All change – EC publishes proposed reforms to EU FDI screening regulation

The European Commission (EC) has adopted five initiatives to strengthen the EU’s economic security in the wake of ‘growing geopolitical tensions and profound technological shifts’.  Included in its European Security Strategy Package is a proposal for an enhanced foreign direct investment (FDI) screening regulation, which aims to achieve a more efficient regime in part through greater harmonisation and convergence of national screening rules across the EU. 

With the vast majority of the 1,200 transactions screened under the existing EU mechanism posing no risks to EU security, the EC is seeking to revise the rules to allow it to focus on those transactions presenting the highest risks.

Here we look at some of the key proposed reforms to the EU’s FDI screening regime.

To implement a harmonised FDI screening mechanism in all Member States

Although Member States are not obliged to introduce a national FDI regime under the existing FDI Regulation, the vast majority have now adopted a regime, with only a small number still developing a screening mechanism (Bulgaria, Croatia, Cyprus, Ireland, and Greece).

The proposed reforms will require all Member States to introduce a screening regime which conforms with a new set of minimum standards, within 15 months from the entry into force of the revised Regulation.  These new criteria would comprise:

• Minimum procedural standards, including the ability to conduct in-depth investigations, annual reporting on screening activities, and measures to identify and prevent circumvention, and to protect confidential information.
• Minimum substantive standards, including a list of sectors that must be screened (i.e., ‘critical technologies’ covering advanced semiconductors, AI language processing, cloud computing, quantum computing, biotechnologies, the Internet of Things and virtual reality).  In addition, regimes will be obliged to assess the potential impact of the investment on critical infrastructure, critical technologies, the continuity of supply of critical inputs, the protection of sensitive information, and the freedom and pluralism of the media.  Member States are free to introduce stricter rules around those sectors, or to include additional sectors not covered by the EC’s mandatory list. 
• The investor’s ability to seek judicial recourse against an adverse screening decision.

Many national regimes will likely need to revise legislation to conform with these new standards, but it may yet be a number of years before they are compelled to do so.  As a result, although these changes may provide greater legal certainty on the application of the rules across Member States, there may be a marked increase in the number of FDI notifications submitted in the EU with new minimum standards introduced across the EU.

To introduce mandatory cooperation measures for multi-jurisdictional transactions

The proposals provide for various measures to improve cooperation and efficiency between investors, Member States, and the EC. 

• First, where an applicant files requests for authorisation across multiple Member States, they must file each request on the same day (and each request shall refer to the other requests).  Aimed at improving predictability across the overall timetable, we expect that this has the potential to lead to delays as completed draft notifications for certain Member States cannot be submitted until the final notification in another is complete.
• Second, Member States must coordinate with one another and align on certain deadlines (e.g., sending their notifications to the EC and other Member States through the cooperation mechanism on the same day, or Member States providing comments and the EC issuing opinions on notified investments).  They are not, however, required to issue a decision on the same day, which may undermine the goal to synchronise the broader timetable.
• Third, the EC would be more actively involved in multi-jurisdictional transactions, including attending meetings to consider whether the investment may negatively affect security or public order across multiple Member States.  In addition, Member States will be required to give ‘utmost consideration’ to the opinions of the EC before Member States issue a final decision.  Where the EC wishes to achieve a particular outcome, we may see increasingly strong opinions which may undermine the Member States’ exclusive decision-making powers. 

These measures may lead to greater coordination and reduced divergence in outcomes within the EU, but equally may result in delays to the overall timetable as Member States are obliged to consult with one another on process to ensure alignment.

The EC’s and Member States’ power to launch an own initiative procedure

The proposed changes grant the EC and Member States the power to launch an ‘own initiative’ procedure to open a review of a foreign investment in another EU jurisdiction for ‘at least’ 15 months after the investment has completed, provided that (i) the investment has not been notified to the cooperation mechanism, and (ii) the screening authority considers that the investment is likely to affect security or public order.  It remains unclear how the EC would be permitted to initiate its own proceedings, given FDI screening is currently an exclusive competence of the Member States.

Where a deal has not been notified, investors will need to be mindful of the ability for Member States or the EC to call in the transaction for review up to 15 months following completion. 

To capture investments from EU entities whose ultimate owners are non-EU investors

The proposals would expand the scope of the EU FDI Regulation to capture investments from EU entities whose ultimate owners are non-EU investors. This is in response to the Court of Justice’s (ECJ) recent judgment in Xella (C-106/22), which had confirmed that the FDI Regulation does not apply to inbound investments made by EU companies that are ultimately owned or controlled by non-EU investors (excluding ‘artificial arrangements’ that do not reflect economic reality and that circumvent screening mechanisms).  These changes would therefore close a perceived loophole where an investor is able to evade FDI scrutiny by investing through an EU entity.

What’s next?

Non-EU companies looking to invest within the EU may benefit from a clearer framework in which to identify which investments are subject to FDI screening.  However, with a revised set of minimum standards as well as enhanced cooperation provisions, investors are likely to see an increase in the number of FDI notification requirements and potential delays to those processes.

The proposed changes to the EU FDI Regulation will follow the standard legislative procedure through the European Parliament and the Council of the EU, and are therefore unlikely to take effect before 2026.  Once in force, Member States will benefit from a 15-month transition period to prepare for national implementation.

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