressing current shortcomings. For example, the Proposal prioritizes high-risk cases that need to be discussed at the EU level under the already existing cooperation mechanism. At the same time, several provisions of the Proposal significantly expand its scope and relevance as compared to the FDI Screening Regulation, and even go beyond what is required under many national screening regimes. If adopted, the Proposal could therefore have a significant impact on the standard of review applied by the Member States and the total number of investments that require notification throughout the EU.

In more detail, the Proposal includes the following changes:

Inclusion of intra-EU investments under foreign control

The Proposal extends the current EU framework to include investments by non-EU investors through EU subsidiaries that aim to establish or to maintain lasting and direct links to an EU target. The amendment is a reaction to the European Court of Justice’s Xella decision. The key consideration is to ensure the framework treats investments by an EU entity that enable a controlling foreign entity’s effective participation in the management or control of the EU target with the same scrutiny as direct investment by non-EU investors under the Proposal, as the scenarios involve similar risks. The vast majority of Member States already covers such “indirect” foreign investments under their current FDI regimes, including indirect minority (portfolio) investments without controlling influence. In fact, some national investment control regimes (e.g., in the Netherlands) are agnostic to investor origin. The Proposal also reminds national governments to apply the instruments in a proportionate manner, in another reference to the Xella decision.

Mandatory screening of foreign investments in key sectors across all Member States

In a departure from the FDI Screening Regulation, the Proposal makes the establishment of a screening mechanism mandatory for all Member States. Member States may include additional sectors, but the Proposal requires the Member States to impose an authorization requirement for all investments in the following targets:

• EU companies involved in projects or programs of EU interest. There are some changes to the current list of EU projects and programs in the Annex to the FDI Screening Regulation covering key high tech fields such as microelectronics, batteries, hydrogen, and cloud infrastructure; and
• EU companies “economically active in” certain areas of particular importance for the security or public order interests of the EU, namely dual-use and military items, a long list of critical technologies, including certain advanced semiconductors, AI, and quantum technologies, biotechnologies, robotics and autonomous systems, advanced connectivity, navigation and digital technologies, advanced materials, manufacturing and recycling technologies, and several other technologies, each of which is specified in the Proposal and in line with the European Commission’s Recommendation of 03 October 2023 on critical technology areas for the EU's economic security. The requirements also cover certain critical medicines, and critical entities and activities in the EU’s financial system (“notifiable investments”).

The Proposal further provides that the European Commission may amend these activities triggering a mandatory filing by way of a delegated act.

If adopted, the Proposal will ensure mandatory EU-wide FDI screening across several economic sectors, including for the few Member States that do not yet have FDI regimes but have pending legislation at differing stages of advancement, namely Ireland, Croatia, Cyprus, Greece, and Bulgaria.

Further harmonization of procedural rules, coordinated screening of multi‑country transactions and more targeted cooperation

The Proposal sets out detailed requirements for procedural rules at the Member State level to further harmonize national review mechanisms. In addition to aspects already covered by the FDI Screening Regulation (e.g., measures to prevent circumvention), the proposed new requirements include the following:

• Procedural differentiation between an initial review and an in depth-investigation of foreign investments (while many FDI regimes already refer to “Phase I” and “Phase II” reviews, this does not currently apply for all Member States, e.g., Italy);
• Legal grounds for ex officio proceedings (call-in for review) in relation to foreign investments that are not subject to an authorization requirement for at least 15 months after completion of the respective transaction, which could lead to significant deal uncertainty. It is worth noting that many national FDI regimes currently do not provide for a catch-all power to call-in foreign investment for review (e.g., in France and Poland); and
• Suspensory effect of a filing requirement, meaning that a notifiable investment must be filed and authorized (“screened”) before completion of the investment.

The Proposal also includes a specific procedure for so-called “multi-country transactions” (i.e., investments notified in two or several Member States). The Proposal requires investors to notify multi-country transactions in all relevant Member States on the same day, allowing for simultaneous screening by multiple Member States. It also includes specific rules and deadlines applicable to multi-country transactions for the initiation and procedure of the cooperation mechanism involving the European Commission and other Member States.

To make the existing cooperation mechanism more efficient and targeted, the Proposal limits the requirement to notify foreign investments to other Member States and the European Commission to “high-risk” cases. This includes notifiable investments as defined above and all in-depth (Phase II) investigations (which corresponds with the current notification practice of some Member States, including Germany). However, this does not preclude the Member States from referring transactions that do not fulfill these criteria to the cooperation mechanism.

Greenfield investments within scope

The Proposal aims to broaden the screening of greenfield investments (defined as investments by setting up new facilities or a new undertaking in the EU). In its recitals, the Proposal states that Member States “are encouraged” to cover greenfield investments with their screening mechanisms, where such investments take place “in sectors relevant to their security or public order or when they present characteristics such as size or essential nature to be relevant to their security or public order.” At the same time, the proposed definitions of (direct and indirect) foreign investment broadly refer to an EU target that exists “or is to be established.” Based on this definition, greenfield investment screening would become mandatory throughout the EU.

This is a notable development. To date, only select Member States screen greenfield investments (e.g., Denmark, Sweden, Slovenia, with other Member States such as Germany considering bringing greenfield investments within the scope of their respective screening regime). The Proposal could trigger a significant expansion of the current scope of many national screening regimes to cover greenfield investments in several sensitive economic sectors.

Outlook

The Proposal contains several welcome specifications, not least in relation to the more precise description of activities that trigger a mandatory filing. This appears essential considering that implementation of the proposed requirements is intended to be mandatory, not optional.

Yet some of the proposed changes may also lead to difficulties. Would it be up to each Member State to determine under which circumstances an EU target merely supplying certain critical technologies should not be considered “economically active in” such technologies to avoid excessive notification obligations (see the recent guidance issued by the Dutch FDI authority on precisely this question in view of the very similar wording under the Vifo Act)? Or would guidance (beyond definitions in the legislation) ultimately have to be provided at the EU level in the interests of uniform application, moving one step closer to a single EU FDI regime?

Same day (simultaneous) notification requirements and 15-months ability of Member States to pick up investments would require investors to adjust their approach to filings across the EU, to achieve deal certainty at the earliest stage possible. The Proposal also builds the bridge to EU financial and economic sanctions that have become a key instrument of security policy since Russia’s attack on Ukraine in February 2022. FDI screening will be particularly intense if a foreign investor or any of its affiliates is owned or controlled by, or acting on behalf or at the direction of, sanctioned parties. The same applies in case of past sanctions violations, including by circumventing EU trade sanctions, a focus of the EU’s recent considerations to ensure effective implementation of sanctions. The EU is aware that further foreign trade instruments are equally important to avoid loopholes and provide for comprehensive protection of EU economic security interests, as the White Paper initiatives show. The EU does not consider licensing agreements as a relevant field for investment control—the Proposal does not suggest screening outbound licensing. However, licensing arrangements can still be caught by export controls or other instruments that are in the process of being prepared.

Changes will not be adopted and come into effect very soon. The upcoming elections at EU level in June will likely also impact the timeline. The FDI Screening Regulation took one and a half years from publication of the proposal in 2017 until adoption in spring of 2019, and only became fully applicable on October 11, 2020. The Proposal also foresees a transitory period and would take full effect 15 months after entering into effect. Nevertheless, investors should plan ahead when considering investments in sensitive technology or other areas of EU or national interest.

Other Initiatives – Outbound Investment, Export Controls, and Research Activities

Apart from the proposed revision to the FDI Screening Regulation, the European Economic Security Package contains the following instruments to further align the Member States’ approach to trade security:

White Paper on Outbound Investment

EU investments flowing into third countries are currently not being screened. In line with regulatory developments worldwide (see our client alert on The Biden Admin’s New Program to Regulate Outbound Investment), the European Commission is launching a discussion with a White Paper on Outbound Investment. The White Paper is based on the preliminary assessment of an Expert Group according to which further analysis is needed to provide an appropriate policy response to the growing concerns, in particular in relation to uncontrolled outflow of highly developed technologies such as quantum, semiconductors, and AI technologies. The European Commission plans to recommend that Member States monitor and assess investments abroad for 12 months. A joint assessment will then be carried out to identify potential risks to EU security and define the necessary remedial measures following a common methodology. Based on the results of the stakeholder consultation, possible investment restrictions could then be proposed in the fall of 2025.

White Paper on Export Controls

The European Commission considers better coordination of export controls at EU level essential for effective action in the current geopolitical context and for tackling unilateral action by third countries. The changing global context, particularly Russia’s aggression against Ukraine, underscores the need to reinforce the EU’s ability to act internationally. The White Paper on Export Controls proposes short-term action items, including uniform EU controls and a political coordination forum, as well as medium-term action items, such as the evaluation of the EU Dual-Use Regulation and a broader debate on the future of export controls and international cooperation.

White Paper on Dual Use Research

Given the omnipresent geopolitical challenges, support for R&D in dual-use technologies (technologies that can be used for both civil and military purposes) becomes increasingly relevant. The White Paper on options for enhancing support for research and development involving technologies with dual-use potential assesses current EU funding programs, and proposes options for enhancement. The European Commission initiates a broad consultation involving public authorities, civil society, industry, and academia to gather input on strategic support for the development of dual-use technologies as a basis for future action.

Proposal for a Council Recommendation on enhancing Research Security

The proposed Council Recommendation on enhancing Research Security seeks to enhance support for Member States and research organizations in addressing research security risks, aiming to prevent the misuse of research and innovation in a way that may impact EU security or violate ethical norms.

While implementation of the five initiatives of the European Economic Security Package may not be imminent, industry stakeholders should take a keen interest in participating in the various stakeholder dialogues offered by the European Commission. In parallel, the legislation on FDI and trade controls is evolving rapidly at the national, European, and global level. Our National Security Team at MoFo is available to guide you through the new initiatives and answer any questions you may have.

Frederike Becker, trainee in the Berlin and Washington, D.C., offices, contributed to this update.

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