knowledge 7 April 2020 |

COVID-19: European Commission Calls for “Fully-Fledged” FDI Screening Throughout the EU

In guidance issued on 25 March (the "Guidance"), the Commission identified that the COVID-19 outbreak could lead to “attempts to acquire healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance developing vaccines) via foreign direct investment.” The Commission warned that “vigilance is required to ensure that any such FDI does not have a harmful impact on the EU’s capacity to cover the health needs of its citizens.”

The FDI Regulation

The EU Regulation on screening of foreign direct investment for possible security and public order risks (2019/452/EU) (the "FDI Regulation") came into force on 11 April 2019, and its provisions will apply from 11 October 2020 (click here for our briefing). 

While the FDI Regulation does not require Member States to adopt an FDI screening regime, it lays down minimum criteria for Member States who choose to do so, and establishes a co-operation mechanism for sharing of information related to FDI between all Member States.

Currently, 14 Member States operate FDI screening mechanisms. The regimes vary widely – some are voluntary while others are mandatory; some are limited to specific sectors while others apply to all investments. The FDI Regulation establishes basic rules for all regimes, imposing requirements of transparency, confidentiality and the application of timeframes for reviews.  Information typically required as part of a screening regime includes the ownership structure of the foreign investor, the value of the investment, the products or services involved and the source of funding.

Member States that do not establish an FDI regime remain bound by the co-operation provisions of the FDI Regulation, and may be required to give information regarding FDI into their territory where requested by another Member State or by the European Commission.

The Guidance

In response to the COVID-19 outbreak, the Guidance calls on Member States that operate screening regimes to “make full use” of them “to take fully into account the risks to critical health infrastructures, supply of critical inputs, and other critical sectors.”

For those Member States that do not operate regimes (such as Ireland), the Commission calls on governments “to set up a fully-fledged screening mechanism and in the meantime to use all other available options to address cases where the acquisition or control of a particular business, infrastructure or technology would create a risk to security or public order in the EU, including a risk to critical health infrastructures and supply of critical inputs.”

The Commission recalls that under the FDI Regulation, Member States are empowered to prevent or impose conditions on transactions that constitute a threat to public security or public order. According to the Commission, “this includes the situation where such threats are linked to a public health emergency”, especially given that the FDI Regulation “explicitly refers to risks to critical health infrastructures.”

Even where an investment is not subject to an FDI screening process, the Guidance warns that the Commission and other Member States can provide comments and opinions to the recipient Member State up to 15 months after a foreign investment, which can result in the imposition of ex post mitigation measures.  The Commission’s view is that, even though the FDI Regulation does not apply until 11 October 2020, after that date Member States could use the ex post provisions to provide comments and opinions to the recipient Member State relating to transactions that occur now (i.e., in March/April 2020).

The Guidance also advises that Member States may take protective action against investments that are not sufficiently high to trigger FDI screening thresholds (for example, the acquisition of a 5% share in a company). In such cases, Member States can act to protect critical interests by taking special rights in certain undertakings (so-called “golden shares”).

Such shares may, for example, allow the Member State to block or limit certain types of investments in the company. The Commission notes that these measures are deemed compatible with the free movement of capital provisions of the Treaty on the Functioning of the EU where they are a necessary and proportionate means of protecting a legitimate interest, such as public health.

Analysis

The Guidance shows that the Commission is highly conscious of the potential for strategic takeovers by foreign firms of European companies central to the EU’s fight against COVID-19.

It is worth noting that the Commission is not only concerned with protecting critical assets necessary to respond directly to COVID-19 (such as medical equipment) but also fears that the crisis may result “in a sell-off of Europe’s business and industrial actors, including SMEs”. The Commission warns that “the risks to the EU’s broader strategic capacities may be exacerbated by the volatility or undervaluation of European stock markets.” The Commission is clearly keen to avoid a fire-sale of key EU assets to global investors during the inevitable economic fallout to COVID-19.

So far, there has been no indication that Ireland intends to establish its own FDI screening regime. However, the Commission’s explicit calls for FDI screening by all Member States may make it difficult for the Irish government to maintain this position.

This is particularly so given the Commission’s clear view that the threat of certain types of FDI can only properly be tackled by the adoption of a common European approach. The Guidance notes that “FDI screening should take into account the impact on the European Union as a whole”; “risks created by an investment do not necessarily stop at the borders of the Member State where the investment happens”; and ”the Union interest may dictate that … supply commitments extend beyond the predicted needs of the host Member State.”

Even before the outbreak of COVID-19, FDI was high on the EU’s political agenda, amid a growing focus on trade policy and concern for the challenge of competing effectively with economic powers such as the United States and China. Many bemoaned the lack of “European Champions” in the wake of the Commission’s prohibition of the rail sector merger between Siemens and Alstom last year. In February, the new Commission promised “a new and assertive industrial policy that will enable the EU to remain a global economic power.”

Around Europe, countries such as France and Germany have been scaling up their FDI screening powers in the last year, while the UK has developed proposals for an “economy-wide” notification system for all FDI, which could result in up to 200 notifications per year. Following COVID-19, it seems likely that the number of jurisdictions operating screening mechanisms and the level of scrutiny by regulators will only increase further. Just last month, Spain introduced a mandatory screening mechanism for acquisitions of a 10% or higher stake in Spanish companies by non-EU and non-EFTA residents, based on public order, public health and public security reasons.  Whether heavily FDI-reliant Ireland can resist the pressure remains to be seen.