What’s Trending in EU Investment Law & Policy? Part I: Screening of Inward Foreign Direct Investment Flows

 Category: International Dispute Resolution (in English)

On the occasion of the upcoming 2018 UNCTAD World Investment Forum in Geneva, our two-part series on WHAT’S TRENDING IN EU INVESTMENT LAW & POLICY, authored by Dr Nicolas Klein, sheds a light on recent developments in EU Investment Law & Policy. Part I (below) deals with the Screening of Inward FDI flows by EU Member States. Part II will cover changes to model BITs of EU Member States and will be published on 22 October 2018.

The reform of the Committee on Foreign Investment in the United States (CFIUS) with the Foreign Investment Risk Review Modernization Act (FIRRMA) is paralleled, in the European Union, by a recent trend to enact a European Framework for FDI Screening by way of regulation. The European Framework for FDI Screening, however, is much more limited in scope than its US counterpart. It will by no means result in an EU veto power similar to that of the CFIUS system. The objective of the proposed EU Framework for FDI Screening is neither to harmonise the formal FDI screening mechanisms currently used by less than half of EU Member States nor to replace them with a single EU mechanism. It rather aims at enhancing cooperation on FDI screening between the Commission and EU Member States, to increase legal certainty and transparency. Although the scope of the currently proposed EU Framework for FDI Screening is limited, there is a growing trend in key EU Member States towards scrutinizing FDI flows and restricting M&A transactions wherever national security or public policy matters are affected.

Germany and Italy have already completed a revision of their FDI screening mechanisms while in Germany there are further plans to lower the threshold for deals to be subject to ministerial veto from 25 percent to 15 percent of equity by non-EU companies. The federal government of Germany for the very first time blocked the sale of shares in a company to a Chinese investor on 1 August 2018. The sale of the shares in Leifeld Metal Spinning AG was blocked on the basis of § 59 (1) of the newly overhauled German Foreign Trade Ordinance (Außenwirtschaftsverordnung – AWV). Leifeld produces high-strength metals used in cars, space, and nuclear industries. This veto followed another recent move to prevent a Chinese takeover of a German energy company by directing Germany’s state-owned development bank KfW to take a 20 percent stake in 50Hertz.

In the United Kingdom, a 2017 Green Paper sets out the broad lines of a review of the FDI screening regime. The review seeks, inter alia, to make targeted legislative changes to make smaller foreign acquisitions (in terms of turnover) in the dual and military use sector and in parts of the advanced technology sector subject to the governmental approval. The government of the Netherlands, in 2017, considered a telecommunications sector bill to block undesirable takeovers, as well as a hostile foreign takeover bill, that have not yet been adopted (cf. Briefing EU Legislation in Progress January 2018).


Scope of existing FDI screening mechanisms in EU Member States

FDI screening mechanisms generally allow EU Member States to monitor foreign investments in sectors of strategic importance. Depending on the respective legislative frameworks, FDI monitoring may exhibit different characteristics such as:

  • ex-ante/ex-post notification requirements,
  • voluntary/mandatory notification requirements and/or
  • objection periods for governmental agencies with or without mandatory notification requirements


  • general/sectoral coverage or
  • coverage limited to specific companies/assets.


Key Elements of the Proposed EU Framework for FDI Screening

The proposal for the EU Framework for FDI Screening sets out basic requirements for EU Member States’ FDI screening schemes: i.e. the possibility of judicial redress for decisions adopted under the FDI screening mechanism, non-discrimination between different third countries, deadlines, and transparency. It contains a non-exhaustive list of factors that may be considered in the screening process. These factors, next to critical infrastructure, critical technologies, etc., also include whether the foreign investor is controlled by the government of a third country, including through significant funding.

The proposal envisages the creation of a formal cooperation mechanism between the Commission and EU Member States to enhance the coordination of EU Member States’ FDI screening decisions and to increase the awareness of EU Member States and the Commission about planned or completed FDI that may affect security or public order. A coordination group comprised of EU Member States’ representatives and the Commission is planned to meet regularly to discuss issues of FDI inflows into the EU.

New transparency and information requirements for all EU Member States are set to address the current lack of information exchange. They include an obligation for screening EU Member States to notify their mechanisms and future amendments within certain time frames, and to submit an annual report on their application. Non-screening Member States would need to submit an annual report on FDI inflows.

Most importantly, however, the Commission would obtain a new competence to screen FDI and issue a non-binding opinion if

  • FDI in an EU Member State may affect the security or public order of projects or programmes “of Union interest” in areas such as research, space, transport and energy; the respective EU Member State would be required to take “utmost account of the Commission’s advisory opinion and provide an explanation to the Commission in case its opinion is not followed”; or
  • FDI in a Member State may affect the security or public order of another/other Member State/s; the latter and the Commission may request minimum information and submit its/their respective comments, and the Commission may issue an advisory opinion; the FDI receiving Member State would be obliged to “give due consideration” to the Commission’ s opinion and Member State/s comments.

The EU Member States should take utmost account of the opinion and provide an explanation to the Commission if they do not follow this opinion, in compliance with their duty of sincere cooperation under Article 4(3) TEU.


Current Status of the Proposal

After publication, the proposed Regulation was sent to the EP and the Council as per ordinary legislative procedure rules. The EP adopted its first reading position on 5 June 2018, on the basis of a report prepared for the Committee on International Trade. In March 2018, the Council assigned legislative priority status to the proposed Regulation, which suggests a joint intention of the EU and Member States to reach swift agreement. Indeed, the EP and the Council are currently discussing the amendments proposed by the EP, and the institutions reportedly aim to reach an agreement within the current legislative period, potentially even before the end of 2018.



The trend in the EU is clear. (Geo-)Political and economic implications of tectonic shifts in global power distribution are the main reason for the EU and EU Member States to implement further mechanisms for screening and regulating FDI flows into industries that are perceived as sensitive. The EU Framework for FDI Screening is a first step towards greater European cooperation and involvement in screening and – in the future – potentially regulating FDI flows.

At this stage, however, the proposal aims neither to establish EU-level screening nor to harmonise existing screening mechanisms. The possibility for the Commission to issue non-binding opinions related to planned or completed FDI in the EU is the most essential feature of the proposal. As the opinions are non-binding, however, it remains to be seen whether and to what extent EU Member States will implement these opinions.

In light of growing FDI flows into the EU from China since the beginning of even further tightened scrutiny in the US, it is – in any event – highly likely that more EU Member States will follow Germany’s example to not only implement tighter screening obligations but also to take action and block divestments under domestic legislation.

Foreign investors as well as companies seeking investments must take this trend seriously. Investors and companies seeking investments should take the new regulations and procedures into account at the earliest stage possible, ideally even before structuring investments and planning M&A projects.

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