Clifford Chance

In the context of heightened geopolitical tensions and persisting challenges affecting the EU economy, the European Commission ("Commission") published on 17 October 2024 its fourth annual report on EU foreign direct investment (“FDI”) screening, providing an overview of enforcement activities and legislative developments in the EU in 2023.

Background

The EU Regulation establishing a framework for the screening of FDI into the Union (the “FDI Screening Regulation”), which entered into force in October 2020, provides a framework for EU Member States to scrutinise foreign investments in their territory, as well as to take measures to address identified security and public order risks. The FDI Screening Regulation also set up a so-called EU cooperation mechanism between the Commission and Member States' supervisory authorities, facilitating the exchange of information on individual transactions in one Member State to identify possible risks for other Member States or for EU programs of common interest.

Citius, Altius, Fortius …

National legislative developments. Over the past years, Member States have continued to adopt and implement national screening mechanisms. In 2023, ten Member States expanded their existing FDI scheme, with six others (Belgium, Estonia, Luxembourg, Romania, Slovakia, and Sweden) adopting new regimes, bringing the total number of countries with screening mechanisms to 24 (including Bulgaria’s regime which entered into force in March 2024, and Ireland’s which is now expected to be effective in January 2025). The remaining three EU countries that do not yet have a FDI regime in place – Croatia, Cyprus and Greece – have already taken concrete steps to introduce one. This is significant progress compared to the 14 Member States that had such schemes in place in 2021. However, noticeable divergences remain between Member States’ coverage, notably regarding notification thresholds, the determination of ‘sensitive’ sectors, and timelines.

National FDI screening activities. In addition to making regulatory changes, Member States have continued to effectively screen FDI transactions, in line with previous years’ figures. In 2023, a total of 1,808 filings were processed by Member States, up from 1,444 in 2022. 56% of such requests underwent formal screening, of which the vast majority (85%) were unconditionally authorised. 10% of formally screened cases were subject to conditions or mitigating measures; with large differences persisting between Member States (e.g., Germany imposed remedies in only 12 cases (4%) in 2022, whereas France did so 70 times, representing 53% of cleared transactions). Only 1% of screened transactions were prohibited in their entirety by national authorities. Also of note is that nearly half (44%) of all transactions for which requests for authorisation were submitted by the parties or for which cases were opened by the authorities ex-officio were deemed ineligible or did not require screening, underscoring the persisting legal uncertainty foreign investors face in the context of varying FDI regimes.

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EU cooperation mechanism. The fourth annual report shows that 36% of all notified cases concerned transactions undergoing screening in several Member States simultaneously (up from 29% the previous year), consistent with the overall increase in national regimes. Accordingly, 2023 brought an 18% increase in notifications by national authorities to the EU cooperation mechanism since 2021. Involvement still varies largely between Member States as a mere seven Member States (Austria, Denmark, France, Germany, Italy, Romania and Spain) accounted for 85% of all notifications, with some others remaining little to not involved at all in the cooperation mechanism so far.

Commission procedure and timing. The Commission "continued using the cooperation mechanism as a limited and targeted tool for exceptional cases where an FDI is likely to negatively affect security or public order". Of the 488 cases reported to the cooperation mechanism in 2023, 92% were processed by the Commission within 15 calendar days in Phase 1, with only 8% requiring a thorough security analysis. As part of such Phase 2, the Commission issued an opinion in less than 2% of notified transactions.

Main sectors requiring screening. The five sectors with the highest number of transactions in 2023 were manufacturing (23%), IC (21%), wholesale and retail (14%), financial activities (11%) and professional activities (11%). The same five sectors also represented the highest proportion of Phase 2 cases. Within the manufacturing sector more specifically, critical technologies (51%, including defence, aerospace, semiconductors, cybersecurity, AI…), critical infrastructure (34%) and supply of critical inputs (13%) represented the main factors leading to a Phase 2 being opened.

Origins of the investors. Compared to 2022, investors remained broadly from the USA (33%), the UK (12%), China (6%, including Hong Kong), Canada (5%) and Japan (4%). Noteworthy is the rise of investments from the United Arab Emirates, in third place with 7% of transactions.

Commission powers regarding transactions not undergoing screening. In 2023, the Commission used its prerogatives “in a very limited manner” to enquire about transactions not undergoing screening, without providing further details.

Looking forward

According to Valdis Dombrovskis, Executive Vice-President and Commissioner for Trade, "[t]he EU is open to foreign direct investment, but this openness must go hand in hand with preparedness to address new and emerging risks to our security and public order. Over the years, in the wider context of growing geopolitical tensions, EU cooperation on FDI screening has been going from strength to strength. FDI screening has become a critical part of our broader Economic Security Strategy. This 4th Annual Report is further evidence to the increasing importance of the EU cooperation in assessing and addressing risks to our collective security."

While the FDI Screening Regulation has already brought much needed harmonisation between Member States' FDI regimes, the last years have allowed the Commission, investors, and practitioners alike to identify certain shortcomings and ‘blind spots’ in the current system. As such, and as part of different initiatives to strengthen the EU’s economic security, the Commission presented in January 2024 a draft legislative proposal for the revision of the FDI Screening Regulation. The proposal, currently in the hands of the Council of the EU and the European Parliament, would require all Member States to impose mandatory filing requirements, as well as strengthen (and possibly lengthen) the cooperation mechanism, while reducing the number of deals that would be subject to the mechanism.