Since the European Union was established in 1993 with the Maastricht Treaty, the rights of foreign investors have always been protected.

The E.U.’s single market is the engine of the European economy: it enables most goods, services, money and people to move freely. In this context, foreign direct investment (FDI) is a driver of competitiveness and of the economic development of the bloc. 

Article 63 of the “Treaty on the Functioning of the European Union” protects the freedom of movement of capital, granting rights and equal opportunity to both E.U. and non-E.U. investors. It stipulates that:

1. all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited; and

2. all restrictions on payments between Member States and between Member States and third countries shall be prohibited. 

The Treaty allows, however, Member States to apply for restrictions to foreign investments on public policy grounds. Such restrictions are carried out through national screening mechanisms, meaning that each Member State has the ultimate veto. 

In the attempt to find a compromise between protecting foreign investors and the legitimate interests of Member States, the Court of Justice of the E.U. has developed a body of case law on the various national screening mechanisms. As at 14 October 2020, fifteen Member States (not including the United Kingdom) have a national screening mechanism in place. 

In an effort to harmonize the different national screening systems, in March 2019, the E.U. introduced Regulation 2019/452, also known as the “E.U. FDI Screening Regulation.” 

It is worth remembering that under the E.U. legal system, and as opposed to a Directive, a Regulation of the E.U. is a law directly applicable and enforceable in each Member State without the need of implementation through a Member State’s national law. 

Regulation 2019/452, which came into force on 11 October 2020, sets out a series of new reporting obligations, which investors should be aware of. 

Key provisions of Regulation 2019/452 

Annual reporting 

All Member States will have to submit to the E.U. Commission an annual report with consolidated information on FDI taking place in their territory, and information on the application of their screening mechanisms. It is important to point out that the E.U. encourages Member States to make use of their internal screening powers and, for those Member States that do not have such a screening mechanism, to set one up.    

Based on the data submitted by the Member States, the Commission will publish an annual report on the implementation of the Regulation. The first report will therefore cover investments completed in 2020. 

Requirements for valid national screening mechanisms 

The Regulation, which applies to all sectors and is subject to no thresholds (eg monetary value), sets out the requirements for a valid screening mechanism of a Member State in accordance with the existing principles of the E.U. In a nutshell, such requirements are: transparency of screening rules and procedures (eg time frames, grounds for screening), non-discrimination among foreign investors, confidentiality of exchange of information and the possibility of recourse against screening decisions. 

Investments subject to screenings

An FDI is likely to fall within the scope of a national screening mechanism when it concerns one of the following areas: 

• critical infrastructure (eg transport, health, communication) 
• critical technologies (eg artificial intelligence, robotics, cybersecurity, defence, aerospace) 
• supply of critical inputs (eg energy or raw materials) 
• access to sensitive information (eg personal data) 
• freedom and pluralism of media 
• if the foreign investor is directly or indirectly controlled by the government of a third country (including state bodies or armed forces), through ownership structure or significant funding 
• where there is a serious risk that the foreign investor may be engaged in illegal or criminal activities. 

Cooperation mechanisms 

The Regulation focuses on a cooperation mechanism that enables the E.U. Commission and the Member States to exchange information on FDI and raise concerns where needed. In particular, a Member State can comment on a FDI in another Member State if it considers that the investment is likely to affect security or public order within the bloc.

Equally, The E.U. Commission can issue opinions when an FDI poses a threat to security or public order in more than one Member State. The Commission will also issue an opinion if at least one-third of the Member States express concerns on a proposed FDI. 

It is important to note that such opinions are not binding on the Member State that is screening the FDI. The responsibility for conducting such a screening will continue to rest with the Member States, who will continue to have the last word. However, they should take the comments made by other Member States and the E.U. Commission into due account. 

Going forward, the new regulation facilitates cooperation between Member States and the European Commission in the context of a structured process.  

FDI affecting E.U. projects 

The E.U. Commission will issue opinions of its own – without the impulse of a Member State – when an FDI is likely to affect projects of interest to the whole E.U. These include programmes that receive E.U. funds, like Galileo and Horizon 2020, and those covered by E.U. law on critical infrastructure, technologies or inputs. In these cases, the Member State must take into utmost account the opinions issued, and give reasons if the opinions are not followed. 

In summary

Member States remain sovereign and independent in terms of screening an FDI. The E.U. FDI Screening Regulation essentially seeks to harmonize different screening regimes and increase the cooperation and exchange of information among Member States. 

The result is that Member States that still lack a screening mechanism may find themselves under increasing scrutiny and pressure from the E.U. Commission (and possibly from other Member States) to establish one.

Foreign investors should be aware of the existing national screening mechanisms across the E.U. prior to making strategic investment decisions. They should consider, in particular, whether the intended investment affects critical or strategic sectors or public order, and they should assess potential risks well in advance. 

Foreign investors shall also be aware of the extra time that a screening process may require. On a final point, it should be noted that even post-closing FDI screenings may occur. Investors must anticipate (and be prepared for) worst-case scenarios already in the transactional documents, including adopting the necessary contractual remedies.

Davide de Rosa is Vice Chairman of the Europe Committee and Partner, Gianni Origoni Grippo Cappelli & Partners