Under the Draft FDI Regulation, acquisitions by EU entities will be reviewable if the EU acquirer is controlled by a foreign investor. This is a marked shift from the current FDI Screening Regulation, which only applies to direct investments by foreign investors and not to indirect investments by EU-based subsidiaries of foreign investors (as was recently confirmed by the European Court of Justice). 

While this is an expansion on the European framework, the approach proposed in the Draft Regulation is still more limited than that of several Member States, which subject even EU companies with minority shareholders from outside the EU to FDI screening or which do not require any element of foreign ownership at all. 

Ideally, these Member States will reflect on the guidance provided by the Commission to align their national regimes with this clear-cut approach. However, given the current geopolitical climate, it seems unlikely that Member States will voluntarily materially scale back the scope of existing national regimes.

Greenfield investments are also in the scope of the Draft FDI Regulation. While the wording seems unclear, it has been indicated by Commission officials that Member States would not be obliged to capture greenfield investment in their national regimes, but if they do so, the Draft FDI Regulation should apply to them. 

The Draft FDI Regulation contains, in its Annex 2, a list of sensitive sectors that must be covered by a mandatory, suspensory FDI screening regime in all EU Member States. The list is expansive and includes military and dual-use items, critical technology, critical medicines and critical entities in the financial sector. The Draft FDI Regulation foresees that the Commission can change the list of sectors. 

While almost all EU Member States have adopted some form of FDI screening, the current FDI Screening Regulation does not contain any obligation to do so, nor does it define a minimum scope for FDI screening regimes. This has long been a point of lament for the Commission – based on the concern that foreign investors could take advantage of “loopholes” in the FDI screening coverage in the EU. 

This had been by far the most critically discussed point of the Draft FDI Regulation. While the concept as such is in little dispute, the Commission has come under heavy criticism, including by Member States, for the vagueness of the list in Annex 2. It seems certain that the list in Annex 2 will be subject to significant redrafting in cooperation with the relevant authorities in the Member States.

In addition, all Member States will be obliged to introduce post-closing screening regimes for all foreign investments that are not subject to an authorization requirement independent of sectors. Member States will be able to screen and prohibit investments for at least 15 months after closing (the Draft FDI Regulation does not provide for a maximum deadline – this will be up to the Member States). Such post-closing regimes will be a source of significant deal uncertainty, particularly as the Draft FDI Regulation does not provide for a voluntary notification scheme (which Member States can, however, introduce themselves). Technically, this provision would even allow the re-opening of cases that were already approved, although the Commission confirmed that this is not the intention. It seems likely that this point will be clarified in the legislative procedure.

Under both the current FDI Screening Regulation and the Draft FDI Regulation, Member States remain the ultimate decision-makers on FDI screening. 

The Draft FDI Regulation does, however, provide the Commission with some tools to subtly nudge the Member States: they have to submit information about their current cases and invite comments from other Member States and the Commission, which they have to take into account when making their decisions – the so-called “cooperation mechanism.” 

This mechanism will become more sophisticated. The Draft FDI Regulation requires notification by the Member States to the Cooperation Mechanism in three cases: when a target participates in a project or program of Union interest; the target is economically active in a defined sensitive sector; and the investor: 

1. is controlled by a foreign state; or 
2. is sanctioned; or 
3. has previously been subject to a prohibition or mitigating measure; or the Member State wants to open an in-depth investigation (“Phase II”). 

The deadline for the Member States to notify is 15 calendar days after they received the FDI filing in the first two cases, and 60 calendar days in the third case. This forces Member States to divide their proceedings in Phase I and Phase II and sets a de facto time limit of 60 days for Phase I.

This is a lot more targeted and clearer than the previous rules that required Member States to notify all cases undergoing “formal screening” – a term that Member States interpreted quite differently. A recent evaluation of the current FDI Screening Regulation criticized the fact that too many unimportant cases were notified to the cooperation mechanism. With the Draft FDI Regulation, the Commission wants to focus its resources on cases that may pose a real risk. This could reduce the length of procedures in no-issue cases, as a notification to the cooperation mechanism will no longer be necessary. However, criticism persists, particularly concerning the notification duty in case of investors that previously have been subject to a prohibition or mitigating measures. Critics argue that such mitigating measures are rarely a result of the investor’s identity but rather the sensitivity of the target company. Moreover, there is considerable disparity among Member States’ practices in this regard, with France notably imposing mitigating measures in 54 percent of screened cases.

The Draft FDI Regulation provides for a number of mandatory procedural rules, including the right to be heard; obligation to provide reasons; possibility to seek judicial recourse against screening decision (until now, the FDI Screening Regulation does not require judicial recourse); and protection of confidential information. 

In each case, the screening Member State must provide ample information to the other Member States and to the Commission. Following their decision, Member States will now also have to justify why they did not follow the recommendations of their fellow Member States or the Commission.

Moreover, Member States and the Commission can now start the cooperation mechanism on their own initiative – even in cases where the Member State in which the investment takes place did not submit to the cooperation mechanism. Essentially, comments and recommendations about potentially problematic investments can also be given uninvited and must be taken into account by the receiving Member States. Notably, this includes investments not subject to a mandatory notification; any Member State can, therefore, recommend the commencement of post-closing proceedings against any foreign investment. 

A most welcome change is made for cross-border transactions. Now, Member States must endeavor to coordinate on procedure and decision-making in cases that are notified to multiple Member States (although this doesn’t necessarily mean that they must agree on the assessment and the outcome). 

To facilitate this, the Draft FDI Regulation foresees that the notifying investors will have to submit all FDI filings on the same day (and reference each of them). Obviously, this would lead only to a partial harmonization as review timelines currently vary widely among Member States.

Overall, it is expected that the necessary coordination, as well as the extended possibility for information requests and the minimum waiting periods required to allow other Member States and the Commission to provide comments, will lead to an extension of the applicable timelines.

While the Draft FDI Regulation extensively addresses procedural aspects, it provides limited guidance on the substantive criteria for determining which types of investments should be prohibited.

The Draft FDI Regulation delegates the determination of prohibited investments primarily to the discretion of Member States, offering only a few general criteria. Despite the Commission's assertions of significant progress, the regulation falls short of providing substantive guidance, resembling the current Regulation in many respects. Its vagueness may limit its potential to harmonize practices across Member States effectively. 

The Commission is conscious of allegations of overreach, similar to those that were raised against some Member States’ activities in investment control. The Draft FDI Regulation reminds Member States to observe the fundamental freedoms (as seen in the aforementioned recent ECJ judgment) and refers to the principle of proportionality; in particular, it obliges the Member States to use “other measures pursuant to Union or national law” instead of prohibitions or conditions if those are sufficient to address security concerns. 

The Draft FDI Regulation would oblige Member States to publish annual reports containing certain minimum information, which could enhance uniformity and predictability of FDI regimes (although the information that needs to be published is rather general).

The Draft FDI Regulation also explicitly tasks the Commission with observing proceedings in Member States and initiating infringement proceedings when necessary (as the Commission is already empowered to do as the guardian of the treaties). The Commission has only used this power once in recent years, but there are indications that it is planning to perform a broader review of the Member States’ application of their FDI regimes to intra-Union transactions. It will remain to be seen whether this is an expression of a more serious commitment on the part of the Commission towards preventing arbitrary or discriminatory use of FDI regimes for political purposes. 

The Draft FDI Regulation is subject to approval by the European Parliament and the Council. Prior to its drafting, discussions were held with the Member States, indicating broad alignment on the underlying principles. The Commission’s approach, focusing on procedural aspects rather than extensive harmonization of FDI screening rules, has garnered support, as procedural matters are typically easier to agree upon. However, significant discussions are anticipated, particularly concerning Annex 2, its list of sensitive sectors and the operational details of the screening mechanism. Some stakeholders have expressed concerns about the potential burden on smaller Member States with limited-capacity authorities. 

The legislative process will resume after the European Parliament elections and after the selection of the chairs of the committees, which is unlikely before October/November 2024. Once promulgated, the Draft FDI Regulation will only start applying 15 months after it is published in the Official Journal of the European Union, giving Member States sufficient time to adapt their national screening mechanisms. Accordingly, it is unlikely that the regulation will apply before 2026. However, many Member States might also implement the changes proposed before the implementation deadline expires.

The Draft FDI Regulation is but one of five new initiatives the Commission presented to advance European economic security. In particular, the Commission is also interested in outbound investment control, meaning the control of investments by EU investors in foreign countries. 

The United States recently announced a narrow Outbound Investment Control (see our story in the last issue of FI monitor). However, there appears to be a lack of consensus within the Commission and among Member States whether this would be useful or not for the EU. Therefore, the Commission will launch a process to gather data and evidence on potential risks before deciding on specific steps.