Background

The Regulation (EU) 2019/452 ("EU FIR Screening Regulation") has entered into force in October 2020. Since then, there has been a significant uptick in FDI screenings each year. However, the European Commission’s experience with the current framework revealed several areas requiring improvement. These include substantial disparities in screening mechanisms across the EU, particularly concerning timing, coverage, and notification procedures, as well as inadequate cooperation within the network of screening authorities. In response, the European Commission initiated a public consultation on amending and replacing the EU FIR Screening Regulation in June 2023.

Key changes in the new proposal

More harmonization by mandatory screening mechanisms in all member states

So far, the EU FIR screening coordination mechanism on the basis of the EU FIR Screening Regulation has neither established a FIR review mechanism at EU level, nor has mandatorily required EU Member States to adopt a FIR screening mechanism under national law. Rather, the introduction of foreign investment review screening regimes at national level was only encouraged and minimum standards for national foreign investment review regimes were suggested. The Proposed Regulation, however, will require Member States to enact a national FIR screening regime within 15 months of the Proposed Regulation’s adoption. Accordingly, EU Member States, which currently do not have a foreign investment review screening regime (i.e., Ireland, Croatia, Cyprus, Greece and Bulgaria) would be required to introduce foreign investment review screening regimes under their national laws.

New minimum standards of rules for screening mechanisms

The Proposed Regulation requires EU Member States to ensure national screening regimes meet certain requirements. In terms of procedural requirements, the Proposed Regulation envisages that potentially critical transactions are screened before they close, that it is possible for authorities to initiate ex post-reviews of non-notifiable transactions, that confidential information provided by the parties is sufficiently protected and that the EU Member States annually report on their screening activities. The draft also includes an explicit obligation on Member States to provide judicial recourse against screening decisions taken by the national authority, which would however already be guaranteed for under EU and Member State constitutional law.

On a substantive level, the Proposed Regulation also introduces a list of sectors, in which transactions must be screened. This concerns investments in EU companies

• That participate in ‘projects or programmes of Union interest’ as further defined in Annex I of the proposed regulation, which mostly relates to a number of EU-funded initiatives, like the Digital Europe Programme and the EU4Health Programme
• And (ii) are active in areas of the economy ‘of particular importance’ as defined in Annex II of the proposed regulation. This includes fields such as military/dual-use goods, semiconductors, AI, quantum technologies, biotechnologies, and more

The Proposed Regulation thus introduces a list of sectors subject to a mandatory screening requirements if the respective target company falls into them. EU Member State foreign investment review screening regimes may and will however be broader and provide for screenings and notification obligations regarding investments in more sectors than those mentioned in the Proposed Regulation.

Extended scope: greenfield investments and indirect investments – legislative reaction to the ECJ's Xella judgment

The Proposed Regulation expands the screening framework to encompass a wider range of foreign investments and deal structures, now including indirect investment through EU subsidiaries and greenfield investment. Non-EU investments made indirectly through entities established in the EU but ultimately controlled by non-EU investors would accordingly be in scope of the Proposed Regulation. While many national foreign investment screening regimes within the EU already enable authorities to review such investments, the European Court of Justice clarified in C-106/22 Xella (2023) that indirect investments through EU entities, even if under foreign control, generally fall outside the scope of the current FDI Screening Regulation (EU) 2019/45, unless they are deemed “artificial arrangements” attempting to circumvent the screening mechanism in question. The amendment to cover also indirect investments in the Proposed Regulation therefore directly addresses the lacunae in the EU regulations on foreign investment review screenings found by the ECJ.

The Proposed Regulation also envisages the possibility to screen the creation of new companies and joint ventures as so-called greenfield investments. Significant uncertainties remain at this stage however regarding in particular the criteria national authorities will use in order to determine which greenfield investments qualify for review (such as turnover thresholds and assets value) and the point at which a notification of such projects becomes necessary.

Changes to the cooperation mechanism

The EU-wide cooperation mechanism, implemented by FDI Screening Regulation (EU) 2019/452, mandates that EU Member States that operate FDI regimes must notify the other Member States and the European Commission of any FDI in their territory that is undergoing national screening. This notification includes essential information such as the transaction value, the investment funding and its source, and details of both the target and the investor's business operations.

The Proposed Regulation aims at enhancing efficiency of the existing cooperation mechanism by introducing a coordinated submission of foreign investment filings across the EU, without however providing for a one-stop solution whereby only one filing would be required. In accordance with the Proposed Regulation, in multi-country transactions, applicants must file their requests for authorization to all relevant EU Member States simultaneously, which are then called upon to coordinate their review process. Necessary parallel notifications by several EU Member States to the cooperation mechanism shall also be made on the same day. Given the stringent filing deadlines that some EU Member States presently apply, the Proposed Regulation could significantly affect transaction planning and timing.

Furthermore, the Proposed Regulation clarifies the scope of transactions requiring notification. The scope of transactions that need to be notified under the cooperation mechanism is narrower than the range of transactions that are covered by the minimum scope of national screening regimes. This refinement aims at reducing the circulation of low-sensitivity cases among EU Members States and the Commission. Member States would only have to report investments to the Commission and other Member States under the coordination mechanism for which screening is mandatory under the new rules, and which meet specific criteria. These criteria relate to investors controlled by third-country governments, investors linked to a sanctioned entity, and investors which were previously subject to a prohibition or remedy decision. Also, all phase II investigations shall be notified.

Outlook

Although the consequences of these changes may seem significant at first glance, it is important to not overstate their relevance in relation to the screening regimes and practices in several EU Member States. For investors, the relevant EU Member State foreign investment review screening regimes at national level remain crucial, and some of those national screening mechanisms may not require much adaption once the Proposed Regulation is in effect. In key jurisdictions like Germany, Italy or France, in particular, where robust screening rules have been in place for years, the ensuing changes will be less substantial.

The Proposed Regulation will undergo the ordinary legislative procedure, subject to scrutiny from both the European Parliament and the Council of the EU. Given the regime could take effect 15 months after its enactment, these new foreign investment screening provisions could become fully effective as soon as late 2025. However, potential delays may arise due to the upcoming European Parliament elections in June. As developments unfold, we stand ready to guide clients through the regulatory impact of evolving foreign investment screening regimes across Europe on their businesses.