- Europe will have a common framework for states and the Commission to share information on investments from outside the Union.
- The final decision stays with each country: the Commission may give an opinion but cannot authorise or block.
- Anyone buying or selling businesses with foreign investors must expect more coordinated scrutiny.
On 14 February 2019, the plenary of the European Parliament approved by a large majority the regulation establishing a framework for the screening of foreign direct investments into the European Union. The text reflects the political agreement reached with the Council in November 2018, which is expected to approve it formally in March. It will apply eighteen months after its publication in the Official Journal.
Until now there was no European rule allowing investments from outside the Union to be examined in a coordinated way on security grounds. Only some member states had their own screening mechanism, with very different rules, and there was no formal channel for sharing information. The regulation does not create a new European screening, but a way of coordinating national ones.
How it will work
The system rests on cooperation. States will have to inform the others and the Commission of the foreign investments they are examining, and these may submit comments. The Commission may issue an opinion, for example when an investment could affect projects or programmes of interest to the Union, and the state concerned must take it into account, though it is not bound to follow it.
The decision to authorise, make conditional or prohibit an investment remains solely with the state where the target company is located; the original proposal to give the Commission the last word was dropped in negotiations. States without their own mechanism may create one, and those that have one will have to adapt it to minimum requirements of transparency and non-discrimination.
What is taken into account
The regulation lists factors that may be considered when assessing an investment: its effect on critical infrastructure such as energy, transport, water, health, communications or the media; on key technologies such as artificial intelligence, semiconductors, cybersecurity or defence; on the supply of raw materials; on access to sensitive information, including personal data; and on media freedom.
It may also be taken into account whether the investor is controlled by the government of a third country, through ownership, financing or other means. That factor is meant to address concern about purchases of strategic European assets by state-backed companies, a debate increasingly present in trade relations with the large Asian economies and with the United States.
What to review
For a company seeking capital or a buyer outside the Union, the practical effect will be predictable: more paperwork and more information shared between countries. In deals in sensitive sectors it is wise to analyse early whether authorisation must be sought in any state, and to allow in the timetable and the contract conditions for the time it may take.
For a family investor or a group with partners from outside the Union taking part in an acquisition, it is also useful to know the framework: what is reported, to whom and with what consequences. It does not change the right to invest in Europe, but it does change how some deals will be reviewed, with more coordination and less improvisation. Anyone planning a deal in a sensitive sector can also prepare in advance the information an authority tends to request, such as the ownership structure, the origin of the funds and the plans for the business, to save time if a review is opened.
Europe is not closing the door to foreign investment, but it is starting to watch more closely who comes through it.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
