Brussels proposes screening foreign investment

European Commission President Jean-Claude Juncker announced on 13 September 2017, in his State of the Union speech, a proposal for a regulation to establish a European framework for screening foreign direct investment. The proposal, presented that same week, still has to be negotiated by the European Parliament and the Council before it becomes law.

Until now the Union lacked specific legislation on the matter, while about half of the Member States already had national screening mechanisms. The proposal neither replaces those mechanisms nor requires them to be created: it authorises States to maintain them for reasons of security or public order and sets a common framework for cooperation among themselves and with the Commission. That division of roles matters: it preserves the States’ competence over national security, which the treaties do not transfer to the Union.

What the proposal provides

According to analysis by several international law firms, the core is a cooperation mechanism among Member States and with the Commission: countries would report the investments they are screening and the others, together with the Commission, could make comments. The final decision on each investment would still rest with the State in whose territory it takes place. For investors, the practical consequence would be somewhat more predictable rules on what information is shared between administrations and within what deadlines, although the details will be settled during negotiation.

In addition, the Commission could review certain investments that affect projects or programmes of Union interest and issue non-binding opinions that the Member State concerned would have to take into account. In other words, Brussels gains a voice in these matters, but not a veto, and control remains in national hands.

Why it is being proposed now

The debate takes place against growing concern about the acquisition of European technology companies and infrastructure by investors from outside the Union, especially in sensitive sectors such as technology, energy or telecommunications. Several Member States were calling for a common response, while others, in favour of open markets, expressed reservations. Among the arguments in favour is reciprocity: some countries demand strict authorisations from European investors and the Union has no equivalent tools.

For the Union’s economic policy, the question is the balance between maintaining openness, which attracts capital and technology, and protecting strategic interests. The proposal tries to reconcile both: it bans no investments and creates no list of off-limits sectors, but offers channels for them to be examined with more information and better coordination.

What to review

If your company receives or expects to receive capital from investors outside the Union, or is preparing a sale to a non-European buyer, it is worth knowing that some Member States already screen this type of transaction, with their own deadlines and criteria, and that the European proposal could add a level of coordination. A transaction in a sensitive sector should include, from the start, an analysis of possible authorisations.

Companies in sectors such as energy, telecommunications, technology or infrastructure can review their ownership structures and shareholder agreements, which sometimes include change-of-control clauses. And investors should know that rules of this kind can affect the timetables and conditions of certain acquisitions, although the proposal is not yet law. It is also worth bearing in mind that the legislative process in Brussels often takes years and that the final text may differ greatly from the proposal, so for now it is enough to follow its progress without changing plans.

Openness to investment remains the rule; what changes is how the exceptions are watched.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.