[Abhinav Srivastava is a graduate of National Law University, Delhi and is currently based out of New Delhi. He is interested in the areas of international finance law, mergers and acquisitions, and investment law.]
The European Union (EU) has recently put forth a new set of rules regarding the Screening of Foreign Direct Investment on the grounds of security or public order. The regulation which will be in effect by the latter stages of 2020 was made public on the 21st of March, 2019 (though the intention to come up with such a framework had been announced on 5th March, 2019). The Union itself recognised the need to construct a comprehensive framework, allowing for the screening of FDI on the grounds of public order due to most of its trading partners already having it in place. Politically, it seems that the aim behind this regulation was to address the growing concerns of several EU Member States (particularly Italy, France and Germany) about the burgeoning influx of foreign investment from state-owned entities, in particular, from China.
The regulation can be seen as an attempt to promulgate a quartet of key revamps – a scope for advisory comments and opinions, a framework for intra-EU cooperation, procedural stipulations, and the enunciation of certain screening factors that the Commission deems fit (open to any future modifications). Following its usual approach of regulating activities in the continent, a substantial chunk of its efforts has gone into creating a strong framework for co-operation between the Member States, inter alia, and with the Commission. It seems to have realised that the evaluation of the effects of a foreign investment is predicated on the information available to a regulator, and, to this end, has provided for expansive rules for the exchange of information amongst the concerned stakeholders. It has also sought to set a time period for the completion of such screening processes.
The Regulations begin by marking out the screening mechanism and the factors that are to be observed by the Member States. The scope is outlined in Article 2(1) of the Regulations, which encompasses ‘investments of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity’.[1] On a careful perusal of the definition clause, it becomes apparent that the definition has been kept fairly wide, so that it is able to encompass within its ambit any effective participation or actual control of a state-owned enterprise. The screening procedure has been endowed with dual powers – having been bestowed the ability to not just prevent or prohibit such investments ex-ante, but also unwind such a transaction ex-post.[2] It goes on to provide a non-exhaustive list of factors that have the potential to raise security or public order concerns and, thus, cause the requirement of screening. Such factors are listed in Article 4[3]:
critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
critical technologies, including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology, as well as nanotechnologies and biotechnologies;
the security of supply of critical inputs;
access to sensitive information or the ability to control sensitive information.
Further, additional consideration is sought to be given to state owned enterprises (directly or indirectly controlled by a government of a third country) and where the investor has previously been involved in activities affecting the public order and security of a Member State. The ‘Chinese influence’ is apparent here, for two reasons that I would like to point out. First, the sub-clauses (a) and (b) seem to be the EU’s response to the massive investments made by the Chinese SOEs towards the acquisition of strategic infrastructures and cutting-edge technology from Europe. Second, there has been an exponential increase in investments by the Chinese SOEs – pegged at being tenfold for the 2008-2017 period.
Although the Regulations provide enough freedom to the Member States to construct their own screening mechanisms as they see fit, it nevertheless sets a periphery of procedural prerequisites that need to be adhered to. This strikes a balance between giving the states enough freedom to tailor their laws according to their geo-political scenarios and having a certain uniformity across the continent. Article 3 imposes that they must follow the principles of non-discrimination with regard to third countries, and there should be transparency, protection and limited usage of confidential data, and providing recourse of judicial review.[4] A great deal of emphasis has also been laid on strict conformity with national screening time frames, in addition to the obligation of Member States to set out triggers, grounds and procedural details for the screening. The Regulations give the Member States a 30 day time period to communicate any amendments or modifications to their respective national FDI screening procedures.
Considering the fact that, in today’s times, investments have a multinational effect, the Regulations aim to foster an inclusive approach – allowing the States and the Commission to make non-binding comments and advisory opinions.[5] This emphasis on cooperation will likely augment the coordination between the Member States as to the treatment of a particular screening decision. The crux of the cooperation-centric provisions is to encourage a robust and free flow of information amongst the concerned stakeholders – slated to not be prolonged past a 35-day period. What is interesting is that the cooperative process would also be applicable to those Member States that do not have a screening process in place – which would allow both the Commission and the interested Member States to issue comments on the FDIs that are not subject to official screening. Members have even been given the ability to issue comments retrospectively, with the Commission being empowered to issue opinions on non-screened completed investments for a period of 15 months post completion. It is specifically mentioned that although the receiving State will have to take into ‘due consideration’ the comments of other affected Member States and opinions of the Commission, the ultimate decision regarding the screening process would be that of the receiving State.
The Member States have also been given the ability to request the Commission’s opinion if they feel an investment is likely to affect their public order or security, with the EC being mandated to issue an opinion should a third of the Member States request it in a particular scenario. In addition to the powers bestowed upon the Member States by virtue of Articles 6 and 7, the Commission is given an additional power in matters that might affect ‘programs or projects of Union interest’. Such programs are defined to be those that are either substantially funded by the Union, or are covered by Union law relating to sectors outlined in Article 4. In these cases, the gravitas to be attached to the EC’s opinion seems to be of a higher threshold – “utmost account” – with the added requirement of the Investee States having to provide justification for their derogation from the said opinion in such cases. The Annex to the Regulations bears the list of programs that are deemed to be of Union interest – though open to modification under the provisions of Article 16.
With the Regulations being but a week old, it is difficult to expound as to what affect they might have on the investors active in Europe. Companies will have to deal with the added stage of FDI Screening post M&A – not just making it more cumbersome, but also uncertain and costlier. Keeping in mind that there is variation amongst the EU Member States in terms of their screening mechanisms and that the Investee State is ultimately the deciding authority with regard to accommodating the opinions and comments of the fellow Member States, there is a minute possibility of the aims of the Regulations being defeated in some instances. I believe that the solution to this is best described by the international law principle of reciprocity.
Invariably, comparisons with the Committee on Foreign Investment in the United States (CFIUS) will abound in the early days. The CFIUS is perhaps the best example of a screening mechanism used to block foreign M&As – particularly Chinese, and the larger question of whether the EU FDI Regulations will have the same kind of effect that CFIUS has will only be answered in due time. There are, however, several differences between the two. For one, the powers of the CFIUS is more centralised. The EU would also not have any veto or enforcement powers. Additionally, the national screening mechanisms will vary widely in scope – at present only 14 Member-States have FDI Screening processes with varying factors and application. This would mean that the same FDI could possibly have different approaches and outcomes, depending on the State. In the coming years, we might perhaps see the EU FDI jurisprudence being modelled around the CFIUS cases – perhaps even the ‘triple threat’ analysis?
[1] EU Regulation 2019/452, Article 2.
[2] Ibid, Article 2(3).
[3] Ibid, Article 4(1).
[4] Ibid, Article 3.
[5] Ibid, Articles 6-8.
[6] Fabrizio Di Benedetto, Reciprocity in International Trade Law and Investment Law and the Establishment of a European Committee on Foreign Investment, UoM-DILHPS.