The European Commission’s first annual report on FDI rules
Background
On 11 October 2020, the EU Regulation establishing a framework for the screening of foreign direct investments (the "FDI Regulation") entered into force.
The FDI Regulation introduces an obligation for EU Member States to cooperate – both with each other and with the Commission – in the screening of foreign investments. Member States are therefore required to notify the Commission of any foreign investment subject to national screening, upon which the Commission and the other Member States may issue comments on the investment.
The FDI Regulation does not impose a requirement on Member States to adopt national FDI rules. However, in the wake of the COVID-19 crisis, the Commission has encouraged Member States to introduce national FDI rules. The FDI Regulation sets out minimum requirements for those Member States that choose to implement national FDI rules, including obligations to ensure transparency in rules and procedures. Nonetheless, it remains for each individual Member State to determine the detailed rules and procedures governing the screening of foreign investments.
On 23 November 2021, the Commission published its first annual report on the application of the FDI Regulation. The report is based on input from Member States as well as on a general consultation process allowing Member States to submit comments on the FDI Regulation.
Implementation of national FDI rules
When the Commission first presented its proposal for the FDI Regulation in 2017, 11 Member States had adopted national FDI regimes of varying scope. Since the Regulation entered into force, all of those Member States have amended their national regimes, while several others have either introduced national FDI regimes or initiated the process of doing so.
Thus, 24 out of 27 EU Member States have either amended their existing national FDI rules, adopted new rules, or initiated processes to introduce or amend such rules. These include:
- Amendments to existing national FDI rules: Austria, France, Finland, Germany, Hungary, Italy, Latvia, Lithuania, Poland, Romania, and Spain.
- Processes initiated to amend existing national FDI rules: the Netherlands and Portugal.
- Adoption of national FDI rules: the Czech Republic, Denmark, Malta, Slovenia, and Slovakia.
- Processes initiated to adopt national FDI regimes: Belgium, Estonia, Greece, Ireland, Luxembourg, and Sweden.
The Commission has stated that it expects additional Member States to have adopted national FDI rules by the time of its next annual report in 2022.
Preliminary experiences with national FDI screening
The screening of foreign direct investments takes place – unlike, for example, merger control – exclusively at a national level. According to the Commission, from 1 January to 31 December 2020, 1,793 investments were notified to national authorities in the EU.
The outcomes of these screenings were as follows:
- 80% of the notified investments were not subject to screening, as they fell outside the scope of national FDI rules.
- 20% of the investments were screened, of which:
- 79% were approved without conditions;
- 12% were approved subject to specific conditions;
- 7% were abandoned during the screening process (for example, where the parties withdrew the transaction);
- 2% were prohibited.
The majority of investments subject to screening were therefore approved without conditions, while only 7 investments were prohibited by national authorities in 2020.
Preliminary experiences with the cooperation mechanism
As mentioned, Member States are required to notify the Commission of all foreign investments subject to national screening, allowing the Commission and other Member States to provide comments or raise questions before the screening Member State issues its decision.
The Commission’s review shows that, from 11 October 2020 to 30 June 2021, a total of 265 investments were notified. The outcomes of these notifications were as follows:
- In 80% of the cases, neither the Commission nor the other Member States provided comments within the 15-calendar-day deadline;
- In 14% of the cases, either the Commission or one or more Member States provided comments or raised questions within the deadline;
- 6% of the cases were still pending as of 1 July 2021
In cases where the Commission and/or other Member States raised questions, these typically concerned:
- The target company’s products and/or services;
- Possible dual-use classification of such products and/or services;
- The target company’s customers, competitors, and market shares;
- The target company’s IP rights and R&D activities;
- Characteristics of the foreign investor.
The Commission notes significant diversity among the notified investments, both in terms of the target companies’ activities, the value of the investments, and the origin of the investors. The reported investments ranged in value from as much as EUR 34 billion to as little as EUR 1,200 across all sectors. Importantly, a low financial value does not preclude an investment from being subject to FDI screening and notification to the Commission.
Other comments from Member States
The Commission’s report incorporates comments submitted by Member States during the consultation.
Several Member States noted that the cooperation mechanism has proven particularly resource-intensive, as it requires them to assess investments that would not otherwise fall within the scope of their national rules. These Member States have therefore proposed establishing uniform criteria for investments reported under the cooperation mechanism. For now, the Commission has rejected this proposal.
Several Member States have also noted that challenges of managing investments that are notified to and processed by national authorities in multiple Member States. The Commission acknowledges that such situations may create difficulties owing to significant differences in national FDI rules. As 29% of notified investments were reviewed by more than one Member State, identifying an optimal approach to address these cases will be crucial going forward.
Plesner’s remarks
The Commission’s annual report is noteworthy in several respects. First, it shows that several Member States have either adopted national FDI rules (for example, Denmark) or initiated the process of doing so. This is particularly relevant in the context of M&A transactions, where it is increasingly necessary to assess whether a potential transaction requires approval in one or more Member States. Where the target company has subsidiaries in several Member States, notification obligations may arise in each of those States, provided the relevant conditions are met. In such cases, it may be necessary to conduct – at times highly extensive – FDI screenings under the national regimes of multiple Member States.
Foreign investors should be particularly aware that national rules can vary considerably, for example in terms of the sectors covered. When planning an investment, it is essential to assess carefully whether the investment triggers notification obligations in one or more Member States. Due to the cooperation mechanism, all investments subject to screening in one Member State are notified to the others. If an investor fails to comply with a notification obligation in a given Member State, the authorities in that Member State may become aware of the transaction through the cooperation mechanism and initiate an investigation on their own initiative.